Mangament Accounting - Assignment Example

Task one: The production cost of products is determined by adding up direct labour cost, direct material cost and the manufacturing overhead costs, direct labour costs and direct material costs can be traced to the product while manufacturing overhead costs cannot be traced to the product. For this reason therefore manufacturing companies apply overhead rates on each product produced in order to determine the cost of a unit of the product produced. There are various methods that are used in assigning overhead costs and this include job order costing, activity based costing and the traditional costing method. For York furniture in the manufacture of job 123 and job 124 we apply the job order costing method, however we also note that there are three departments involved in the production of these products and therefore we have to determine the overhead rates in each department. We consider the five department namely department A, department B, department C, service department X and service department Y as cost centres whereby products are assigned costs by the departments they pass through The budgeted overhead costs are as follows: Overhead Total Rent and rates 12,800 Machine insurance 6,000 Telephone charges 3,200 Depreciation 18,000 Production supervisor's salaries 24,000 Heating and lighting 6,400 Total 70,400 We are also provided with information regarding the area occupied, machine value and labour hour rate: A B C X Y Floor area occupied (sq metres 3,000 1,800 600 600 400 Machine value (000s) 24 10 8 4 2 Direct labour hrs budgeted 3,200 1,800 1,000 Labour rates per hour 3,80 3. 50 3.40 3.00 3.00 Service Dept X cost apportioned 50% 25% 25% Service Dept Y cost apportioned 20% 30% 50% The first step is to assign an appropriate cost driver to the overheads so as to determine the appropriate departmental overhead rate, the following table summarises the appropriate cost drivers for the cost objects: Overheads cost driver 1. Rent and rates floor area occupied 2. Machine insurance machine value 3. Telephone charges labour hours 4. Depreciation machine value 5. Production supervisor's salaries labour hours 6. Heating and lighting labour hours From the above table it is evident that the rent and rates will be charged to each department with reference to floor area, machine insurance cost will be charged using the machine value in each department, telephone charges, supervisor salaries and heat and lighting will be charged with reference to labour hours. We now determine the overhead rate in each department: Rent and rates: We determine the rent and rate allocation rate for each department, this will be determined by dividing the rent and rate cost by the total area and multiplying this with the area occupied by each department: Rent and rates = 12,800 Floor area = 3,000 + 1,800 + 600 + 600 + 400 = 6400 Rent and rates allocation rate = 12,800/6400 = 2 Each department allocated rent and rate costs: We determine the rent and rate cost for each department by multiplying the rent and rate allocation rate by the floor area for each department: A B C X Y Floor area occupied(sq metres) 3000 1800 600 600 400 Rent and rates allocation rate 2 2 2 2 2 Rent and rate cost 6000 3600 1200 1200 800 Machine and insurance: The machine and insurance cost will be allocated using the machine value in each department, for this reason we determine the allocation rate by dividing the machine insurance cost by the total value of machines: Insurance cost = 6,000 Total machine value = 24000+ 10000+ 8000+ 4000+ 2000 = 48000 Allocation rate = 6,000/48000 = 0.125 We determine the machine insurance cost for each department by multiplying the allocation rate by value of machine in each department: A B C X Y machine value 24000 10000 8000 4000 2000 Allocation rate 0.125 0.125 0.125 0.125 0.125 machine insurance cost 3000 1250 1000 500 250 Telephone charges: For telephone charges we assign the allocation rate using labour hours as the base, the following is a summary of provided information: Telephone charges = 3,200 Labour hours = 3200+ 1800+1000 = 6000 Allocation rate = 3200/6000 = 0.533333 We determine the telephone charges for each department by multiplying the allocation rate by value of machine in each department: A B C X Y Direct labour hrs budgeted 3200 1800 1000 Allocation rate 0.533333 0.533333 0.533333 telephone charges 1706.67 960 533.33 Depreciation: Depreciation = 18,000 Total machine value = 24000+ 10000+ 8000+ 4000+ 2000 = 48000 Allocation rate = 18,000 / 48,000 = 0.375 A B C X Y machine value 24000 10000 8000 4000 2000 Allocation rate 0.375 0.375 0.375 0.375 0.375 Depreciation cost 9000 3750 3000 1500 750 Production supervisor's salaries: Production supervisor's salaries = 24,000 Labour hours =3200+ 1800+1000 = 6000 Allocation rate = 24000/6000 = 4 A B C X Y Direct labour hrs budgeted 3200 1800 1000 Allocation rate 4 4 4 supervision cost 12800 7200 4000 Heating and lighting: Heating and lighting 6,400 Labour hours =3200+ 1800+1000 = 6000 Allocation crate = 6400/6000 = 1.0667 A B C X Y Direct labour hrs budgeted 3200 1800 1000 Allocation rate 1.0667 1.0667 1.0667 Heating and lighting 3413.44 1920.06 1066.7 Totals for each department are as follows: A B C X Y Rent and rate cost 6000 3600 1200 1200 800 machine insurance cost 3000 1250 1000 500 250 telephone charges 1706.67 960 533.33 Depreciation cost 9000 3750 3000 1500 750 supervision cost 12800 7200 4000 Heating and lighting 3413.44 1920.06 1066.7 total overhead in each department 35920.11 18680.06 10800.03 3200 1800 We are given information that A B C Service Dept X cost apportioned 50% 25% 25% Service Dept Y cost apportioned 20% 30% 50% We therefore allocate the service department X and Y to the three departments by multiplying the percentages with the total overheads for those departments, the following table summarises the results: Service Dept X cost = 3200 Service Dept Y cost = 1800 A B C X 1600 800 800 Y 360 540 900 The overhead allocated to each of the three departments is as follows: A B C Rent and rate cost 6000 3600 1200 machine insurance cost 3000 1250 1000 telephone charges 1706.67 960 533.33 Depreciation cost 9000 3750 3000 supervision cost 12800 7200 4000 Heating and lighting 3413.44 1920.06 1066.7 overhead in each department 35920.11 18680.06 10800.03 X 1600 800 800 Y 360 540 900 total overhead in each department 37880.11 20020.06 12500.03 A B C overhead in each department 35920.11 18680.06 10800.03 X 1600 800 800 Y 360 540 900 total overhead in each department 37880.11 20020.06 12500.03 We determine the overhead rates for these three department using labour hours, this will be calculated by dividing the total overheads for each department by the labour hours, and the following is a summary of the calculations of allocation of overhead costs: Department A rate = 37880.11/3,200 = 11.838 per labour hour Department B rate = 20020.06/ 1,800 = 11.122 per labour hour Department C rate = 12500.03/1000 = 12.5 per labour hour Task two: Selling price for job 123 and job 124 The following information is provided: Job 123 Direct Material: 154 Direct Labour: 20 hours in Department A 12 hours in Department B 10 hours in Department C For job 123 we determine the direct labour cost, direct material cost and the overhead costs. Direct material = 154 Direct Labour: 20 hours in Department A Direct labour = 20 X 3.80 = 72 12 hours in Department B Direct labour = 12 X 3.5 =42 10 hours in Department C Direct labour = 10 X 3.40 = 34 Total direct labour cost = 72+42+34 = 148 Overheads: Department A = 20 X 11.838 = 236.76 Department B = 12 X 11.122 = 133.464 Department C = 10 X 12.5 = 125 Total overhead cost = 236.76 + 133.464 + 125 = 495.224 Total costs = 154 + 148 + 495.224 = 797.224 Cost of production = 797.224 Selling price: Desired profit margin is 25% Selling price = 797.224 X 125% = 996.53 Therefore the selling price = 996.53 Job 124: Job 124 Direct Material: 108 Direct Labour: 16 hours in Department A 10 hours in Department B 14 hours in Department C Direct material = 108 Direct Labour: 16 hours in Department A Direct labour = 16 X 3.80 = 60.8 10 hours in Department B Direct labour = 10 X 3.5 =35 14 hours in Department C Direct labour = 14 X 3.40 = 47.6 Total direct labour cost = 60.8+35+47.6 = 143.4 Overheads: Department A = 16 X 11.838 = 189.408 Department B = 10 X 11.122 = 111.22 Department C = 14 X 12.5 = 175 Total overhead cost = 189.408 + 111.22 + 175 = 475.628 Total costs = 108 + 143.4 + 475.628 = 727.028 Cost of production = 727.028 Selling price: Desired profit margin is 25% Selling price = 727.028X 125% = 908.785 Therefore the selling price = 908.785 Task 3: FIFO is an inventory method that depicts that stock be accounted for on first in first out, units that were earlier purchased are first issued, therefore the cost of units is determined using the cost of units first received, the following summarises the material cost for job 125: Goods for job 125 were issued on 17th October and 27th October, on 17th goods issued amounted to 24,000, this means this included the opening balance that was 20,000 units plus 4000 units received on 3rd October, therefore we determine the cost of materials as follows: 20,000 units = 20,000 X 3 = 60000 4,000 units = 4,000 X 4 = 16,000 Total cost of the goods issued on 17th October = 60,000 + 16,000 = 76,000 Another bunch of goods were issued on 27th October, these were 20,000units, using the FIFO method we include the remaining 1,000 units received on 3rd October, 12,000 received on 10th October and this amounts to 13,000 units, the remaining 7,000 units will therefore be those units received on 20th October, the following is a summary of the cost of units: 1,000 X 4 = 4,000 12,000 X 5 = 60,000 7,000 X 4.5 = 31500 The total cost of materials = 4000 + 60000 + 31500 = 95500 The following table summarises the total cost of materials issued for job 125: date issued include 17th October 24,000 20000 opening balance and 4,000 units received on 3rd October 27th October 20,000 1,000 units received on 3rd October, 12,000 units received on 10th October and 7,000 units received on 20th October Total cost of materials for job order 125 = 76,000 + 95,500 = 171500 Task 4: Selling price of job order 125: We are provided with the following information: Job 125 Direct Material: XY- see below re material cost Direct Labour: 50,000 Overhead: recovered on basis of 110% of direct material cost Direct materials = 171500 Direct labour = 50,000 Overhead cost = 171500 X 110% = 188650 Total cost = 171,500 + 50,000 + 188,650 = 410,150 In order to achieve profit margin of 10%: 410,150 X 110% = 451,165 Job 125 Selling price = 451,165 Task 5: Costing methods and their uses Contract costing: It is an order costing method that is assigned to a specific contract or job, this type of costing is used in companies that receive contracts to perform specific tasks. The cost of production is determined by adding up expected labour cost, material cost and overheads. Process costing: This is costing method that involves tracing both the direct and indirect cost in the production process for a batch of units produced, when these costs are assigned to the products the cost per unit is determined by dividing the cost by units produced, in the case for York furniture this costing method can be used if the company produces a large number of products whose production process is similar and therefore the company can budget the costs and the units to be produced, as a result the indirect costs per unit are determined by dividing the total indirect costs by the number of units. Service costing: Service costing is a costing method that involves allocation of cost depending on a given services rendered, this method involves determining the processed involved in delivering services to consumers and cost are budgeted to determine the cost of services. This costing method is used by service organisations. Marginal costing: This is a costing method that involves classifying cost into two categories, the fixed and variable costs, it is used when a company produces a large number of units and has the ability to increase or reduce the units produced, the optimal number of units to be produced is determined and the break even point is also determined. Activity Based costing: This is a costing method that involves identifying the activities involved in the manufacturing process, when these activities are identified the activities a cost is assigned to each activity and therefore the cost of product produced will be based on the activities. This method is used in a company that produces 2 or more of different products in large numbers Standard costing: Standard costing is a costing method that involves assigning costs to products using predetermined rates, this method requires the use of historical data to determined the cost per unit produced and therefore each product cost is pre determined, this method is used in companies that produce a single product. Task 6: In the production process there are those goods that add value to a product and those that are none value adding activities, some of the non value adding activities include accounting costs, human resource costs, quality department costs, value adding activities are those activities that add value to the final product while non value adding are those activities that add cost to products produced but doe not add value to the product. York Furniture should reduce those activities that do not add value to the final products, the company should also identify the characteristics of goods that consumers are willing to buy at a given price, this way the company will produce products that consumers are willing to purchase. References: Warren, C and Reeve, J (2002) Financial and managerial accounting, McGraw Hill Press, New York Read More