Purpose of Product Costing - Assignment Example

Table of Contents 1.0 Introduction 1 2.0 Purpose of product costing 2 3.0 Schedule for goods manufactured, and goods sold 3 5.0 Evaluate whether ABC should be presented 7 6.0. Conclusion 9 6.0. Bibliography 10 1.0 Introduction Activity based costing is one of the new costing models widely embraced by management accountant as one of new ways of improving company efficiencies and cost cutting while strategically allocating resources in more efficient manner in their operations. This paper discusses various aspects of management and cost accounting that includes the purpose of product costing within organization, which is Lifestyle furniture limited, the paper also analyses the various cost schedules of production of the Lifestyle furniture limited, cost of goods sold schedules of the organization. The paper calculated different T-accounts before embarking on the discussion on how indirect disbursements can be applied either under or over and how the corporation would deal with the over- or under-application. The paper concluded by discussing ABC model into details elaborating on the importance of the ABC elaboration on how the company can use ABC as a means of increasing efficiencies and resource allocation. The paper lastly discussed why the Lifestyle furniture limited should use activity-based cost as opposed to traditional costing method. 2.0 Purpose of product costing Johnson & Glad (2006) indicates that produce costing are essential for two major tenacities; first product costing is important for financial accounting in order for them to allocate the cost incurred by the manufactures between the cost of goods sold and the inventories for a given period. Secondly, product costing gives useful information for the organization management for crucial decisions making process. David (2012) points out that if management knows the cost of different product that they produce then it will be useful in making judgment concerning the product profitability and performance, which is useful in decisions concerning resource allocation within the organization. Products costing have also proved important in pricing decisions in an organization where cost plus pricing is used to give selling price of the product in situations where demand and supply forces do not necessarily influence cost of goods. Most organizations are interested in keeping good records of the value of inventories and put it as their priorities today. Is unprofitable to keep much of the dead stock and to use inappropriate costing methods can deplete the organization much of its profit quickly. The product costing system is very important to businesses as it allows one to retrieve cost information and at the same time helps management properly manage cost as it provides useful information useful for business planning. With accurate product costing, businesses can evaluate the manufacturing processes to determine how they affect the company profitability (Johnson & Glad 2006). The correctness of the merchandise costs ought to be unswervingly dependent on the tenacity for which the price information is necessary for, and in order to encounter financial secretarial requirement, it may not essentially measure the cost disbursed in the manufacture. 3.0 Schedule for goods manufactured, and goods sold In preparation of the cost of goods manufactured, some of the factors that must be included are; Cost of the raw materials used in the manufacturing process; cost of direct labor Table 1.1: Production Schedule Items Costs AUD ($) Costs AUD ($) Cost of opening raw materials $ 2100 Cost of purchase of raw material $ 14600 Less: Closing raw material $ (3200) Cost RM consumed $ 13,500 Cost of direct labor $ 21900 Cost of goods Manufactured $ 35,400 In preparation of the cost of goods sold, the closing and opening inventory must be taken into consideration. The schedule is as follows; Table 1.2: Cost of goods sold schedule Items Costs AUD ($) Costs AUD ($) Opening inventory finished goods $ 46,980 Cost of Production $ 35,400 Cost of goods available for sale $ 82,380 Closing stock $ (44,410) Cogs $ 37,970 For both production and cost of goods sold schedule, most items are removed and not included. In production schedule only cost involves in the direct production of goods and services are included for example, price of raw resources and straight labor are glided directly in the invention cost while indirect cost are excluded since the indirect overhead production were not directly involve in the production of goods and if included will give wrong cost of production. In the cost of goods sold, work in progress are not included since they are not part of goods available for sale part will for part of the stock available in the company for the production. T- Accounts of the company Raw materials Bal.1st April $ 12,000 Raw materials $ 2100 Bal. b/d $ 28,700 Purchase of raw materials $ 14,600 $ 28,700 $ 28,700 $ 28,700 Bal. c/d $ 28,700 Manufacturing overheads Actual cost for April $ 14,800 Direct labor cost $ 21,900 Bal. b/d $ 36,700 Total $ 36,700 $ 36,700 Bal. c/d $ 36,700 Work in progress Bal.1st April $ 4,500 Opening work in progress $ 1670 Closing work in progress $ 1,110 Bal. b/d $ 5060 Total $ 6170 $ 6,170 Bal. c/d $ 5,060 Accounts payable Cash adm exp. $ 2,400 Bal. 30th April $ 8000 Cash Advert. $ 1200 Indirect labor cost $ 11,800 Insurance of factory $ 1,400 Sales Salary $ 2000 Travel & Ent. Expense $ 1,410 Bal. b/d $ 12,210 Total $ 20,210 $ 20,210 Bal. C/d $ 12,210 Finished goods Finished goods $ 46,980 Cost of goods manufactured $ 35,400 Ending finished goods $ 44, 410 Bal. 30th April $ 16,000 Bal. b/d $ 53,970 Total $ 98,380 $ 98, 380 Bal. C/d $ 53,970 Cost of goods sold Cost of goods sold $ 39, 970 Balance b/d $ 39,970 Total $ 39,970 $ 39,970 Bal. c/d $ 39,970 i. Work in Process at the finish of April; $ 5,060 ii. Raw materials purchased in April; $ 14,600 iii. Overhead applied in April; $ 36,700 iv. Cost of Goods sold in April; $ 39,970 v. Raw materials used in April; and, $ 28,700 vi. Over- or under-applied overhead in April. $ 1480 4.0 Deliberate how expenses can be over- or under-applied, and how the company should deal with the over- or under-application. In circumstances when a corporation uses a given standard costing method, it derives a standard quantity of overhead costs, which should be earned in a given accounting period, and the cost accountant applies this amount of overhead costing to cost substances on the produced goods (Johnson & Glad 2006). In case the exact amount of overhead appears to be different from the given standard amount of overhead, then this gives under absorbed or over absorbed. In situations where overhead is under absorbed, it indicates that extra actual overhead cost of goods produced were incurred more than the expected amount, and the variance is charged to expenditure as experienced. It usually means that the acknowledgment of the expenses is improved into the present period; therefore, that amount of profit recognized is dropped (Kaplan, & Anderson, 2004). In circumstances overhead is over absorbed, it shows that scarcer the actual overhead costs were experienced during production than expected amount. It means that the acknowledgment of expenses is reduced in the current period that increases revenues (Larson, & Kerr, 2007). For instance, if a corporation has determined its standard overhead cost at $ 25 per any direct labor hour spent and the actual amount ought to have been $ 20 per hour, then the difference, which is $ 5, is considered as over- absorbed overhead. Some of the reasons of overhead under absorption or over absorption include. First, the amount of the given overhead acquired is not similar as the expected amount. Secondly, the foundation upon which the overhead is functional is in the amount dissimilar than expected amount. Thirdly, there may be seasonal changes for overhead incurred or in the basis of the presentation, against a standard rate that is originated on a longer-term run-of-the-mill and lastly the foundation of allocation could be incorrect, possibly due to a data admission or calculation mistake (Larson, & Kerr, 2007). Situations under which over absorption are met includes, when the variance either positive or negative is emotional on the cost of inventory sold at once or when the difference be it positive or negative applied to the applicable cost object. The principal one is usually easier to achieve but in real sense fewer precise hence can lead to immediate transcribe off which is usually inadequate to a smaller variances while the later method can be used well when there is large variances (Kaplan, & Anderson, 2004). In most cases, manufacturing overhead is applied to merchandise based on prearranged overhead rates given. The rates are planned by cost accountants as the total assessed overhead for a given period divided by the projected activity level of an apportionment base. While the managers make these projections as precise as possible, it is mutual to have overhead over applied or under applied at the end of any trading period. Understanding common methods that overhead may be under applied can also aid an organization to jingle up its approximations for the most exact reporting even in lesser business environments. If the organization guesstimates less overhead than the organization can incurs, the organization is most probable to under-apply overhead within that retro. The magnitude of the under application normally hang on how inaccurate the estimates of the overhead prices is. In the case of small business, they can underestimate overhead costs with few common pitfalls through several ways. First, an organization might mistakenly exclude some important items from the overhead rate calculation. Any costs of manufacturing that is not material or labor should be encompassed. Inaccurate approximations of the numbers of times in the allocation base can results to under-application of production overhead. Much small businesses use direct labor cost or direct labor hours as one of the allocation basis. In situations where this foundation is overvalued, then the amount of overhead applied per hour will be too low, and overhead will be under applied (Johnson & Glad, 2006). Additional of overhead applied to work in progress stock over the amount of overhead essentially gained. This amount is classically called auspicious change and put on financially planned profit at the end of bookkeeping period financial statements. Also known as over absorbed overhead. A state where the overhead functional to a work in progress (WIP) merchandise is more that the overhead that the WIP essentially incurs. This result in the manufacturing overhead having credit balances (Johnson & Glad 2006). Over applied overhead is recounted on the balance sheet and further given as undeserved revenue. At the end of the accounting period, over-applied overhead is poised by coming up with a credit to cost of goods sold as opposed to under applied overhead. 5.0 Evaluate whether ABC should be presented Activity Based Costing (ABC) is a new and a distinct costing model that permits business managers to manage business costs or expenditures by identifying happenings used in manufacturing of product and services (Johnson & Glad 2006). The costs of the related activities are consigned to all products or amenities so as to establish the real value of the production. The model allocates indirect costs, such as overhead, to product or service to better differentiate which goods are more lucrative and which other products are not profitable within the organization. This costing method emerged in early 1980’s. It was a means of increasing competitiveness across the global market through increasing total output. The technological improvement in the production process where fewer manual labors are required and more oversight of the costs associated with the production. In early 1990’s, most people out looked it, it can be still valuable means of accurately assessing corporate costs expenses (David 2012). Activity bases costing in best cases are best suitable for organizations that have different products yields having different levels of involvements and operational intensity. It is also well suited to those firms that provide customers with varying level of product services (David 2012). ABC allows such businesses to appropriately determine the quantity of total resources and means being devoted to each particular project. With an ABC costing system, companies may develop a more inclusive picture of which products or services are most valuable, and which productivities need to be either corrected or eliminated (Johnson & Glad 2006). There are four major ways of conducting the activity based costing. First, productions must have a principal list of all activities, which they are dealing with within their organization. This stage can be easily done through digitalization of the company operations and will make it much easier. Secondly, it is very important for cost accountant to regulate costs related with carrying out each of the recognized activities in step one above (Johnson & Glad, 2006). The model necessitates that the costs be allocated to each activity, which is achieved. The best example is where the organization is bearing in mind the repair cost of the machine in which the organization have to take in consideration the cost of paying the maintenance as well as any other related cost associated with other hardware costs. Thirdly, organizations are utilizing activity-based costing out to accumulate a list of all the merchandises or services provided by the business. These phases are also involves relating activities with a specific product or services and control whether a profit is being made or not. The results here can be related with the revenue, which is generated, from clienteles and sales in order to create inclusive representations of the company prices. Lastly, organizations ought to recognize sources of costs associated with various events. The cost drivers of these sources of expenses fall into three major phases. They include transaction drives, duration drives and lastly intensity drives. These drivers may detect the chief categories into which happenings fall thereby authorizing businesses to govern their most expensive types of responsibilities hence able to adjust their applies accordingly. Activity Based Costing is applicable in various in various business financing, costing and accounting needs of a business. The modeling process is applicable not only to partial views of the company practices but also for assessing the full scope of the organization expenditure. ABC is specifically helpful for identifying inefficient products and departments and other related activities across the whole spectrum of business practices. Furthermore, the ABC can be able to assist in establishing the resource allocation in the organization. Using this method, more capitals may be designated to profitable product and activities while, at the same time, fewer resources will be directed to areas that are less profitable in the organization. Through the activity based costing, organizations can increase their efficiencies by finding and eliminating extraneous costs and resource control supply at any per product level, as well as at any section level (Larson, & Kerr, 2007). Activity based costing is an outstanding means of recognizing places where the commercial might as well be hemorrhaging money in the provision of unprofitable enterprise. Lastly, through activity based costing, businesses have the capability to respond to upsurges in overhead costs by establishing precisely where that money is profitable. It is also an efficient means of replying to any increase in the substance from regulators by straighter controlling the flow of company funds (Larson, & Kerr, 2007). Therefore for Lifestyle Furniture; Activity based costing is one of the most efficient ways through which they can develop a comprehensive picture of their furniture business as it will enable the comparison of revenue and expenses within the company. The Lifestyle Furniture will be able to respond to their business by identifying the areas that are captivating too many resources, managers or the company can move resources. Activity based costing will provide them with a more straight means of controlling company funds with ABC business can accomplish exactly where funds are going and how incomes are being used. The business can respond more quickly to and efficiently to changes in demand for a long period. Hence, the Lifestyle Furniture Company should adopt this kind of costing method as opposed to traditional costing method. 6.0. Conclusion This study has reviewed multiplicity of issues including product costing. To this extent, the study realizes that product costing is essential especially when organisations are making decisions on pricing. Additionally, this report recognizes, from evidence-based research that product costing gives business an opportunity to gain cost information. This is linked with production and cost of goods sold schedule. The observation made in such connectedness is that production schedule is essential for future predictions of how the organization should run. Conversely, highlighting production and cost has to be linked with amount of overhead which this report finds to be unique from the given standard amount of overhead and this is seen as tabulated in the T accounts. 6.0. Bibliography David M. 2012 Activity-Based Costing (ABC); CFO.com; http://businessfinancemag.com/article/beyond-traditional-product-costing-0801 Johnson, B. and Glad, E. 2006. Spring chicken or a dead lunch? Chartered Accountants Journal, March 2006, Volume 85, Issue 2, pp 35-36 Kaplan, R. & Anderson, S.2004 Time-driven activity-based costing. Harvard Business Review, Volume 82, Issue 11, p. 131 Larson, P. and Kerr, S. 2007. Integration of process management tools to support TQM implementation: ISO 9000 and activity-based costing. Total Quality Management & Business Excellence, Volume 18, Issue 1-2, pp 201-207 Tad Leahy 2008 Beyond Traditional Product Costing; Business Finance; http://www.cfo.com/article.cfm/3007694 Read More