ACC 200 Term 3 2018 Assignment
The key objective of this report is to analyze the use of both the methods such as existing as well as new methods in respect to measure the product costing and help in determining the cost per unit in concern of model that is basic and advance that is produced by the company.
In addition, this research report also helps to develop an understanding of the importance of accurate product costing within the company. In this way, this report also discusses the actual as well as applied overhead that might be different for the year-end.
At the same time, three different ways that are essential in dealing with the over/under applied overhead costs are also considered under this report. At the end of this report, the calculation of under/over applied overhead is done and for disposing off these under/over applied overhead, a proportion method is also discussed.
Cost per unit under the current traditional costing system
Traditional costing method is a method which is adopted for allocation of factory overhead as per product which is based on the production volume of consumption of resources (Laudon and Laudon, 2016).
Cost per unit under traditional costing system can be determined by using the following formula:
Cost per unit= Direct material cost per unit+ Direct labor cost per unit + Indirect overhead cost per unit produced and sold
For basic model:
Direct material cost/unit: $350
Direct labor cost/ unit: $175
Total units: 1700
Indirect cost:
| Indirect overhead activities | Basic + advanced | Percent to total indirect |
| Inspection | 30000 | 11% |
| Assembly | 100000 | 36% |
| Production scheduling | 110000 | 39% |
| Machine Set-up | 40000 | 14% |
| Total overhead cost | 280000 | 100% |
So, indirect labor cost / direct labor cost proportion will be as follows:
= $ 280000/ ($175*1700+$280*1600)
= $ 280000/$745500
= 0.3755 or 37.55%
For basic model, manufacturing overhead per unit will be:
= $175 *37.55%
= $65.71
Cost per unit= $350 +$175+ $65.71
= 590.71
For Advanced model:
Direct material cost/ unit: $580
Direct labor cost/ unit: $280
Total units: 1600
For advanced model, manufacturing overhead per unit will be:
= $280*37.55%
= $105.14
Cost per unit= $580 +$280+ $105.14 + (SAE + Interest expense and office rent/1600)
= $965.14 + [(300200+40500+42800)/1600]
= $965.14 +$239.69
=$1204.83
From the above calculation, it is determined that the cost per unit related to both the models is adopted in concern of sewing machine that is different from each other. Example: the basic model has $ 590.71 cost per unit whereas $ 1,204.83cost per unit from the advance model.
Cost per unit under Activity based Costing
The activity based costing is adopted by the accountant to identify those actions that consumes the resources and assign the actions cost respectively (Ito and Sallee, 2018).
Manufacturing overheads costs per unit for each cost activity:
| Activity | Cost driver | Total cost (a) | Expected unit (b) [basic +advanced] | Unit cost per cost driver (a/b) |
| Inspection | Inspections | 30000.00 | 970 | 30.93 |
| Assembly | Machine hours | 100000.00 | 8200 | 12.20 |
| Production scheduling | runs | 110000 | 570 | 192.98 |
| Machine Set-up | Set ups | 40000 | 390 | 102.56 |
| Total Overhead cost | 280000 |
For Basic Model
Total units: 1700
Direct material cost per unit: $350
Direct labor cost per unit: $175
Indirect overheads for basic model:
| Activity | Cost driver | Unit cost per cost driver (a) | Expected unit (b) | ABC cost assigned (a*b) |
| Inspection | Inspections | 30.93 | 210 | 6494.85 |
| Assembly | Machine hours | 12.20 | 4700 | 57317.07 |
| Production scheduling | runs | 192.98 | 60 | 11578.95 |
| Machine Set-up | Set ups | 102.56 | 120 | 12307.69 |
| Total overhead costs | 87698.56 | |||
| Overhead cost per unit | $51.59 |
Indirect overheads per unit for basic model: =87698.56/1700
= $51.59
Activity Based Costing = Direct material cost/unit+ Direct labor cost/unit+ overhead cost/unit
= 350+175+51.59
=$576.59 per unit
For Advance model:
Total units: 1600
Direct material cost per unit: $580
Direct labor cost per unit: $280
Indirect overheads for advanced model:
| Activity | Cost driver | Unit cost per cost driver (a) | Expected unit (b) | ABC cost assigned (a*b) |
| Inspection | Inspections | 30.93 | 760 | 23506.80 |
| Assembly | Machine hours | 12.2 | 3500 | 42700.00 |
| Production scheduling | runs | 192.98 | 510 | 98419.80 |
| Machine Set-up | Set ups | 102.56 | 270 | 27691.20 |
| Total overhead costs | 192317.80 | |||
| Overhead cost per unit | 120.198 |
Activity Based Costing = Direct material cost/unit+ Direct labor cost/unit+ overhead cost/unit + (SAE + Interest expense and office rent/1600)
= $580+$280+$120.199+ $239.69
=$ 1219.89
P/L account and importance of accurate product costing
Profit & Loss Statement for advanced model by using traditional costing
As on December, 2017
| Particular | Per unit | Amount |
| Total units | 1600 | |
| Direct material cost | $ 580 | $ 9,28,000 |
| Direct labour cost | $ 280 | $ 1,62,400 |
| Indirect overhead cost | $ 105 | $ 29,439 |
| Total overheads | $ 11,19,839 | |
| Selling and administration expenses | $ 3,00,200 | |
| Interest expenses | $ 40,500 | |
| Office rent | $ 42,800 | |
| Total other operating expenses | $ 3,83,500 | |
| Total cost of product (a) | $ 15,03,339 | |
| Selling price (cost plus 30%) (b) | $ 19,54,341 | |
| Profit (b-a) | $ 4,51,002 |
Profit & Loss Statement for advanced model by using ABC costing
As on December, 2017
| Particular | Per unit | Amount |
| Total units | 1600 | |
| Direct material cost | $ 580 | $ 9,28,000 |
| Direct labour cost | $ 280 | $ 1,62,400 |
| Indirect overhead cost | $ 120 | $ 33,656 |
| Total overheads | $ 11,24,056 | |
| Selling and administration expenses | $ 3,00,200 | |
| Interest expenses | $ 40,500 | |
| Office rent | $ 42,800 | |
| Total other operating expenses | $ 3,83,500 | |
| Total cost of product (a) | $ 15,07,556 | |
| Selling price (cost plus 30%) (b) | $ 19,59,823 | |
| Profit (b-a) | $ 4,52,267 |
Importance of accurate product costing
The accurate product costing is important as it is helpful to measure as well as calculate the direct cost of products. In this way, the accurate product costing gives the permission to the business for making effective decisions under which the cost is determined as influential and it also creates the implications over the business very deeply if any kind of inaccurate cost is related to this (Christopher, 2016).
In the similar manner, the accurate costing also creates a deeper impact over the valuation of assets that can be effective to change the results of the balance sheet of the business.
Discuss the reason for the difference between the actual overhead and the applied overhead at the year-end
While discussing about the differences, it is determined that actual overheads are different from the applied overheads in the year-end because it has been analyzed that actual overheads are real costs that are incurred through including various indirect costs in which indirect material, indirect labor and factory taxes, depreciation, factory maintenance, and factory insurance etc are included (Shirmohammadi, 2017).
Apart from this, applied overheads are defined as the costs that are associated with indirect manufacturing cost that has been applied in respect of manufacturing the goods. Thus, the applied costs are different from the actual overhead and due to this; it is easy to determine the over/under applied overhead costs that are incurred by the business.
Moreover, the difference between actual overhead and applied overhead can be determined on the behalf of financial accounts management as these are several overhead activities as well as items that need to be debited or credited within the company’s financial books.
In addition, many times, company has to face the situation at which applied overheads are different from the applied overheads due to under applied situations and over applied situations (Braswell and Daniels, 2017). In this manner, over applied situation occurs when there is high cost of goods sold that subtract the amount that is over applied.
Apart from this, under applied overhead occur when there is little overhead that is come out from the cost of goods sold due to adding the amount that is associated with the under-applied.
In this manner, on the basis of the balance amount of the factory overhead, the difference between actual overhead and applied overhead can be determined. In this, to calculate the difference, the actually incurred overheads are debited from the allocated amount that is credited respectively.
In the concern of determining the total production overhead, the work-in-progress, cost of goods sold and finished goods are needed to be calculated at the end of the year. These productions related overheads are allocated from the various debit or credit accounts.
In a similar manner, under the accounting statements, the actual overhead and applied overhead is mentioned in terms of come in and go out (Tuskaeva, 2016). On the basis of this, it is determined that actual overhead comes in and applied overhead goes out. However, it is also examined that the credit amount is earned at the time of applying. At the same time, debits amount is generated as well as represented the actual amount that is being expensed on overhead.
Define the three ways to deal with under/over applied overhead costs
In the manner of identifying the ways, there are three ways that are essential to deal with under/over applied overhead costs within the business (Kim and Leung, 2016). These three ways are defined as below:
- Production is identified as the first way under which a supplementary rate might be applicable or worked out.
- The next period account is another way in which the costs can be carried forward.
- In addition, the cost of profit & loss account under which the overhead costs can be written off.
After finalizing the above ways, it is analyzed that businesses find easy to operate their business due to these ways because these help them to manage the business accounts.
In addition, while discussing this case of over/under applied overhead costs, it is examined that the first situation is applicable in the cases in which there are owing for the critical error associated with overhead estimation as well as the error that is for estimation of the base rate of recovery (Lueg and Morratz, 2017).
Moreover, with the help of using the supplementary rates, the adjustment related to over/under-absorbed overhead is accomplished in concern of work-in-progress that have not been sold and finished goods. In the same way, it is also determined that along with the supplementary rate, these organizational accounts are really credited under the case of over absorption in which the account of factory overhead is debited to an extent.
In addition to this, the second option is applied at the time of extending the business cycle over several years. By using this way, businesses can ignore the matching of the cost that represents the abnormal situations of the business (Kim and Leung, 2016).
By this way, the justification can be given for these abnormal situations by carrying forward in under/over absorption overhead in that order. Furthermore, the last one method can be applicable at the time when the under/over absorbed amount is found not much significant. Under this situation, the small amount can be written off under the profit and loss account without disturbing the production cost.
In the concern of under/over applied overhead, it is examined that proration method is found as the method that is helpful to analyse the two different situations under the business (Bishop et al., 2016). In this, the allocation of under/over applied overhead costs among the various indirect costs such as cost of goods sold, work-in-progress etc are included at the end of the accounting period.
| Manufacturing overhead | |
| Actual Overhead | $ 3,00,000 |
| Applied Overhead | $ 2,10,000 |
| Under Applied Overhead | $ -90,000 |
Proportional relationships:
| Accounts | Amount | Proportion | Percentage |
| Work in progress | $ 60,500 | $60500/$2000500 | 3.02% |
| Finished Goods | $ 90,000 | $90000/$2000500 | 4.50% |
| Cost of Goods Sold | $ 18,50,000 | $1850000/$2000500 | 92.48% |
| Total overhead applied | $ 20,00,500 | 100% |
Adjustment amount:
| Accounts | Account percentage | Under Applied Overhead | Adjustment Amount |
| Work in progress | 3.02 | $ 90,000 | 2718 |
| Finished Goods | 4.50 | $ 90,000 | 4050 |
| Cost of Goods Sold | 92.48 | $ 90,000 | 83232 |
Accounting:
| Accounts | Debit | Credit |
| Work in progress | $ 2,718 | |
| Finished Goods | $ 4,050 | |
| Cost of Goods Sold | $ 83,232 | |
| Manufacturing overhead | $ 90,000 |
Conclusion
After analysing all the actual facts above, it is concluded that the use of activity based costing method is effective in concern of Fantori Ltd against of traditional based costing method that is beneficial while evaluating the accurate product costing in respect of production of sewing machine with the help of both the methods such as basic and advance method.
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