Introduction: Case Study On Product Costing System – Accounting Management
An accountant not only hire for the reason of Accounting Management they also advise the company which project would be profitable in future. This case study Help, the Lifestyle Furniture requires appointing an accountant to prepare a schedule of cost goods manufacturing and a schedule of cost of goods sold. The company lost some Accounting Management data by fire. Hence, the accountant needs to prepare accounts for the company, that has shown in the Case study.
Purpose of product costing system:
Benedict and Elliot (2011) opined that the product costing system is the systematic process of accumulating direct and indirect cost of a manufacturing process in Accounting Management. Usually, a company prepares the product costing system for every month. Product costing is applicable where goods or services are manufacturing. According to this case study, the company manufacturing two types of furniture, classical and modern furniture. They need to find out the actual manufacturing cost of the product costing system. Purpose of preparing a product costing system has discussed below
Identify the cost object– Cost objective is anything which is related to the production cost of the company. Product costing system helps the company identify the total cost of the production that will help the company to identify per unit cost of the company (Gordon 2010). In this case study, the owner appoints an accountant to select a scientific method to choose the price of the product. They only followed their competitor’s price level and selected their product price. Product costing system helps the organization to select their product price after identifying the product cost.
Identify the direct costs– According to Robinson and Henry (2012), direct cost is the cost that is directly related to the unit cost of the product. Direct cost includes labor cost, raw material cost, power cost, etc. In case of lifestyle furniture, they need to identify the direct cost because some of the product doesn’t come into the direct cost such as salaries. The direct cost of Lifestyle Furniture is direct labor cost and raw material cost.
Identify the overhead cost-Overhead cost are those costs with are related to the product unit cost. Overhead cost includes electricity charges, office expenses, maintenance charges, depreciation of assets, etc (Wachter 2009). Lifestyle Furniture’s indirect costs are administrative salaries, advertising expenses, depreciation of factory building and equipment, insurance on the factory, sales salaries, travel and entertainment expenses etc.
Cost allocation– According to Fridson and Alvarez (2011), cost allocation manuals, based on the total cost of the product the company can calculate more or less unit production cost of the product. As an example, if a company produces 5000 units and calculate per cost unit if they wanted to produce 6000 units, then they can easily calculate the per unit cost based on the 5000 units cost
Purpose of schedule of cost of Goods Manufacturing and schedule of Cost of goods sold:
Cost of goods manufacturing schedule mainly uses to calculate the cost of production at a time in Accounting Management. Cost of goods manufacturing schedule amount transferred to the finished goods inventory accounts during the period and that uses for calculating the cost of goods sold on the income statement (Ittelson 2009). Cost of goods manufacturing schedule sued for calculating the manufacturing cost of the company. Lifestyle Furniture has lost much data, those related to Accounting Management. Hence, the accountant prepares the cost of goods manufacturing accounts with adjustment of available data. In below cost of goods manufacturing accounts cost of goods, manufacturing comes out $91480. But as per data that was $ 89000. Hence, the company under-applied the overhead cost.
Work-in-process:
In the work-in-process account, there have no changes has been found by the accountant. Opening work-in-process was $ 4500 and that was found from the T-accounts of the company. The accounted found that in previous year work-in-process opening balance was $ 1670 and the closing balance was $ 1110, but in T-accounts that should be shown as an opening balance of work-in-process, but as the company undercharged the manufacturing cost so they work-in-process was changed from the previous budget (Calomiris and Herrings 2011). On the other hand, the accountant analyses that if their work-in-process, increase then their inventory cost also increase (La et al. 2009).
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On the other hand, if the work-in-process, decrease than their holding cost also decreases it represents that their manufacturing process going smoothly, but in accounts work-in-process must be calculated. Work-in-process represents that the company continuously produces their product. According to a case study, due to an accident the company’s producing stopped for few days but not affects such as.
Raw materials purchased:
In April raw material of the company was $ 42600, but they paid for the raw materials $ 40000 in April. In this study, the accountant found that the opening balance of the account of raw material was $ 12000, and closing balance of the raw material was $ 14600. In previous year opening balance of the raw material was $ 2100 and the closing balance was $ 3200. The accountant analyses that compare with the previous year their purchasing activity was increased (Maric et al. 2011). In previous year closing balance was $ 3200, that should be an opening balance of the month April, but it has seen that there opening balance, of the month was $ 12000.
That represents that their raw material purchased activity were increased because they undercharged their manufacturing cost (Treynor and Black 2009). In manufacturing cost includes labor cost, direct cost, and raw material purchase cost. Undercharged of overhead is directly related to the manufacturing cost of the company. The accountant found that company’s overall activity increases that is why their raw material cost increases.
Under applied Overhead:
In this research study, the accountant calculated that the company undercharged the overhead. That means that their expected budget does not match with their actual accounts of the company. There are many reasons for underapplied overhead one of the major reason is their activity of the production is increased (Amihud and Mendelson 2010). The accountant analyze that their cost of labor has increased double from the previous year. In previous year labor cost was $3 per hour, but in the month of April labor cost increased from $ 3 ($ 180000/60000 hour= 3) to $ 6
Cost of goods sold:
Cost of goods sold account many activities has been shown. Actual Cost of goods sold by the company was $102480. Cost of goods sold is directly related to inventory and purchase. At cost of goods sold account purchased was mentioned $ 38000 And inventory was mentioned $ 11000. The closing balance of the accounts was 53480. Cost of goods sold amount comes in the income statement to calculate the net profit. In this study, the net profit will be $ 47430 ($53480-$2400-$1200-$2000-$450). Net profit calculated after deducting advertisement cost, salaries, taxes from the cost of goods sold (www.sec.gov 2014).
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The raw material used in April:
The accountant analyses the T-accounts of raw material for the month April. He found that the company used the raw material of $ 42600. The accountant also analyses the accounts of raw material and manufacturing overhead accounts and found that the company paid $ 40000 to suppliers in April. In past year the company used the raw material of $ 46800. Opening balance of raw material was $ 12000. In previous year opening balance, the company has the raw material of $ 2100 and closing balance of the company was $ 3200. The accountant found that in the April opening balance of raw material should be $ 2100 but it shows $ 12000, that represents that either their overall cost was increased or they increased their purchase raw material.
Over or underapplied overhead in April:
In budget manufacturing overhead cost that applied to the job is estimated or predetermined. Budgeted manufacturing cost may not be matched with the actual manufacturing cost of the company after year end. It may be less or higher (Schlingemann et al. 2009. At the company’s manufacturing cost get out lower than the budgeted manufacturing cost, then it represents that manufacturing cost was applied higher.
On the other hand, manufacturing cost comes out higher than the budgeted manufacturing cost, then it represents that budgeted manufacturing cost applied lower. In this case study, the accountant saw that the company applied to lower manufacturing cost at the time of budget preparation.
Reason for under-applied overhead:
In this study, the accountant analyses the accounts of the company and prepare a new one based on the available data of the company. A company predetermines the overhead cost of the company beginning of the year. In case of Lifestyle Furniture company, they predetermine the overhead cost. Predetermine cost may not match with the actual cost of the company. Hence the company needs to adjust the cost after the period over (www.cgma.org 2014).
In case of Lifestyle furniture, they undercharged the overhead cost of the company. The reason behind the under the cost of the company has increased the purchase activity of the company such as increase the labor cost and material purchase cost. The company increases the labor cost from $ 3 to $ 6, hence their cost of labor increased that was not predetermined in the accounts. On the other hand, company’s purchases increased. So their cost was also increased that also not predetermine. These two main reasons were found by the accountant for undercharged the overhead cost.
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Deal with undercharged overhead:
In case of undercharged overhead, the company must be analyzed accounts of the company if any kinds of activity found that under or overcharged then they should be marked. On the time budget prepare the company must ensure that the charge must be realistic, without any reason the company should not increase labor cost of the company. In the organization, it has seen that labor cost per hour was $ 3, but they changed their labor cost from $ 3 to $6. This changed affects the overhand, cost of overhead increases to $ 42800.
Due to the increase of labor cost per hour their overhead cost increases that are the reason for unmatched their accounts with predetermine accounts. On the other hand, it also affects the cost of goods manufacturing of the company. It increases the cost of the company. The company must be careful at the time of preparing the budget. It is not easy to avoid the over or undercharged overhead of the company, because uncertainty works in overhead cost of the company. Under applied overhead account can be treated easily in the accounts of the company, simple the underapplied overhead cost close out to the cost of goods sold accounts. That amount credited to the account of the cost of goods sold. At the at a same time cost of goods sold account debited (www.mca.gov.in 2014).
Reason for introducing the ABC technique:
According to Epstein (2009), ABC (activity-based costing) assigns the manufacturing the overhead cost in a more logical manner than the traditional approaches. ABC techniques consider those activities which are directly related to the manufacturing overhead cost such as labor costs, machine hour cost, etc. The company can calculate each of the activities of manufacturing to use ABC technique. In case of Lifestyle furniture company, they produce types of product one is modern and another is a classical product. ABC technique is the powerful tools of the Accounting Management.