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Cost and Management Accounting

Question:

Discuss about the Cost and Management Accounting.

Answer:

Introduction

The report aims to evaluate the importance and purpose of the product costing system in relation to Seafarer Kayaks. In addition, the comments on AASB 102 have been also described vividly, which are associated with the production cost. Furthermore, the schedules related to cost of sales and cost of goods manufactured are being prepared based on the provided data. The latter section of the report demonstrates the preparation of the T-accounts, the overheads computed and the journal entry for the disposal of imbalance. The study also deals with the utilization of over-absorbed or under-absorbed overhead and the necessary journal entry to eradicate the imbalance. Lastly, the report sheds light on critical evaluation of the standard costing system and the benefits Seafarer Kayaks could enjoy through the implementation of such system.

Purpose and Necessity of the Product Costing System and Comments on AASB 102 Related to Production Cost:

Product costing comprises of allocation of costs pertaining to the inventories along with manufacturing activities. This form of costing is congruent for manufacturing units thereby can be considered imperative for production units of Seafarer Kayaks. Product costing tends to assist managers towards rational decision making through dissemination of each cost factors from the overall product costs. Products costing provide the framework based upon which the budgetary allocations to each cost centre are streamlined (Drury 2013). Moreover, products costing are an effective management tool in examining variances and cost overruns. Further, viability in terms of manufacturing newly introduced products is also examined through the product costing mechanism (Fisher and Krumwiede 2012).

However, the effectiveness of product costing is limited to the assistance it provides as a management accounting methodology. Further, product costing has shortcomings due to its inherent inability towards providing material facts regarding corporate performance. Moreover, this form of costing tends to disseminate contribution made at different production and distribution stages thereby enabling management interventions. Warren, Reeve and Duchac (2013) mentions that in case of economic downturns and rising input prices product costing plays an imperative role towards downsizing production towards a level desirable by the management. Moreover, Warren, Reeve and Duchac (2013) states that in a market with monopolistic environment the allocation of fixed overheads are to be made based upon demand and accordingly process costing is implemented for a shift in cost management policy. Thereby, it can be inferred that relevance of process costing as a management tool has improved over time. In case of introduction of a new product the opportunity cost has to be allocated accordingly depending on the viability of the product.

As stated by AASB 102, costs of conversion of inventories pertain to the apportionment in regards to variable and fixed production costs. The allocation in terms of costs of converting inventories into finished products is based upon normal capacity of the current production in the respective organizations (Carey, Potter and Tanewski, 2014). Seafarer Kayaks can assess the level of its normal production through the averaging of production expected under normal business circumstances. Further, according to AASB 102, such capacities are to derive at after taking into account the losses and cost overruns pertaining to the planned maintenance. Further, in case of production levels in achieving substantially high levels the overhead are reallocated at a manner that reduces the overall inventory costs below the levels of average production cost. Moreover, in case more than one product is produced simultaneously the amount of costs is allocated either immediately after the products become separately identifiable or after the production process is completed (aasb.gov.au 2016).

Schedule of Cost of Goods Manufactured and Cost of Goods Sold:

The schedule of cost of goods manufactured and cost of goods sold has been briefly represented in the form of a table (Refer to Appendices, Appendix 1). The cost of goods manufactured is a comprehensive statement depicting the computation of the cost of production of an organisation in a particular accounting year. The schedule of cost of goods sold, on the other hand, is the total cost incurred to develop a product or service, which are sold (Fan and Liu, 2016).

Based on the provided data, the salaries associated with the administration, advertising expenditures and general insurance related to sales liability are being omitted from the schedule. This is because these items are falling under the manufacturing or production unit. The company has also shown their assent on accounting the excluded expenses in other heads than the manufacturing overheads. As cited by Weygandt, Kimmel and Kieso (2015), the cost of goods manufactured and cost of sales do not take into account the cost associated with the office branches. The above-mentioned items are considered as office expenses, whereas, the schedule only deals with the office expenses. Hence, this is the main reason of excluding these items from the schedules.

T-accounts, Opening and Closing Balances, Overheads and Journal Entry for Writing off Imbalance:

The T-accounts, the other two balances, overheads and journal entry have been depicted in a tabular form (Refer to Appendices, Appendix 2).

  1. Application of overhead in the current year:

The overhead applied in the current year on the part of Seafarer Kayaks amounts to $110,650.

  1. Actual overhead or indirect cost incurred in the accounting year:

The actual overhead cost of the organisation has been obtained as $92,800 in the accounting year.

 Over or under applied overhead:

It has been found that the organisation has over-applied overhead of $17,850. The detailed breakdown of calculation has depicted in tabular form (Refer to Appendices, Appendix 3).

  1. Journal entry for eliminating the imbalance:

The journal entry for eliminating the imbalance is briefly demonstrated below:

Particulars

Debit Amount (in $)

Credit Amount (in $)

Manufacturing Overhead A/C

17850

 

To Work-in-Process

 

571

To Finished Goods

 

1036

To Cost of Goods Sold

 

16243

(Being over-applied overhead disposed for elimination of imbalance)         

In order to prepare the journal entry, the percentage of weighted and adjusted amount has been computed (Refer to Appendices, Appendix 4).

Use of Over or Under Applied Overhead and Dealing with issue by depicting the Journal for Eradication of Imbalance:

Seafarer Kayaks could under apply overhead by applying the same to a product related to work-in-progress, which needs to be lower on the actual overhead incurred on the work-in-process. As a result, manufacturing overhead would lead to a balance in debit side (Needles, Powers and Crosson, 2013). Hence, Seafarer Kayaks could report this as prepaid expense in its statement of financial position. Over-applied overhead could be made by allocating overhead to inventory of work-in-process. This needs to be higher compared to that of the actual overhead incurred on the work-in-process.  Due to this, the manufacturing expense would result in a credit side balance. Thus, this amount is added to the budgeted profit of the organisation at the end of the accounting year (Kinney and Raiborn, 2012). 

In the case of Seafarer Kayaks, it has been found that there is over-application of overhead. Therefore, in order to deal with such issue, the following journal entry could be helpful in writing off the imbalance:

Particulars

Debit (in $)

Credit (in $)

Manufacturing overhead Account

17850

 

To work in process Account

 

17850

(Being the over application of direct labour cost as part of the manufacturing overhead is transferred to work in process)

Standard Costing System and its Importance in Planning and Controlling Operations to Seafarer Kayaks:

Standard costing constitutes the predetermined costs per unit of the produced goods pertaining to a single period. Computations of standard costing are based upon several parameters or bases. The primary use of standard costing as a management tool entails measurement of a cost centre’s performance, evaluating the effectiveness of cost control measures along with fixation of product prices (Eisenberg 2016). Further, the method of costing is congruent for the organization whose production lines comprises of repetitive production process as standard costing have inherent drawbacks because of which the method cannot be applied towards non standard or non repetitive production methods (CPA and Shi 2016). The standard costing process involves benchmarking products based upon past data and involves formulation on standard usage of labor and material. Actual products are then examined for computing the degree of variances from such benchmarks.

Seafarer Kayak’s production comprises of repetitive production of kayaks, thereby implementing standard costing measures at its production floors can enable the company towards setting a benchmark and examining the prevalent production methods in light of it. Standard costing assists managers of Seafarer towards identifying cost centre that are performing lower of the benchmark level and thereby respond appropriately to production issues. Further, the implementation of Standard Costing at Seafarer could assist it towards the formulating budgetary framework since it forms the core of budgetary analysis. Moreover, in a production situation where actual costs tend to remain inconsistent over time there are particular form of metrics in standard costing that allows taking into account a situation of dynamic set of costs (Ruiz-de-Arbulo-Lopez, Fortuny-Santos and Cuatrecasas-Arbós 2013). The product pricing policy of Seafarer Kayaks can be formulated with the assistance from standard costing tools.  In absence of an actual cost of production providing an additional margin on the standard costs per unit of a product the managers can arrive at a potential selling price.

Conclusion:

The different sets of costing tools enable management of a company towards evaluating the performance level of distinct cost centers’.  Moreover, quality control as well constant value creation is assisted from different sets of costing tools. In case of Seafarer Kayaks, implementing product costing system tends to assist them towards dissemination costs pertaining to different sets of stages in the production.  Further, the management is assisted through implementation of standard costing in its production premises as the company produces repetitive sets of kayaking products. Moreover, formulation of cost budgets are streamlined with the presence of product costing and standard costing at its disposal. The aforementioned methods of costing have the potential to maintain vigilance on both the quality control mechanism of production along with the sustaining desirable level of per unit product costs. Further, recognition of variances in terms of labor and material costs are streamlined through standard costing. The overall production costs of Seafarer Kayaks can reduce substantially through such costing methods, and even though Seafarer enjoys sizeable reputation and market share, installation of appropriate sets of cost management functions tends to enable the company in lowering its breakeven point. 

References and Bibliography:

Capalbo, F. and Sorrentino, M., 2013. Cash to Accrual accounting: Does it mean more control for the public sector? The case of revenue from non-exchange transactions. Risk Governance & Control: Financial Markets & Institutions, 3(4), pp.28-35.

Carey, P., Potter, B. and Tanewski, G., 2014. AASB Research Report No.

CPA, A.B. and Shi, Y., 2016. Leaning away from standard costing. Strategic Finance, 97(12), pp.38-45.

Drury, C.M., 2013. Management and cost accounting. Springer.

Eisenberg, P., 2016. Implications of Standard Costing System in Manufacturing: A Case Study. Journal of Applied Management and Investments, 5(3), pp.162-165.

Fan, Y. and Liu, X.K., 2016. Misclassifying Core Expenses as Special Items: Cost of Goods Sold or Selling, General, and Administrative Expenses?. Contemporary Accounting Research, 17(3), pp.56-63.

Fisher, J.G. and Krumwiede, K., 2012. Product costing systems: Finding the right approach. Journal of Corporate Accounting & Finance, 23(3), pp.43-51.

Kinney, M.R. and Raiborn, C.A., 2012. Cost accounting: Foundations and evolutions. Cengage Learning.

Needles, B.E., Powers, M. and Crosson, S.V., 2013. Principles of accounting. Cengage Learning.

Ruiz-de-Arbulo-Lopez, P., Fortuny-Santos, J. and Cuatrecasas-Arbós, L., 2013. Lean manufacturing: costing the value stream. Industrial Management & Data Systems, 113(5), pp.647-668.

Warren, C.S., Reeve, J.M. and Duchac, J., 2013. Financial & managerial accounting. Cengage Learning.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John Wiley & Sons.

aasb.gov.au (2016). [online] Available at: http://www.aasb.gov.au/admin/file/content105/c9/AASB102_07-04_COMPdec12_07-13.pdf [Accessed 3 Sep. 2016]. 

 

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