ACC200 Term 3 2018 Assignment2
ACC200 Term 3 2018 Assignment2.
Question 1: ACC200 Term 3 2018 Assignment2
Calculations In Two Decimal Places
Calculate cost per unit of the two models of sewing machines under the current traditional costing system.
Calculate cost per unit of the two models of sewing machines under Activity based Costing.
Sewing easy sells the advance model at a price of total cost (under the current costing system) plus 30% and is willing to give the same selling price to the overseas buyer. The overseas buyer wants to purchase only the advance model. Prepare December 2017 Profit and Loss Statement for the advance model where (a)traditional costing is used to calculate the product cost (b) Activity Based Costing is used to calculate the product cost. Analyse why the overseas buyer is interested to buy only the advance model. In your discussion you should highlight the importance of accurate product costing.
Discuss why actual overhead and applied overhead may be different at year end and state three ways to deal with under/over applied overhead costs (no journal entries are required).
Assume actual overhead is $300 000 and applied overhead is $210 000 and also assume that at the end of the year the inventory and the cost of goods sold accounts are as follows:
Work-in-process: $60 500
Finished goods: $90 000
Cost of goods sold is $1 850 000
Calculate the under/over applied overhead and using the proration method dispose the under/over applied overhead (no journal entries are required).
Traditional costing approach is the system of allocation of the factory overhead over the products on the basis of production volume for the resources consumed. As per this method the overhead is generally applied on the basis of direct labour value for hours consumed or use of machine hours. Major problem associated with traditional costing approach is that factory overhead may be higher as compared to allocation basis, so that small change in volume of the resources consumed will results into big changes in the overhead application (Dong, Liu and Lin 2014). On the other hand, activity based costing (ABC) is the accounting approach that recognizes and allocates the costs to activities of overheads and assigns the costs to products. ABC approach identifies the relationship among manufactured products, overhead activities and based on the relationship the direct costs are allocated to products. Fantori Ltd that is engaged in selling 2 types of models basis and advance is that is planning for implementing the Activity Based Costing approach against the existing traditional approach (Lakmal 2014). The report will focus on computation of cost per unit for 2 models based on traditional approach as well as ABC approach. Based on overhead allocation the report will focus on the profitability of advance model under both the approaches.
Computation of cost per unit for sewing machine under traditional method
Using the traditional method the company allocates the overheads based on the direct labour cost spend per unit for each model. However, it is unlikely that each model will consume the overhead at the same rate for which the labour cost is consumed. For instance, the inspection cost is $ 30,000 and inspection for basic model is 210 and for advance model it is 760. Hence, it is justified to allocate the inspection cost based on the labour expenses.
From the above table, it can be identified that the direct cost per unit for basic model is $ 525 whereas the same for advance model is $ 860 per unit. Overhead cost per unit for basic model is $ 63.35 and for advance model is $ 347.38. The significant difference in overhead cost is due to the fact that selling and distribution expenses, office rent and interest expenses are incurred for the advance model only (Plank 2018). Total cost per unit for basic model as per traditional approach is $ 588.35 whereas the same for advance model is $ 1207.38 per unit.
Activity based costing allocates the overhead to products in more logical approach as compared to the traditional method of allocating the overhead on the basis of the labour hour. Under ABC approach the costs are allocated to the costs related to the activities those are real cause of the overheads. For instance, the inspection cost is $ 30,000 and inspection for basic model is 210 and for advance model it is 760. Hence, the inspection cost will be allocated on the basis of number of inspection carried out for each model.
From the above table, it can be identified that as per ABC method the direct cost per unit for basic model is $ 525 whereas the same for advance model is $ 860 per unit. Overhead cost per unit for basic model is $ 51.59 and for advance model is $ 359.88. The significant difference in overhead cost is due to the fact that selling and distribution expenses, office rent and interest expenses are incurred for the advance model only (Keiser, Garner and Vandermar 2017). Total cost per unit for basic model as per ABC model is $ 576.59 whereas the same for advance model is $ 1219.88 per unit.
Profit and loss statement for advance model
From the above table, it can be identified that as per traditional method as well as ABC method the direct cost per unit for advance model is $ 860 per unit. However, the total cost per unit as per traditional method is $ 1207.38 and as per ABC method is $ 1219.88. The company sells the advance model at cost under the existing method that is traditional method plus 30% that makes the selling cost to $ 1,569.59. Same selling price is used by the company for selling the advance model to overseas buyer. This makes profit per unit as per traditional model $ 362.21 and as per ABC method at $ 349.72 per unit (Osadchy and Akhmetshin 2015).
While considering the finance aspect accurate costing of the product is important for the purpose of preparing the financial statement as well as filing of tax. Each component of the financial statement and reporting has an impact on the overall financial aspect of the business. Incorrect computation of product costing will have great impact on the sales revenue of the company which in turn will have great impact on the profitability of the company (Akhavan, Ward and Bozic 2016). Accurate product costing is important for the below mentioned reasons –
- Impact on budget – process of budget depends on the accurate calculation of revenues and expenses so that more accurate forecast can be made. If the product costs are miscalculated, there will be significant errors in the process of budget.
- Income statement – the income statement depends on the accurate computation of COGS or the product cost. Cost for each product that is sold is subtracted from the sales value to arrive at profit. If the calculation of product cost is wrong it will lead to lower or higher profit as compared to actual (Costabile et al. 2017).
- Assets and inventory – calculation of inventory are based upon the accurate reporting of product’s direct cost. If the product cost is not computed correctly the value of inventory will not be accurate. Based on amount of error in the calculation it may lead to material misstatement of asset reporting. Assets of the company are important aspect for determining the business with for the potential investors or when the business seeks borrowing for financing.
- Decision making purpose – while computing the product cost, approaches varies for the manufactured products and the product bought from the wholesaler. If the product is purchased product cost is simply the price paid for buying the product. On the contrary when the product is manufactured all the related costs with manufacturing are considered. Hence, accurate product costing is required for making a decision regarding purchase or manufacturing the product.