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ACC200 Introduction To Management Accounting5

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  • Course Code: ACC200
  • University: Kings Own Institute
  • Country: Australia

 Question:

(a)Describe the circumstances when a job order costing system should be used

(b)Calculate,showing working, the balance in Turramurra Furniture Company’s Work in Process Account at 30 June 2017.

(c)Calculate the cost of the chairs in the Finished Goods Inventory at 30 June 2017

(d)Actual manufacturing overhead incurred in June amounted to 217,000 .Calculate the over or underapplied overhead for the year.

(e) Outline two different treatments for the over or underapplied overhead balances when using a job order costing system.

( f)If the Turramurra Furniture Company considers that a variation of $40,000 in the over or underapplication of overhead is material and must be dealt with appropriately in the accounts is the variation(over or underapplication of overhead) material? If it is what approach does the company use to adjust the over or underapplication of overhead?

(g) The company is concerned with its calculation and application of overhead and has asked you to advise if it should consider using Activity Based Costing as it is considering expanding its product range and its concerns about overhead application .   
 

Answer:

Introduction:

Turramurra furniture manufactures furniture, specialised for using with computers. There are different furniture, produced under different job numbers. This report is prepared to determine the cost of each type of furniture and explain the process of cost estimation under job order costing system.

Body:

Suitable Circumstances for Job Order Costing System: 

There are various circumstances in which the process of job order costing system can be used by the organizations and individuals. The job order costing system is usually employed by the firms that produce a number of products that are different in nature. It is an extensively exploited costing system in the production along with the industries associated with the service sector. The production firms that are using the job costing process generally gain he orders for customised services and products (Öker and Ad?güzel 2016). These orders that are customised in nature are known as batches or jobs. When a firm grants jobs and orders for various products, the cost assignment to the product becomes a complex task. In this scenario, the record of the cost for every specific job is kept due to the fact that each of the jobs has various products and the various costs related with it (Trépanier et al. 2014). The cost per unit of a specific job is calculated by dividing the overall cost allocated to that job by the number of specific units associated with the job. The three basic elements of job costing system include the materials, labour cost and the factory overhead.

 

Work-in-Process Balance:

Particulars

SE523

PS612

CH421

DS174

Total

Opening WIP

20000

25000

15000

0

 

Quantity Completed

20000

0

15000

5000

 

Closing WIP Units

0

25000

0

0

 

Opening Value of Work-in-Process

 

$ 300,000

 

 

$ 300,000

Raw Material

 

$ 221,000

 

 

$ 221,000

Labour Cost

 

$ 200,500

 

 

$ 200,500

Manufacturing Overhead

 

$ 97,500

 

 

$ 97,500

Closing Value of Work-in-Process

$ 0

$ 819,000

$ 0

$ 0

$ 819,000

Cost of Chairs in Finished Goods Inventory:

Particulars

Amount

 

 

Direct Raw Material

$ 13,800

 

 

Labor Cost

$ 43,200

 

 

Manufacturing Overhead

$ 22,000

 

 

 

$ 79,000

 

 

Opening WIP

$ 431,000

 

 

Less: Closing WIP

$ 0

 

 

Cost of Goods Manufactured

$ 510,000

 

 

Quantity Completed

15000

 

 

Cost per Units completed

$ 34

 

 

Particulars

Opening Inventory

Units Completed

Total

Total Units

19400

15000

34400

Units Sold

19400

1600

21000

Closing Units

0

13400

13400

Cost per unit

$ 35

$ 34

 

Value of Closing Inventory

$ 0

$ 455,600

$ 455,600

 Computation of Over or Under Applied Overhead:

Particulars

Amount

Annual Predetermined Overhead

$ 4,500,000

Budgeted Machine Hours

$ 900,000

Predetermined Overhead Rate

$ 5

Machine Hours up to May'17

835000

Machine Hours in June'17

49900

Total Machine Hours

884900

Applied Manufacturing Overhead

$ 4,424,500

Actual Overhead up to May'17

$ 4,105,000

Actual Overhead in June'17

$ 217,000

Total Actual Overhead

$ 4,322,000

Over Applied Overhead Expenses

$ 102,500

Different Treatments for Adjusting Over Applied Overheads:

 

 

 

Dr.

Cr.

Date

Particulars

Amount

Amount

 

First Treatment:

 

 

 

6/30/2017

Manufacturing Overhead A/c.

Dr.

$ 102,500

 

 

To,

Cost of Goods Sold A/c.

 

$ 102,500

 

Second Treatment:

 

 

 

6/30/2017

Manufacturing Overhead A/c.

Dr.

$ 102,500

 

 

To,

Work-in Process A/c.

 

$ 102,500

 

Work-in-Process A/c.

Dr.

$ 102,500

 

 

To,

Cost of Goods Sold A/c.

 

$ 102,500

Approach for Adjusting Over Applied Material Cost:

In order to mitigate the issues that is associated to the over or under application of the overhead material, Turramurra Furniture Company looks to debit the manufacturing overhead and credit the cost of goods sold and the second treatment of the manufacturing overhead is debiting the manufacturing overhead cost with the work in process and debit the work in process with the cost of goods sold. This would be able to mitigate the issues that is present with the over and under application of the manufacturing overhead.   

Activity Based Costing

The organization is concerned with their calculations and the application of the overhead and is of the idea of using Activity Based Costing as it is looking for an expansion of their product range and is even concerned about the overhead applications. Activity Based Costing is generally utilised by the manufacturing companies as it improves the reliability of the cost data and thereby manufacturing close to the true and authentic cost and better categorising the costs that has been incurred by the firm during the time of the manufacturing process (Tsai et al. 2014). The costing process is exploited in the product costing, target costing, customer profitability, service pricing and profitability assessment. It has been hugely popular as the companies can create an improved corporate strategy and concentration if the costs are grasped effectively. The process of Activity Based Costing makes use of the numerous costing pools managed by the activity in order to allocate the overhead costs (Dong, Liu and Lin 2014). The idea has been that the activities are needed to manufacture the products like the establishment of the machinery, purchasing the materials, examining the finished products and assembling the the products. These activities can be expensive and therefore the expense of the activities needs to be allocated to the product reliant on the usage of the activities of the products.

An activity is a method that looks to consume the overhead resources. The aim is to understand all the operations that is essential to manufacture the products of the organization (Co?ar, Guner and Tybout, 2016). This step requires the overhead costs related with every activity that is to be assigned to the operations. Hence, Activity Based Costing is essential for considering the product range and the overhead applications.          

Conclusion:

It can be stated from the above discussion and calculations that job order costing is very effective for determining the cost of different specialized products. The management has allocated the overhead to the product cost at higher rate than the actual overhead rate. However, the management can adjust the over applied overhead in different methods and under both the methods, the cost of goods sold would get reduced.

The company can minimize the discrepancy related to the overhead allocation by introducing activity based costing method. It would help the company to allocate the overheads as per the benefits consumed by each product and also to determine the cost more appropriately.

 

Reference List 

Baker, C.R. and Burlaud, A., 2015. The historical evolution from accounting theory to conceptual framework in financial standards setting. The CPA Journal, 85(8), p.54.

Co?ar, A.K., Guner, N. and Tybout, J., 2016. Firm dynamics, job turnover, and wage distributions in an open economy. The American Economic Review, 106(3), pp.625-663.

Dong, J., Liu, C. and Lin, Z., 2014. Charging infrastructure planning for promoting battery electric vehicles: An activity-based approach using multiday travel data. Transportation Research Part C: Emerging Technologies, 38, pp.44-55.

Frazier, W.E., 2014. Metal additive manufacturing: a review. Journal of Materials Engineering and Performance, 23(6), pp.1917-1928.

Öker, F. and Ad?güzel, H., 2016. Time?driven activity?based costing: An implementation in a manufacturing company. Journal of Corporate Accounting & Finance, 27(3), pp.39-56.

Plank, P., 2018. Introduction. In Price and Product-Mix Decisions Under Different Cost Systems (pp. 1-5). Springer Gabler, Wiesbaden.

Trépanier, S.G., Fernet, C., Austin, S., Forest, J. and Vallerand, R.J., 2014. Linking job demands and resources to burnout and work engagement: Does passion underlie these differential relationships?. Motivation and Emotion, 38(3), pp.353-366.

Tsai, W.H., Yang, C.H., Chang, J.C. and Lee, H.L., 2014. An Activity-Based Costing decision model for life cycle assessment in green building projects. European Journal of Operational Research, 238(2), pp.607-619.

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