Essay: Report On Product Costing System And Costing Techniques For Frank Burgess.

Prepare a report for Frank Burgess that addresses the following:

a) The purpose of a product costing system.

b) Preparation of a Schedule of Cost of Goods Manufactured and Cost of Goods Sold. (The schedules may be in the appendix). Explain why some items have been excluded from the schedules.

c) Complete the T-accounts and determine the following:

i. Work in Process at the end of April;

ii. Raw materials purchased in April;

iii. Overhead applied in April;

iv. Cost of Goods sold in April;

v. Raw materials used in April; and,

vi. Over- or under-applied overhead in April.

d) Discuss how overheads can be over- or under-applied and how the company should deal with the over- or under-application.

e) Evaluate whether ABC should be introduced.

Product Costing System

This report has been prepared to tell the Frank about the importance of costing system and accounts in the business. This report tells the benefits of cost accounting to Frank. In this report, the figures of the company has been presented in a good manner to make the Frank understand about the benefits of costing and could explain him that how costing technique helps the company to reduce the cost. While preparing this report, the case has been analyzed very well and every detail of mike has been considered.

Schedule of cost of manufactured goods and cost of goods sold has been prepared to present the figures and benefits of costing in a better manner. For understanding the benefits of accounts, T figures have been prepared and the benefits have been understood to Frank.

The main reason behind preparing this report is to convince the Frank to hire an accountant to keep a track over all the financial figures and costing procedure of the company. Earlier, Frank has not been convinced due to the fact that the identification of costing is not important for his business and profits are analyzed through deducting the expenses from revenue.

Product costing system is an accounting procedure to determine the entire expenses of an organization while pertaining the making of company products. Product costing includes all the cost which is directly related to link with the production of a product. In product costing system, cost per unit is calculated.

Product costing system must be adopted by Frank. It is the process of assigning the cost to stock and production which go for sale. There are several purposes due to which Frank could accept the product costing system:

Product costing system is quite effective and offers an accurate figure to analyze and make a better decision. It becomes easy for the business to get accurate result. Product costing analysis could help the organization to enhance the process of cost allocating and especially the process of allocating the variable cost. It would help the organization to enforce the attaching cost, matching principle to the value which could be creating throughout the operations of the company.

Product costing system helps the business to track the product at various stages. This also helps the business to keep an eye over the budget of the company. Without a proper costing system, it becomes quite difficult for a company to manage the product at various stages as well as the budget.

Purpose of Product Costing System

Project development depicts the creation of new manufacturing products. Whenever an organization is planning for designing the new line of manufacturing products or recreates an old product with various new features and product costing that could be an invaluable resources.

Whenever a business makes decision, many figures are required. Product costing system offers that figures to the organization. It could be called a foundation to make better decisions. This also helps the company to investigate the difference between variable and fixed cost.

While preparing the above schedules, many expenses have not been considered due to the fact that these expenses are not directly related with the production of the company. Such as administrative salary, administrative expense, depreciation on office equipment, general liability, sales salaries, travel and entertainment expenses etc. these expenses and not the factory expenses neither these expenses impacted over the production of the company directly. So these expenses have been excluded from the schedules (Hansen, Mowen, & Guan, 2007).

The under or over applied manufacturing overhead could be defined as the difference between actual applied manufacturing overhead to manufacturing overhead cost and work in process which has been incurred in a particular period. If the applied manufacturing overhead cost on WIP is quite more than the actual manufacturing overhead cost incurred in a particular time than the occurred difference is called over-applied manufacturing overhead whereas if the applied manufacturing overhead cost on WIP is quite low than the actual manufacturing overhead cost incurred in a particular time than the occurred difference is called under-applied manufacturing overhead (Horngren, 2009).

Applied overhead > Actual Overhead = Over applied manufacturing overhead

Applied overhead < Actual Overhead = under applied manufacturing overhead

These under or overhead manufacturing overheads are applied to WIP account by concerning a predetermined Overhead rate. This rate is computed by the organization in beginning of the period by investigating the information. Company could deal with manufacturing over or under overhead by following the procedure of predetermined rate. This process is also known as “measuring and recording manufacturing overhead cost”.

Actual cost of manufacturing overhead is debited and applied cost of manufacturing overhead is credited to manufacturing overhead account. Actual are debited as they has been incurred and applied are credited as they has been charged in WIP account if the credit balance leaves in manufacturing overhead that means it has been over applied vice versa (Hansen, Mowen & Guan, 2007).

Schedule of Cost of Manufactured Goods

Through this calculation, it has been analyzed that company has applied higher overheads to the production system of the company. Through analyzing the documents of the company and after preparing the cost of manufactured goods schedule, cost of goods sold schedule it has been identified that the changed overhead of the company is quite higher than the actual Overhead as company was applying the cost of administrative salary, administrative expense, depreciation on office equipment, general liability, sales salaries, travel and entertainment expenses etc to the production cost of the company.

ABC costing technique is known as activity based costing. This technique is the modern technique of allocating the cost to the products and the cost centre. This technique helps the organization and manufacturing houses to solve all the issues related to costing. Depth information is required in this technique so the outcome of this technique is more accurate and reliable (Garrison et al, 2010). It offers the accurate cost per unit to the manufacturing house.

It is mostly used by the organization with a goal of supervise and diminish the inaccuracy issues while transferring the total cost to every cost element and centre. In this technique, firstly the entire amount is allocated to the cost centre than many steps are followed to reach at the result.

Traditional costing system is one of the oldest techniques to analyze and allocate the cost to the cost centres and product canter of the company. This technique does not gather extra information and costs are allocated in limited information. Variable and fixed overheads are not allocated differently in this system. It assigns the cost of overheads to the cost centre according to an average rate of overhead expenses. It says that all the indirect cost must be allocated to production department. It concerns the cost drivers to allocate the cost equally to every product.

Through analyzing the ABC and traditional costing system of the company, it has been analyzed that ABC costing technique is a better option as this considers all the information of the company and allocate the cost accordingly. Variable and fixed overheads are not allocated differently in traditional system but ABC considers it well (Bhimani et al, 2008). This technique helps the organization and manufacturing houses to solve all the issues related to costing. Depth information is required in this technique so the outcome of this technique is more accurate and reliable. It offers the accurate cost per unit to the manufacturing house.

So it has been evaluated that ABC is the best technique for the company to apply in the production house to get the best result and accurate and reliable result so that the decisions could be made in a better way.

(Drury, 2013)

Conclusion:

This report has been presented to make the Frank understand about the benefits of the costing system. In this report the costing figures has been presented in a proper manner to make the Frank understand about proposes of the costing system. The proposes of costing system has been analyzed to understand the importance of an accountant and the costing data of the company.

Schedule of manufacturing goods and cost of goods sold has been presented to understand the process and production system of the company. It has been also analyzed that how much production cost are paying by the company. T accounts have been prepared to analyze the figures of the company. At last, the ABC technique and traditional costing technique has been studied and it has been evaluated that activity based costing is a better choice for the purpose of getting accurate result of cost of the organization.

References:

Bhimani, A., Horngren, C. T., Datar, S. M., & Foster, G. 2008. Management and cost accounting (Vol. 1). Pearson Education.

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

Garrison, R. H., Noreen, E. W., Brewer, P. C., & McGowan, A. 2010. Managerial accounting. Issues in Accounting Education, 25(4), 792-793.

Hansen, D. R., Mowen, M. M., & Madison, T. (2010). Cornerstones of cost accounting. Issues in Accounting Education, 25(4), 790-791.

Hansen, D., Mowen, M., & Guan, L. 2007. Cost management: accounting and control. Cengage Learning.

Hopper, T., Northcott, D., & Scapens, R. 2007. Issues in management accounting. Pearson education.

Horngren, C. T. 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education India.