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Question:

Required:
 
1. i. Identify which cost assignment method would most likely be used to assign the cost of each activity to the motor manufacturing cell: direct tracing, driver tracing or allocation.
 
ii. When driver tracing is selected, identify a potential driver that could be used for cost tracing. State your assumptions where appropriate.
 
2. Explain the difference between direct tracing and driver tracing.
 
 

Answer:

Introduction:

Taking into consideration the different types of costs incurred to manufacture motor cell it seems that using direct tracing would be most effective method to assign cost of each activity to the motor manufacturing cell. Tracing costs directly would result in appropriate costing of cells manufactured. 

In case selection of driver tracing generally the quantity of raw materials used or number of direct labour hours needed can be used as potential driver to trace costs. Generally, the assumptions such as the costs are related to direct materials used or number of labours used is the main foundation behind tracing manufacturing overheads to products (Ganesan, 2015).

Direct tracing is the method where costs are directly traced to different costs objects whereas in driver tracing the cost drivers are traced to assign cost to products manufactured. In direct tracing, cost of products are ascertained more accurately compared to cost of products determined using driver tracing method.

Part 1:

Particulars  

 Amount ($)

 Amount ($)

 Closing raw materials in hand (30 November)

   20,000.00

 

 Add: raw materials used in production during November  

   39,000.00

 

 

   59,000.00

 

 Less: Opening raw materials in hand (01 November)

   17,000.00

 

 Raw materials purchased during the month of November  

   42,000.00


Amount of raw materials purchased during the month of November as can be seen in the table above is $42,000.

Part 2:

Particulars  

 Amount ($)

 Amount ($)

 Beginning work in process  

     9,000.00

 Less:  

 

 

 Direct labour costs (300 x 10)

   3,000.00

 

 Manufacturing overhead (300 x 8)

   2,400.00

 

 

 

     5,400.00

 Direct material costs in the beginning work in process

     3,600.00


The cost of direct materials included in the beginning work in process is $3,600 as per the above calculation.

Part 3:

Particulars  

 Amount ($)

 Manufacturing overhead costs applied during November  

   26,400.00

 Pre-determined overhead rate  

 8 Per direct labour  

 Number of direct labours worked during November   

(Manufacturing overhead cost applied / Pre-determined overhead rate)

     3300 hours


Number of direct labour hours working in the month of November has been calculated by dividing the manufacturing overhead costs applied with the predetermined overhead rate and the resultant number of labour hours worked during the month is 3,300 hours.

Part 4:

Particulars  

 Amount ($)

 Amount ($)

 Ending working in process  

   11,000.00

 Less: Direct material costs

     4,700.00

 Direct labour costs in the ending inventory

     6,300.00


Direct labour costs included in the closing inventory is $6,300 as per the calculation made in the table above.  

Part 5:

Particulars  

 Amount ($)

 Amount ($)

 Opening finished goods  

   50,000.00

 

 Opening work in process  

     9,000.00

 

 

   59,000.00

 

 Add: Materials used during the month   

   39,000.00

 

 

   98,000.00

 

 Add: Manufacturing overhead applied  

   26,400.00

 

 

 

   124,400.00

 Less: Closing finished goods

   44,000.00

 

 Closing work in process

   11,000.00

 

 

 

     55,000.00

 Cost of goods manufactured during November  

     69,400.00


Taking into consideration the cost of raw materials, labour cost and manufacturing overhead the amount of cost of goods manufactured during the month of November is $69,400.

Part 6:

Manufacturing overhead incurred during November is $28,000 whereas manufacturing overhead applied during the period is $26,400. Thus, manufacturing overhead is under-applied by $1,600.

Date  

 Account titles and explanations  

 Debit ($)

 Credit ($)

 

 Finished goods  

     1,280.00

 

 

 Work in process  

         320.00

 

 

 Manufacturing overhead  

   1,600.00

 

 

 

 



Process costing is generally used in manufacturing industry however, a company operating service industry can also use process costing in case similar services are provided in large volume to the customers. An example in service industry is the telecommunication service provider which can use process costing to ascertain cost of services provided.

There are number of examples of manufacturing organisations using process costing. Organizations manufacturing chemicals, refining oil are few of the many organizations that can use process costing to ascertain cost of their products.

 

Process costing in case of manufacturing industries would use the proportionate amount of raw materials, proportionate amount of direct labour and manufacturing overheads to determine the cost of work in progress. However, in case of service industry ascertaining cost of work in progress would be significantly different as there is no cost of materials hence, it is primarily consists of the proportionate cost of services incurred to complete the proportionate service provision. It is easier to calculate the cost of work in progress for manufactured goods compared to calculation of work in progress for process costing of services.

Amounts are in $

 

 Particulars  

 Mineral analysis  

 Soil Analysis  

 Directly incurred overhead costs  

       900,000.00

         800,000.00

 Computing department:  

 

 Mineral Analysis (200000 x 385/700)

       110,000.00

 

 Soil Analysis (200000 x 315/700)

           90,000.00

 Engineering department:  

 

 Mineral Analysis (400000 x 530/1000)

       212,000.00

 

 Soil Analysis (400000 x 470/1000)

         188,000.00

 Total costs  

   1,222,000.00

     1,078,000.00

Usage ratios calculation:

 

 Mineral analysis  

 Soil Analysis  

 Computing department  

 

 Mineral Analysis (200000 x 385/700)

       110,000.00

 

 Soil Analysis (200000 x 315/700)

           90,000.00

 Usage ratios  

 

 (110000 x 100/200000)

                 55%

 

 (90000 x 100/200000)

                   45%

 Engineering department:  

 

 Mineral Analysis (400000 x 530/1000)

       212,000.00

 

 Soil Analysis (400000 x 470/1000)

         188,000.00

 Usage ratios  

 

 (212000 x 100/400000)

                 53%

 

 (188000 x 100/400000)

                   47%


Thus, usage ratio of computing department is 55% for MA and 45% for SA. In case of engineering department the usage ratio is 53% for MA and 47% of SA. 

Economic order quantity is the quantity of goods to be ordered in each order to minimize the inventory costs of an organization. Economic order quantity (EOQ) is calculated by using the following formula:

Where, S= set up cost per order (Ordering cost per order); D= Demand per year and H= Holding costs per unit per year.

Accordingly, EOQ in this case is 5,656.85 per order, i.e. 5657 bottle per order (Weygandt, Kimmel & Kieso, 2015).

Part (2):

Assuming that the company is ordering 5657 bottle per order which is the calculated economic order quantity then the amount of savings in annual inventory costs would be as following:

Particulars  

 Amount ($)

 Amount ($)

 Annual inventory costs with EOQ  

 

 

 

 Holding costs (5657 x 0.50)/2

             1,414.25

 Ordering costs  

 

 Number of orders (40000/5657)

                    8.00

 

 Ordering costs (100 x 8)

                 800.00

 Annual inventory costs  

             2,214.25

 Existing annual inventory costs  

             3,000.00

 Savings in annual inventory  costs (3000 - 2214.25)

                 785.75

With the following new parameters the new reorder quantity is calculated below:

Ordering cost per order

               100.00

 Holding cost per bottle per year  

                    0.50

 Annual demand (150 x 350)

         52,500.00


Where, S= set up cost per order (Ordering cost per order); D= Demand per year and H= Holding costs per unit per year.

EOQ for the above will be 6481 bottles per order.

 

References:

Ganesan, R. (2015). Managerial Cost Accounting. In The Profitable Supply Chain (pp. 259-265). Apress, Berkeley, CA.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. John Wiley & Sons.

OR

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