Assessment Item 1: Costing Products And Services Essay.

Question 1: Management accounting and costs

The purpose of Assessment item 1 is to establish the skills needed in the workplace for costing products and services using the appropriate processes and tools and apply analytical processes to construct accounting systems and models using workplace tools. Each question uses realistic data and the professional practices similar to that found in workplaces.
Your assignment consists of different question styles including discussion questions, reports, exercises, problem questions and spreadsheet questions. It assesses learning outcomes as listed in the assignment rationale below.

Question 1 Management accounting and costs (4 marks)
Identify the five major cost elements in the cost of a product or service. Define each and give examples.

Question 2 Costing
Give five examples of products where more detailed recording of costs is required and five examples of products where averaging techniques may be appropriate.
 
Question 3 Cost concepts (4 marks)
The monthly cost of renting a manufacturing plant is
A a prime cost and an inventoriable cost.
B a prime cost and a period cost.
C a prime cost and a product cost.
D a conversion cost and a period cost
E a conversion cost and an inventoriable cost.?Explain your answer.

?Question 4 Manufacturing statement and income statement (18 marks)
Spreadsheet. See the Spreadsheet Advice PDF in Interact2 Resources and the examples in your textbook.
See the requirements within the spreadsheet template below.

Check the assignment requirements in this subject outline paying particular attention to the spreadsheet requirements. Ensure you have separate data and report areas showing only formulas. Use IF functions to allow for the possibility of either a net income or a net loss. Show row and column headings and paste both a normal view and a formula view.

 
Question 5 Cost concepts (8 marks)
Should overtime payments be treated as direct labour, or as overhead? Explain.with 2 example .

Question 6 Understanding the entries in the Materials Control account (6 marks)?The Materials Control account balances were $40 000 on 1 April and $20 000 on 30 April. During April direct materials issued to production were $70 000 and indirect materials consumed were $30 000.
Required:
Show the Materials Control account in the ledger for April and a general journal entry to record the cost materials purchased during April.

Question 7 Understanding the entries in the Accrued Payroll account (8 marks)?Salaries and wages payable to factory employees were $20 000 on 1 March and $8000 on 31 March. Gross salaries and wages paid during March totalled $50 000. March's direct labour totalled $28 000.
Required:
T-account for Accrued Payroll for March and general journal entries for recording salaries and wages earned by factory employees during March.

Question 8 Payroll: direct and indirect labour (8 marks)?J. Smith worked for 48 hours during the pay week ending Friday April 24. His normal working week consists of 40 hours, of which 35 hours were spent on production while the remaining 5 hours were non-productive idle time. Smith worked 2 hours overtime at a premium of 50% on Monday April 20 because a customer required work finished by Tuesday April 21 even if overtime had to be worked to complete it. Smith worked a further 6 hours overtime on Wednesday April 22 on other production. It is the policy of the company to pay an overtime premium of 100% after the first 3 hours on any one day. Smith’s normal wage rate is $22 per hour.
Required:
(a) Calculate Smith’s gross pay for the week.
(b) Indicate the sum to be treated as indirect labour.

Question 9 Activity Based Costing (10 marks)
Your employer is contemplating changing the existing traditional costing systems used in the business to adopt activity based costing (ABC). See your text page 81.
Prepare a business report outlining the traditional costing system and evaluate arguments for and against ABC. Use the Internet as a resource. The following resources will help you prepare and format your report:eportfolio.csu.edu.au/pebblepad/viewasset.aspx
Or see this resource. unilearning.uow.edu.au/report/4b.html

Question 10 Direct, step and reciprocal methods of overhead allocation Colin and Company has two production departments and two service departments. The budgeted costs of these departments are:

The services of S1 are allocated according to the number of employees in the other departments:
S2 has 20 employees, P1 30 employees and P2 30 employees.
The services of S2 are allocated 30% to S1, 20% to P1 and 50% to P2.

Certain cost elements are associated with the cost of producing a cost or service, five of which are described along with their examples as follows:

Materials:

The costs of materials are tangible goods required to produce a product. The material costs could be in the form of direct or indirect material costs. The direct costs of materials are the traceable and quantifiable costs incurred in production (Chenhall & Moers, 2015). On the other hand, the indirect materials are untraceable or it is not cost effective. For instance, an organisation manufacturing artisan crafts might take into account wood as a direct material, as the amount of wood required could be quantified easily. On the contrary, it would not be cost-effective to track glue and other fasteners in this fashion. Thus, these items could be adjudged as indirect materials.

Labour:

The amount incurred in the manufacturing process in the form of wages and salaries to the staffs is considered as the cost of labour. The cost of labour could be segregated into both direct labour and indirect labour. Wages are considered as a major part of direct labour cost, which are paid to the staffs involved with physical handling of the product (Dekker, 2016). The cost of indirect labour comprises of other wages and salaries involved in production; however, they could not be traced to units. For instance, the direct labour costs constitute of the wages for line staffs and material handlers. The indirect labour costs would include the salaries of plant supervisors, engineers of quality control and workers associated with factory maintenance.

Overhead:

The overhead costs are associated with production; however, it could not be segregated as direct materials or direct labour. In other words, the overhead costs consider all indirect material and labour costs along with untraceable costs. Some of the popular overhead costs include manufacturing rents, insurance costs and depreciation on factory equipment. In case of small-sized businesses, majority of the cost of production comprises of overhead cost (Drury, 2013). However, effective cost management practices need to be adopted for handling the overhead costs.

Direct expenses:

The expenses, which could be identified along with charging to the centre directly, are considered as direct expenses. These expenditures are charged directly to the products as portion of prime cost (Farhan, 2013). Some common forms of direct expenses include excise duty, royalty and cost involved in designing a particular pattern.

Question 2: Costing

Period costs:

Period costs are those costs, which are expensed immediately they are incurred. Some of the common period costs involved with small businesses comprise of sales commissions, advertising costs, owners’ salaries and depreciation for non-factory equipment. In addition, period costs might minimise net income and thus, the management might intend to keep track of the same to check if these costs are not higher in contrast to the expected ones.  

The products that require more detailed recording of costs include the raw materials, fuel, packaging, labour and factory depreciation. On the contrary, the products that require averaging techniques constitute of office supplies, advertising, sales commissions, office depreciation and research and development (Schuster, 2015).

The monthly cost of renting a manufacturing plant is a conversion cost and an inventoriable cost, as it is a portion of the manufacturing overhead costs. It could not be considered as a part of direct labour or prime cost, since it is not directly associated with the cost of production.

In the Books of Tendulkar Manufacturing Co.
Manufacturing Statement
for the period ended 30 September 3017
Particulars	Amount (in $)	Amount (in $)
Raw Materials Purchased	5,00,000
Add: Opening Stock of Raw Materials	1,10,000
Less: Closing Stock of Raw Materials	16,000	5,94,000
Productive Labour		1,30,000
Inward Charges on Raw Materials		22,000
Prime Cost		7,46,000
Manufacturing Overhead:
Manufacturing Expense		60,000
Depreciation on Machinery		12,000
Factory Salaries	2,00,000
Add: Accrued Salaries	11,000	2,11,000
Insurance	3,000
Add: Prepaid Insurance	750	3,750
Rates		6,750
Factory Cost		10,39,500
Add: Opening Work-in-Process
Material	15,000
Labour	9,000
Overhead Expenses	6,000	30,000
		10,69,500
Less: Closing Work-in-Process
Material	7,000
Labour	5,000
Overhead Expenses	3,000	15,000
Cost of Goods Manufactured		10,54,500
Add: Opening Stock of Finished Goods		70,000
Less: Closing Stock of Finished Goods		25,000
Cost of Goods Sold		10,99,500

Manufacturing statement for the year (Formula view):

Income statement for the year (Normal view):

In the Books of Tendulkar Manufacturing Co.
Manufacturing Statement
for the period ended 30 September 3017
Particulars	Amount (in $)	Amount (in $)
Sales of Finished Goods		17,00,000
Cost of Goods Sold		10,99,500
Gross Profit		6,00,500
Operating Expenses:
Advertising		12,000
Audit Fee		3,000
Discount Expense		6,000
Discount Revenue		(4,000)
Carriage Outwards		5,000
Insurance	1,000
Less: Prepaid Insurance	250	750
Light and Power		12,000
General Expenses		23,000
Rates		2,250
Office Salaries	1,00,000
Add: Accrued Office Salaries	700	1,00,700
Sales Commission		40,000
Total Operating Expenses		2,00,700
Operating Income		3,99,800
Tax Expense		50,000
Net Profit		3,49,800

Income statement for the year (Formula view):

In the words of Fullerton, Kennedy & Widener (2014), overtime payments are the amount incurred for the overtime worked in excess of the normal rate of wages. It is treated as cost of indirect labour and such payment is incorporated in the cost of manufacturing overhead. For instance, a labour works for 48 hours each week at a rate of $8 per hour. In a specific week, if the labour works for 52 hours and the payment of each excess hour is $12, the apportionment of labour cost would be as follows:

Particulars	Amount (in $)
Direct labour (52 x 8)	416
Manufacturing overhead (4 x 4)	16
Total cost	432

At the time the overtime wages are spent on chance, as the staffs are working overtime in contrast to necessity, it could be considered as a strenuous job or a rush job. This is because it needs additional work and thus, overtime payments could be adjudged as overhead with the necessary treatment (Hemmer & Labro, 2016). For instance, it is assumed that a press operator in a plant makes $12 each hour for normal 40 working hours. During a specific worker, the operator has worked for 45 weeks and the overtime premium is $6 per hour. The labour cost would be apportioned as follows:

Particulars	Amount (in $)
Direct labour (12 x 45)	540
Manufacturing overhead (6 x 5)	30
Total cost	570

In this case, the GST rate is assumed as 10% on all purchases.

Question 3: Cost concepts

Material control and other associated ledger accounts (Normal view):

Material Control Account
Dr.			Cr.
Date	Particulars	Amount	Date	Particulars	Amount
1st April	To Balance b/d	40,000		By Work-in-Process Account	1,00,000
	To Accounts Payable Account	80,000	31st April	By Balance c/d	20,000
		1,20,000			1,20,000

Accounts Payable Account
Dr.			Cr.
Date	Particulars	Amount	Date	Particulars	Amount
				By Material Control Account	80,000
31st April	To Balance c/d	88,000		By GST Clearing Account	8,000
		88,000			88,000

GST Clearing Account
Dr.			Cr.
Date	Particulars	Amount	Date	Particulars	Amount
	To Accounts Payable Account	8,000		By Balance c/d	8,000
		8,000			8,000

Material control and other associated ledger accounts (Formula view):

Journal entry for recording the cost of materials purchased (Normal view):

Journal Entry:
Material Control Account………Dr	$     80,000
GST Clearing Account…………….Dr	$       8,000
To Accounts Payable Account	$     88,000

Journal entry for recording the cost of materials purchased (Formula view):

Accrued payroll and salaries and wages ledger accounts (Normal view):

Accrued Payroll Account
Dr.			Cr.
Date	Particulars	Amount	Date	Particulars	Amount
	To Salary and Wages Account	50,000	1st March	By Balance b/d	20,000
31st  March	To Balance c/d	8,000		By Salary and Wages Account	38,000
		58,000			58,000

Salary and Wages Account
Dr.			Cr.
Date	Particulars	Amount	Date	Particulars	Amount
	To Bank Account	50,000		By Accrued Payroll Account	50,000
	To Accrued Payroll Account	38,000		By Salary and Wages Account	38,000
		88,000			88,000

Accrued payroll and salaries and wages ledger accounts (Formula view):

Journal entries for recording salaries and wages (Normal view):

Journal Entry:
Salary Account……..Dr	10,000
Wages Account……..Dr	28,000
To Accrued Payroll Account	38,000
Accrued Payroll Account…..Dr	50,000
To Salary and Wages Account	50,000
Salary and Wages Account.....Dr	50,000
To Bank Account	50,000

Journal entries for recording salaries and wages (Formula view):

Gross pay and amount of indirect labour of J. Smith (Normal view):

Particulars	Units
Working hours of J. Smith	48
Normal Working hours	40
Production time(in hours)	35
Idle time (in hours)	5
Overtime work on April 20	2
Overtime work on April 22	6
Premium for 1st three hours	50%
Premium for more than three hours	100%
Normal wage rate	$      22
Amount paid for normal working hours	$ 1,056
Overtime rate for 1st three hours	$      11
Overtime rate after first three hours	$      22
Total overtime amount for J. Smith	$    143
Gross pay of J. Smith	$ 1,199
Amount of indirect labour	$    253

In this case, the amount of idle time and overtime premium has been considered as a part of indirect labour to arrive at the overall amount of the same.

With the help of costing systems, an organisation would be able to ascertain the cost associated with a specific product or service for revenue generation.  The two most prevalent costing systems include traditional costing and activity-based costing. The traditional costing primarily engages in delegating manufacturing overhead depending on the volumes of cost driver. The drivers of cost take into account the machine hours, direct material and direct labour hours. On the other hand, activity-based costing intends to apportion the manufacturing cost of a specific product in compliance with activities for production. Thus, it is crucial for the business managers to gain an insight of the merits and drawbacks of each costing system to fulfil the needs of their business organisations.

The traditional costing system indicates the apportionment of cost related to manufacturing overheads for production. It is utilised for delegation of costs associated with factory overhead depending on the produced units. This method is feasibility when there is lack of availability of time and the impact on production activities is minimal. The external usage is relatively easier for ascertaining the product valuation (Noordin et al., 2014). Activity-based costing enables in depicting accurate overview of the cost of a product. However, its use is supplementary in most of the business organisations. This costing system helps in ascertainment of activity in manufacturing a product and allocation of cost in production activity (Becker et al., 2015). The initiation of this costing system is to overcome the loopholes of the conventional costing system, since it uses drivers of cost for apportionment of indirect cost of the manufacturers.

The costing accuracy in ABC costing is greater, as the costs are assigned to products based on production. Such technique helps in eradicating the apportionment of irrelevant costs for a particular product. In addition, this costing system is easy to interpret for the internal management and standards for overhead costs. However, this system might be time-consuming as well as confusing in absence of lack of adequate knowledge on the part of the business personnel. This is because it takes into account both managerial costs and administration costs at the same time (Otley & Emmanuel, 2013). 

Direct method (Normal view):

Particulars	Material and Labour	Percentage	Total of Production Department	Indirect Costs	Percentage	Total of Production Department
P1	2,00,000	53.33%	93.33%	90,000	48.91%	86.96%
P2	1,50,000	40.00%		70,000	38.04%
S1	10,000	2.67%		6,000	3.26%
S2	15,000	4.00%		18,000	9.78%
Total	3,75,000			1,84,000

Apportionment of Cost:
Particulars	Material and Labour	Allocation from Service Department	Indirect Costs	Allocation from Service Department	Total
P1	2,00,000	43,750	90,000	42,667	3,76,417
P2	1,50,000	58,333	70,000	54,857	3,33,190

Direct method (Formula view):

Step Method:
Particulars	P1	P2	S1	S2
Material and labour	2,00,000	1,50,000	10,000	15,000
Indirect costs	90,000	70,000	6,000	18,000
Total	2,90,000	2,20,000	16,000	33,000
Add: Apportionment of S2 department	18,194	13,802	1,004
Total	3,08,194	2,33,802	17,004
Add: Apportionment of S1 department	9,669	7,335
Total	3,17,863	2,41,137

Step method (Formula view): 

Reciprocal services method (using algebraic equation):

The cost of simultaneous equation method would be used to solve the provided problem. The original cost of the service departments are provided as follows:

S1 = $16,000

S2 = $33,000

After obtaining the share from the service departments’ distribution:

S1 = $16,000 + 30% S2 [Equation 1]

S2= $33,000 + [20/(20+30+30)] S1

S2 = $33,000 + 25% S1 [Equation 2]

By placing the value of S2 in Equation 1,

S1 = 16,000 + 30% (33,000 + 25% S1)

S1 = 16,000 + 9,900 + 0.075 S1

S1 = 25,500 + 0.075 S1

S1 – 0.075 S1 = 25,500

0.925 S1 = 25,500

S1 = 25,500/0.925

S1 = $28,000

Similarly, by placing the value of S1 in Equation 2,

S2 = 33,000 + 25% (16,000 + 30% S2)

S2 = 33,000 + 4,000 + 0.075 S2

S2 – 0.075 S2 = 37,000

0.925 S2 = 37,000

S2 = 37,000/0.925

S2 = $40,000

Distribution summary:

Particulars	P1	P2	S1	S2
Material and labour	2,00,000	1,50,000	10,000	15,000
Indirect costs	90,000	70,000	6,000	18,000
Total	2,90,000	2,20,000	16,000	33,000
Add: Distribution of S2	40,000 x 20% = 8,000	40,000 x 50% = 20,000	(40,000 x 30%) = 12,000	(40,000)
Add: Distribution of S1	28,000 * [30/(30+30+20)] = 28,000 * 37.50% = 10,500	28,000 * [30/(30+30+20)] = 28,000 * 37.50% = 10,500	(28,000)	28,000 * 25% = 7,000
Total	3,08,500	2,50,500	-	-

Reciprocal services method (Normal view):

Reciprocal Method:
Particulars	Allocation of S1	Percentage	Allocation of S2	Percentage
P1	30	37.50%	20	20.00%
P2	30	37.50%	50	50.00%
S1			30	30.00%
S2	20	25.00%
Total	80		100

Apportionment of Cost:
Particulars	P1	P2	S1	S2
Material and labour	2,00,000	1,50,000	10,000	15,000
Indirect costs	90,000	70,000	6,000	18,000
Total	2,90,000	2,20,000	16,000	33,000
Add: Allocation of S2	8,000	20,000	12,000	(40,000)
Total	2,98,000	2,40,000	28,000	(7,000)
Add: Allocation of S1	10,500	10,500	(28,000)	7,000
Total	3,08,500	2,50,500	-	-

References:

Becker, S. D., Wald, A., Gessner, C., & Gleich, R. (2015). The Role of Perceived Attributes for the Diffusion of Innovations in Cost Accounting: The Case of Activity-Based Costing. Comptabilité-Contrôle-Audit, 21(1), 105-137.

Chenhall, R. H., & Moers, F. (2015). The role of innovation in the evolution of management accounting and its integration into management control. Accounting, Organizations and Society, 47, 1-13.

Dekker, H. C. (2016). On the boundaries between intrafirm and interfirm management accounting research. Management Accounting Research, 31, 86-99.

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

Farhan, M. A. (2013). Cost & Management Accounting.

Fullerton, R. R., Kennedy, F. A., & Widener, S. K. (2014). Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7), 414-428.

Hemmer, T., & Labro, E. (2016). Productions and Operations Management & Management Accounting.

Noordin, R., Zainuddin, Y., Mail, F., & Mail, R. (2014). Strategic Management Accounting: State-of-the-Art. Malaysian Journal of Business and Economics (MJBE), 1(1).

Otley, D., & Emmanuel, K. M. C. (2013). Readings in accounting for management control. Springer.

Schuster, P. (2015). Cost and Management Accounting. In Transfer Prices and Management Accounting (pp. 1-4). Springer International Publishing.