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Product Costing System for New Age Caravans

Discuss about the Convergence of Management Accounting.

The report has been prepared to analyze the purpose and the significance of the product costing system in relation to New Age Caravans. Furthermore, the suggestions on AASB 102 has even been explained brightly, which are related with the cost of production. In addition, the schedules associated with sales cost and the cost of goods sold produced are being constructed with respect to the overheads and the T-Accounts are analysed and the journal entry for the discarding of the inequity (Kaminska and Kolesnikova 2014). The paper even tries to deal with the exploitation of the under-absorbed or the over-absorbed overhead and the relevant journal entry to eliminate the imbalances. Finally, the report highlights on the significant analysis of the ABC costing system and the advantages New Age Caravans can enjoy with the introduction of these systems (Bodie 2013).

The process of product costing consists of the assignment of the costs that is relevant to the inventories along with the production activities. This process of costing is similar for the production units and thus can be taken into account the imperative for the manufacturing entities of New Age Caravans. Product costing tries to assist the managers towards sensible decisions making through the distribution of every cost factors from the total cost of product. Product costing gives out the model that is based on which the budgetary assignments to every cost centre that are restructured (Saunders and Cornett 2014). Furthermore, product costing is an efficient device in investigating the cost overruns and variances. Moreover, feasibility in terms of production that is introduced newly is even investigated with the help of product costing system.

Conversely, the efficiency of product costing is restricted to the succour it gives out as a management accounting methodology. Moreover, product costing comprises of various limitations due to its intrinsic incapability to provide material evidence with respect to the corporate performance. Furthermore, this style of costing tries to distribute the contributions made at various production and distribution stages thus enabling the interventions of the management. Simons (2013) explains that that in case of economic downturns and increase in prices of inputs product costing plays a significant role in downsizing the manufacturing towards a degree that is wished by the management. It is seen that Renz (2016) explains that in market having a monopolistic atmosphere the assignment of the fixed overheads are to be created by looking at the mandate and then process costing is introduced for a modification in the management of cost policy. Hence, it is said that the significance of product costing as a device for management has enhanced with period. In case of the implementation of a novel and innovative commodity the opportunity cost requires to be assigned by relying on the feasibility of the commodity.

Limitations of Product Costing System

With respect to AASB 102, the conversion costs of the inventories relate to the allotment with respect to the fixed and the variable cost of production. The assignment with respect to the cost of transferring the inventories into the final products is based on the real activity of the present production with respect to the firm. New Age caravans can analyse the degree of their actual production by aggregating the expected production under the real circumstances of the business. Moreover, with respect to AASB 102, these capacities are there to derive at a point after considering the account of losses and the overruns of the cost that is relevant to the planned maintenance. Furthermore, in case the production levels in accomplishing continuous high levels then the overheads are reassigned in a process that decreases the total cost of inventory below the degree of aggregate cost of production (Fullerton, Kennedy and Widener 2014). In addition, it is seen that if more products are manufactured concurrently the value of the costs is assigned right now after the commodity develop distinct recognizable or subsequently the manufacturing system is accomplished.

The cost of goods schedule produced and the costs of goods vended has been summarised and shown in the table form that is presented in Appendix 1. The costs of goods produced are a widespread declaration revealing the analysis of the production cost of a firm in a specific accounting year. The cost of goods schedule on the other perspective is the entire incurred cost to enhance the service or the product that are offered for sale.

By looking at the data provided, the salaries that are related with the administration expenditures, general insurances and advertising that are associated with the liability of sales that are being deleted from the schedule. This is due to the fact that these items fall under the production or the manufacturing entity. The organization has even revealed that their consent regarding accounting excludes the expenses in other heads rather than on the manufacturing overheads. Wagenhofer (2016) explained that the cost of goods contrived and the sales cost do not consider the costs that are related with the branches of the office. The items that have been mentioned above are taken into account as office expenditures and it is seen that the schedule only considers the expenditures incurred in the factory. Therefore, this is the primary factor for not excluding the goods from the schedule.

AASB 102: Conversion Costs of Inventories

The overhead that is implemented in the present year with respect to New Age Caravans has amounted to $489000.

Actual overhead or the indirect cost that is incurred in the accounting year The real overhead cost of New Age Caravans has been seen to amount to $1963000 in the current year. Over or under applied overhead It is discovered that New Age Caravans over applied the overhead by $ 163000. The explained itemasition of the analysis has been shown in the table that is given in Journal entry for terminating the imbalance

The journal entry for terminating the inequality is demonstrated in a synopsis as follows:

Particulars

Debit Amount (in $)

Credit Amount (in $)

Manufacturing Overhead A/C

-1618000

To Work-in-Process

-100283

To Finished Goods

-47896

To Cost of Goods Sold

-1469821

(Being over-applied overhead disposed for elimination of imbalance)

New Age Caravan can under apply the overhead by implementing the same to a commodity that is associated to the work-in-progress, which requires being lower than the real overhead that has been experienced in the work-in-progress. It is due to this consequence that manufacturing overhead shall enable an equilibrium in the debit side. Therefore, New Age Caravan could publish a report that this is an expense that is prepaid in nature and their financial position statement. The over application of the overhead could be done by assigning the overhead in the inventory of the work-in-progress (Taipaleenmäki and Ikäheimo 2013). This requires being greater in comparison to the real overhead that have been experienced on the work-in-progress. It is because of this that the production expense would lead to a balance on the credit side. Therefore, this value is added to the profit that is budgeted of the firm at the completion of the accounting year.

In case of New Age Caravans, it is discovered that under application of the overhead is done. Thus, to rectify this subject, the journal entry given below has to be passed in order to write off the inequality.

Particulars

Debit

Credit

   

Manufacturing overhead a/c

-1618000

   

To work in process account

-1618000

   

(Being the over application of direct labour cost as part of the manufacturing overhead is transferred to work in process)

ABC method allocates the manufacturing overhead costs to the merchandises in a more practical manner than the conventional approach of easily assigning the cost by looking at the machine hours. It is seen that Activity based costing primarily allocates the cost to the operations that underlines the actual cause of the overhead. The process then allocates the cost of these operations to the commodities that are really looking for the undertakings (Otley and Emmanuel 2013).

ABC method identifies that the special examining, special engineering, set up of machines and few others are the operations that result to costs, the reasons the organizations consume the resources. Within the Activity based costing, the firm will compute the resource costs that is utilised in every operations. The following step involves the price of every one of these operations will be allocated to the products that desired for the undertakings (Eilifsen et al. 2013).

Schedules of Costs of Goods Manufactured and Sold

The process of ABC has grown in significance in the current year because the costs of manufacturing overhead have increased potentially. The cost of manufacturing overhead does not relate to the direct labour hours and the machine hours that are productive in nature. The product diversity and the diversity in the demand of the customers have grown and it is even seen that some commodities are manufactured in large scale while few of them in small batches.

With respect to New Age Caravans, it is seen that the process of ABC will be helpful to them as they manufacture two lines of products namely the Off-road and the Semi-off road caravans. It is seen that that both the products are of the highest quality and thus the pricing is done accordingly. The use of ABC method will allocate the costs according to the product that desires for manufacturing activities so that the costs can be allocated accordingly giving the company the ideal path to assign the costs thereby helping them improve their production capabilities (DRURY 2013). The pricing policy of New Age Caravans can even be improved as the proper allocation of the cost will determine the actual production cost and thereby a true and fair price can be determined. It is will ease the management of the firm to reach at a probable selling price.

Conclusion

The various sets of costing equipment are helping the management of the firm in analysing the performance level of various cost centres. Furthermore, creation of constant value and the control of quality is supported from various costing tool sets. With respect to New Age Caravans, the implementation of product costing system will help them to assist to the cost dissemination that are pertinent to the various production stages. Furthermore, the management is supported with the introduction of ABC method in its manufacturing platforms as the firm manufactures various sets of caravan products. In addition, computation of cost budgets is directed with the presence of ABC and product costing system at their armoury. The methods discussed above regarding costing have the ability to maintain attention on both the sustainable desirable degree and quality control technique of per unit cost of the products. Additionally, identification of the variances with respect to the cost of materials and the labour can be lined with the help of ABC. The total cost of production of New Age Caravans can decrease considerably with the help of the methods of costing and even though New Age Caravans has a reputation and share in the market, the introduction of the suitable cost management functions will help the firm in reducing their breakeven point.

Reference and Bibliography

Bodie, Z., 2013. Investments. McGraw-Hill.

Cohen, L.J., Cornett, M.M., Marcus, A.J. and Tehranian, H., 2014. Bank earnings management and tail risk during the financial crisis. Journal of Money, Credit and Banking, 46(1), pp.171-197.

Cooper, D.J., Ezzamel, M. and Qu, S.Q., 2017. Popularizing a management accounting idea: The case of the balanced scorecard. Contemporary Accounting Research.

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

Eilifsen, A., Messier, W.F., Glover, S.M. and Prawitt, D.F., 2013. Auditing and assurance services. McGraw-Hill.

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

Kaminska, T. and Kolesnikova, O., 2014. Financial Risk Management Accounting. Accounting and Finance, (1), pp.20-25.

Mariana, M.A.N. and Bogdan, R.A.V.A., 2017. Implementation Of Management Accounting Tools–Solution To Enhance The Performance Of Public Capital Companies In Difficulty. Case Study: Romanian Television Company. Internal Auditing and Risk Management, 45(1), pp.1-15.

Nuhu, N.A., Baird, K. and Appuhami, R., 2016. The Association between the Use of Management Accounting Practices with Organizational Change and Organizational Performance. In Advances in Management Accounting (pp. 67-98). Emerald Group Publishing Limited.

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

Renz, D.O., 2016. The Jossey-Bass handbook of nonprofit leadership and management. John Wiley & Sons.

Saunders, A. and Cornett, M.M., 2014. Financial institutions management. McGraw-Hill Education,.

Simons, R., 2013. Performance Measurement and Control Systems for Implementing Strategy Text and Cases: Pearson New International Edition. Pearson Higher Ed.

Soin, K. and Collier, P., 2013. Risk and risk management in management accounting and control.

Taipaleenmäki, J. and Ikäheimo, S., 2013. On the convergence of management accounting and financial accounting–the role of information technology in accounting change. International Journal of Accounting Information Systems, 14(4), pp.321-348.

Wagenhofer, A., 2016. Exploiting regulatory changes for research in management accounting. Management Accounting Research, 31, pp.112-117.

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