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Purpose of Product Costing System

Discuss about the Interpreting Accounting Information for Decision Making.

Calculation of cost of goods or services is very necessary to be computed for the organization providing manufacturing as well as services. For the ascertainment of the profit, it is very necessary to know the selling price of any product or service. As per "AASB 102", inventory cost should have purchased cost of material, conversion cost and another cost about inventories. Therefore it is mandatory for recognizing the expense and allocation in exact cost unit for the determining cost of purchase and another cost. Product costing is referred as the method for calculating the cost of product and service through the allocation of all expense related to business equally in the total production cost. So, it helps to know the exact method for calculating the cost of products.

The purpose of the Product costing can be known in two ways, first will be the primary goal and secondary goal.

The primary goal of the Product costing can be referred to as one of the common reason for the inclusion of Product Costing of business. The primary goal of Product costing is given below:

Computation of cost and selling price – Product costing on a product or service in a firm is very much necessary. Management will not be able to compute the exact selling price of the product unless and until there is the exact computation of production cost is done because it will take the company in the loss (Collier,2015).

Expenses to be allocated – Product costing method uses the proper allocation of the expenses under the exact overhead. So it is very necessary to include only that cost only which is used for manufacturing purpose. As per AASB, the production cost is to be calculated only on the expense related to manufacturing of the goods (Demski,2013).

Ascertaining Selling Price and Profits – It is already said above that selling price plays a vital role in computing production cost of the product. Selling price is mainly determined by the price of competitor and market. Therefore production cost plays a vital component for assessing the profit of the company. According to the method of account cost of production is used for calculating gross profit only after excluding the cost from the revenue. Gross profit is further used for computing net profit which stands as criteria for the managers of the business (Drury,2013).

Preparation of Schedule

A secondary goal of the production cost is mainly concentrating on the decision making the process of management. The secondary goal of Product costing are given below:

Control – Production is always considered as the major cost of the business, so this cost is always tried by the management to control it. Production costing will also help the management for effective controlling of the cost of the product. It gives detailing of all the expenses used in the production process, which helps the management for getting the control over the business easily (Hart et al., 2012).

Budget – Each and every firm of the company prepare budget on a regular interval of time, which helps them in a proceeding in a planned way. Production cost can be a useful element for the preparation of the budget. So, management can gather related production cost and do forecasting in the budgets (Horngren et., 2013).

Efficiency – The business can effectively make use of the production cost for increasing the efficiency of the different level of production. Production costing assigns different expense of production under different overhead and department, based on nature and expense. This way the efficiency level can be achieved on the various levels of the department. As the data of the production costing is very necessary for controlling such system, on an indirect approach efficiency level of the different department will be increased (Kaplan & Atkinson,2015).

Decision Making – Production costing will be providing many useful decisions related to management. The managers are using this method for assessing the expenses related to the different department. It is also used for doing division of the overhead head into fixed and variable. Moreover, it will also be used in computing contribution, Break even unit and margin of safety of the business. So, with the use of statistic, the product costing will help in decision making process by the management (Needles et al., 2013).

Cost of goods manufactured

Schedule of Cost of goods manufactured is a statement which will show step by step calculation of total production cost. It is made for the ascertainment of the actual manufacturing cost of the product which is to be calculated for a particular time (Needles et al., 2013). The schedule will be having different production related cost for the calculation of the cost of goods manufactured. First of all, basic cost is determined by adding the amount direct material and direct labor to be consumed. That amount is known as Prime cost. Then that amount of the prime cost is added with the amount of factory overhead for calculating factory cost. Production is continuing method. So at the end of specific time, there are many materials left in the inventory which is not under the category of Finished goods, those goods will be coming under the category of work-in-progress. So after adding opening balances for work-in-progress and deducting the closing balances for work-in-progress, the final amount is said to be the cost of goods manufactured (Maher et al., 2012).

Cost of goods sold

Schedule of cost of goods sold is computed for determining total expense has occurred for the units to be sold. It is seen that at the end of the certain period all the produced goods are not sold totally, the units which are not sold is called finished goods. The cost of goods sold will be calculated only after the adjustments of opening and closing balances of the finished goods, which will be again added back to the cost of goods manufactured (Needles & Crosson,2013).

Dr.

i) Work-in-Progress A/c.

Cr.

Date

Particulars

Amount

Date

Particulars

Amount

1st July

To, Balance B/f

8000

By, Finished Goods A/c.

121500

To, Raw Materials A/c.

121000

129000

129000

Dr.

ii) Accounts Payable A/c.

Cr.

Date

Particulars

Amount

Date

Particulars

Amount

30-Apr

To, Bank A/c.

117500

1st July

By, Balance B/f

20000

By, Purchase of Raw Material A/c.

120000

30th June

By, Balance C/f

22500

140000

140000

Dr.

iii) Manufacturing Overhead A/c.

Cr.

Date

Particulars

Amount

Date

Particulars

Amount

30th June

To Bank A/c.

57100

By, Cost of Goods Sold A/c.

57100

57100

57100

Over / Under Valuation of Overhead:-

     

Direct Labor Hours

Direct Labor Hours

Total Overhead Cost

Predetermined Overhead

850

63

53550

Actual Overhead

57100

Under Applied Overhead Rate

-3550

The cost of Goods Sold A/c.Dr. $3550

To, Manufacturing Overhead A/c $3550

The company maintains a budget for getting forecasting of the business methods and controlling the level of production. It is seen that in many of the cases there is a lot of difference between the actual overhead expenses and budgeted amount (Ward,2012). The distinguishing in the actual and budgeted overhead are divided into two categories, i.e., under applied and over applied overhead. Under applied overhead is referred to when actual overhead is more than budgeted overhead. Whereas, over applied overhead is referred to when budgeted overhead is more than actual overhead. The reasons for those differences are given below:

  • When actual output level is increased or decreased.
  • When actual consumption unit of different cost related factor like, materials, electricity and labor are increasing or decreasing (Warren et al., 2013).
  • When actual per unit cost which is one of the cost factors is increasing or decreasing.
  • Due to the inefficiency of the manufacturing process, which is occurred because of the over consumption of the different component (Weygandt et al., 2015).
  • When budgetary control is strong.
  • When advanced technology is to be implemented (Parker,2012).

Journal entries for removing the difference are given below:

  • under applied overhead:

The cost of Goods Sold A/c ..Dr.

To, Manufacturing Overhead A/c

  • For over applied overhead:

Manufacturing Overhead A/c ..Dr.

To, Cost of Goods Sold A/c

Standard costing is one of the famous costing methods for implementing exact budget controls on the process of control (Wagenhofer,2016). In this process, expected standard rates and consumption unit are calculated by considering the openeing balance of the direct material, labor and manufacturing overhead. The component of the cost element is incurred on the budgeted balances and the actual expense. Seafarer Kayaks manager and owner will be having some advantage by applying the strategy of Standard Costing System of the production method:-

  • During the initial stage of operation, there has strong control of the budget.
  • During the financial period, recognization of risk at the end of the financial period will be done (Strumickas & Valanciene,2015).
  • On the stage of entry, the recording will be done on the reconciliation of actual expense with that of budgeted expense.

Conclusion

From the above discussion and analysis, the concept of Production Costing and Standard Costing are clear from each and every aspect of information. The journal entry provided also gives a clear information of the concept related to over and under applied overheads. Applicability of AASB 102 has been properly done and taken into consideration. A proper analysis of the case study of Seafarer Kayaks has been properly done on the with relevant knowledge and research. According to the research done it has been analyzed that Seafarer Kayaks should implement the exact costing method, for getting benefits in the firm.

References

Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.

Demski, J., 2013. Managerial uses of accounting information. Springer Science & Business Media 

Drury, C.M., 2013. Management and cost accounting. Springe.

Hart, J., Wilson, C. & Fergus, C., 2012. Management Accounting: Principles & Applications. Pearson Higher Education AU.

Horngren, C.T., Sundem, G.L., Schatzberg, J.O. & Burgstahler, D., 2013.Introduction to management accounting. Pearson Higher Ed  

Kaplan, R.S. &  Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.    

Maher, M.W., Stickney, C.P. & Weil, R.L., 2012. Managerial accounting: An introduction to concepts, methods and uses. Cengage Learning   

Needles, B.E. & Crosson, S.V., 2013. Managerial accounting. Nelson Education.  

Needles, B.E., Powers, M. & Crosson, S.V., 2013. Financial and managerial accounting. Nelson Education.  

Needles, B.E., Powers, M. & Crosson, S.V., 2013. Principles of accounting. Cengage Learning  

Parker, L. D. (2012). Qualitative management accounting research: Assessing deliverables and relevance. Critical Perspectives on Accounting,23(1), 54-70. 

Strumickas, M., & Valanciene, L. (2015). Research of management accounting changes in Lithuanian business organizations. Engineering Economics, 63(4).  

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

Ward, K., 2012. Strategic management accounting. Routledge.  

Warren, C.S., Reeve, J.M. & Duchac, J., 2013. Financial & managerial accounting. Cengage Learning  

Weygandt, J.J., Kimmel, P.D. &  Kieso, D.E., 2015. Financial & Managerial Accounting. John Wiley & Sons.

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