Reasons for Excluding Some of the Items †Myassignmenthelp.Com

Question: What Is the Information Form Control and Planning? Answer: Introducation Product costing system is a set of procedures which is responsible for accounting the organizations cost of products and is responsible for providing timely and accurate unit cost information form control and planning, financial statement preparation, pricing and inventory valuation. (AllBusiness, 2017). Product costing is one of the processes of accounting with the purpose of determining all the business expenses for creation of products of the company. These costs include wages of the workers, retail stocking fees, raw material purchases and product transportation costs. The purpose of products costing system behind the companys using this system is that it helps in planning a variety of business strategies which further includes costs of developing promotional campaigns and setting product prices (Polimeni, et al., 1999). The system is also adopted in order to find ways to derive maximum profits out of production costs (Lister, 2017). Product costs are calculated on the basis of p acking material cost and direct raw materials. Product costing system provides information to the organizations for the purpose of valuation of inventory for financial reporting purposes. The system helps the organization in providing timely and relevant cost information which further helps the company in strategic planning and profitability analysis (Manalo Manalo, 2011). The purpose of product costing system is that it helps the company is making accurate and long term decisions regarding the costing of the product and also helps in delivering extraordinary results. (Fisher Krumwiede, 2012; Marx, 2009) . Product costing system is important as it ensures the accuracy of business expenses. Accuracy is how much business can trace the expenses and to the accurate inventory values and product costs. Product costing system helps in increasing the accuracy of this process. It is specifically significant when it comes to variable costing in which involves assigning variable costs to cre ation of product units and leave fixed costs for other expenses. It also helps the business in attaching the cost to the value which was created throughout the business. Product costing system also helps in decision making as the information acts as the basis on which the decisions can be taken. The system helps in making decisions regarding how much profit a business will make in a particular period of time and also the decisions where there is return on investment. Product costing system also helps in the development of project which refers to creation of new products (Hansen, et al., 2007). In case a company plans for designing new product or new line of product or to recreate the existing product with advanced features, product costing acts as the most valuable source of information. It allows the business to attach the specific costs with products as well as product materials, abilities and features which can allow the business for highly accurate cost predictions regarding man ufacturing. Product costing system is important and serves as the purpose of facilitating project tracking. Project tracking means keeping an eye on budgets of products to ensure that whether the costs are matching the desired expectations or not. The system is helpful as it helps in analyzing the cash flows and also in determining the success factor of the project. (Lacoma, 2017). In this way product costing system is essential and purposeful for every business. Schedule of Cost of Goods manufactured and Cost of Goods Sold for the previous year of operations Preparation of schedules of Cost of Goods Sold and Cost of Goods Manufactured of the last year will help in ascertaining the situation of the company and will ultimately help in preparation and completion of the destroyed records. The schedule for the last year is presented in the below table: Table 1: Schedule of COGS and COGM for the previous year of operations Particulars Amount Amount Raw Material at the Beginning 12000 - Add: Purchase of Raw Material 180000 - Less: Raw material at the end -12000 - Cost of Material Consumed 180000 Add: Direct Labour Cost 182000 Add: Factory Overhead - - Depreciation - Factory Building 8000 - Depreciation - Factory Equipment 16000 - Indirect Labour Cost 118000 - Insurance on Factory 14000 - Repairs and Maintenance Factory 8000 - Land Tax on Factory 4500 168500 Factory Cost - 530500 Add: Opening stock of WIP - 4500 Less: Closing Stock of WIP - -33500 Cost of Goods Manufactured - 670000 Add: Opening stock of Finished Goods 11000 - Less: Closing Stock of Finished Goods -16000 -5000 Cost of Goods Sold - 665000 Thus, the COGS for the previous year of operations was $ 665000. Reasons for excluding some of the items from the schedules of Cost of Goods Manufactured and Cost of Goods Sold There are two types of costs which are generally incurred in a manufacturing concern. These are direct costs and indirect costs (Drury, 2005). Direct costs are those costs which are incurred by the company directly in relation to the manufacturing activities. These are generally accounted for in the trading accounts of the company. On the other hand, indirect costs are those costs which are incurred to facilitate manufacturing and production activities. Such costs are dealt with in the income statement of the company and are indirectly related to manufacturing activities (Drury, 2008). The above schedule so prepared is based on last years figures. However, while preparing the schedule all the costs that were incurred by the company was not considered. While calculating the cost of goods sold and cost of goods manufactured, only those costs are included which are incurred in the factory. However, such costs include direct as well as indirect costs that are incurred in the factory. The reason behind this is that only those costs are considered as costs of goods manufactured and sold which are incurred directly and indirectly in the factory where manufacturing is undertaken. Examples include depreciation, opening and closing inventory and material and labour costs. All the other costs such as salary and rents are considered as operating expenses and such expenses are a part of income statement. Preparation and Completion of T-accounts of cost related heads and determination of values of various individual items Since, due to a fire in the company manufacturing caravans which led to the destruction of all the books of accounts and necessary records, those associated with preparation of accounts had to gather all types of information to redraft the books. However, the major issue was related to collection of information. On the basis of available information such as charred accounts and interviewing people and bank statements, the accounts were prepared again as under: Calculation of Overhead Rate for determining amount of total manufacturing overheads Overhead Cost 1800000 Direct Labour 60000 Overhead Rate = Overhead Cost/ Direct Labour(per hour) 30 Total direct labour hours 5200 Total Overheads in the month of April 156000 Raw Material Account To opening balance of raw materials 12000 By Raw Materials Consumed 188000 To Raw Materials Purchased 176000 By Closing balance of Raw Materials 0 188000 188000 Work In Process Account To opening balance of Work in Process 4500 By Cost of Goods Manufactured 489000 To Raw Materials Consumed 188000 By closing balance of Work in Process 41500 To labour cost incurred 182000 To overhead cost incurred 156000 530500 530500 Finished Goods Account To opening balance of Finished Goods Inventory 11000 By Cost of Goods Sold 484000 To Cost of Goods Manufactured 489000 By Closing balance of Finished Goods Inventory 16000 500000 500000 Manufacturing Overheads Account To Actual Manufacturing Overheads incurred 168500 By Total Manufacturing Overheads 156000 By under application of manufacturing overhead 12500 168500 168500 Accounts Payable Account To opening balance of account payables 12000 By Payments for raw materials made during April 180000 To purchases of raw material in April 176000 By closing balance of account payables 8000 188000 188000 Cost of Goods Sold Account To Finished Goods Account 484000 By cost of goods manufactured 489000 To closing finished goods inventory 16000 By opening finished goods inventory 11000 By closing balance Cost of Goods Sold 0 500000 500000 Hence, the values of various items asked in the question are as follows: Work in Process at the end of April $ 41500 Raw materials purchased in April - $176000 Overhead applied in April - $156000 Raw materials used in April - $ 188000 Over- or under-applied overhead in April - $12500 Cost of Goods sold in April - $ 484000 Application of over and under applied overheads and the manner in which such variances can be dealt with The term overheads includes all the costs which are incurred by the manufacturer in the factory but this excludes the costs incurred with respect to material and labour used in the manufacturing of products (Gill, 2015). All the overheads which are incurred in the factory are required to be allocated (applied) appropriately based on a scientific method such as calculating a recovery rate of overheads based on direct labour hours which is usually predetermined. However, application of overheads based on such predetermined recovery rate generates a variance in the actual position and the planned one. The difference between those overheads which are actually incurred and the overhead cost which is allocated to the WIP based on a predetermined rate of recovery are termed and either over applied and under applied overheads (Shim Siegel, 2009). Over Applied Overheads- Over applied overheads means the overheads which are applied on products manufactured are more than the overheads actually incurred. Such an outcome where applied overheads are more than actual overheads is considered to be favourable because the company has spent less amount than was anticipated by it. Under Applied Overheads- The overheads which are actually incurred are more than what was expected. These are considered as unfavourable because the company has spent more amount of money than it had planned to and this also signifies that the company does not have enough jobs to allocate these overheads (Scarlett, 2005). There are various ways in which a company can deal with over applied and under applied overheads. One such manner includes debiting or crediting the overheads which are overvalued or undervalued in the profit and loss account of the company. This will help in reflecting the impact of such over application and under application on the balance sheet of the company(Hansen Mowen, 2017) . Whether ABC must be introduced or not Activity Based Costing (ABC) It is an accounting method which helps in identifying the activities that are performed by a firm and will assign the indirect costs to the products. Activity based costing system will recognize the relationships that exist in between costs, products along with the activities. With the help of these relationships, Activity Based Costing will assign indirect costs to the product less method over traditional methods (Investopedia, 2017; BusinessDictionary, 2017). It can also be explained as the accessing costs in a logical manner than that of the traditional approach in which costs are allocated on the basis of number of machine hours. ABC will first assign the costs to those activities which are the cause for overhead or which are of on-demand and then assigns the cost to those particular activities which are on priority and demanding the activity (Averkamp, 2017). Activity Based Costing is broadly used in manufacturing industry. This is because, ABC has the true capability to enhance cost data and hence help in producing true costs and better classification of costs that are incurred by the company during the times of its production process. Every ABC system of cost totally depends on the activities which are considered as an event and each unit of work will have a specific goal that has to be achieved. For example: setting up of machines in production, designing of products, distribution of finished goods or operation of machines etc (Investopedia, 2017; Mahal Hossain, 2015). Importance of Activity Based Costing In day todays environment of evolving globalization, when each of the organization is forced to improve their productivity with quality and hence benchmark its activity more efficiently in the world. Without firm based activity it is not possible to do activity based costing. A firm can hold up its market value if only it manages the value chain at each and every stage of productivity. Value that has been added at each stage of the activities is compared with the costs which are associated with the decisions that are based on cutting unnecessary activities that have been performed. So it is clear that each and every firm needs ABC to control and also enhance its value in this era to be competitive (Lodha, 2016). Activity based costing will make sure that it provides exact cost information which will help in improving and making managerial decisions more efficiently. In ABC, the focus will total be the activities that are being performed rather than focusing on a particular department. A department may consist of activities that are in large but those activities may not add value to the total outcome of the product. These types of activities are targeted so that the activities are pushed to downward and then concentrate on activities that will help the department grow in an effective manner (Lodha, 2016). Activity based costing will help in resolving inaccurate cost information present in an activity of a department or activity of single entity. It is considered as the modern approach for indirect cost allocation process. Activity Based Costing will not restrict itself for the allocation of indirect costs which is generally done in the traditional approach. Rather, ABC will recognize individual activity to be lowest unit and allocates cost indirectly. Costs that are allocated to each activity of a department or a single entity activity will represent the resources that are consumed by it. Activity Based Costing is built on the layer that the activities will eventually give rise to the costs. So there has to be a link that should be made in between activities and the products with the help of assigning cost of the activities to the products that are based on an individual project. Important characteristics that has to be noted on Activity Based Costing are: Simple and traditional distinction that is made in between fixed and variable cost will not be enough to guide and provide quality information for designing of cost system. Appropriate distinctions between volume (scale) (Lodha, 2016) and cost behavior patterns, diversity related patterns and event related patterns should be made accurately. Cost drivers should be identified and a cost driver is nothing but a structural determinant of the cost related activity. The logic that stays behind the cost drivers is that they dictate cost behavior patterns. For the sake of tracing overhead cost, behavior pattern related to cost should be understood in an appropriate manner and this help in identifying appropriate cost driver (Lodha, 2016; Account Learning, 2017). Thus, from the above detailed analysis of the meaning, limitations and benefits of Activity Based Costing, it can be said that implementation of ABC in the manufacturing division of New Age Caravans will be beneficial for the company. Hence, introduction of ABC must be considered by the management of the company to allocate the overheads in an appropriate manner based on activities and not on products. References Account Learning, 2017. Activity Based Costing | Meaning | Features | Objectives | Implementation. [Online] Available at: https://accountlearning.com/activity-based-costing-meaning-features-objectives-implementation/ [Accessed 18 may 2017]. AllBusiness, 2017. Product Costing System. [Online] Available at: https://www.allbusiness.com/barrons_dictionary/dictionary-product-costing-system-4945883-1.html [Accessed 18 may 2017]. Averkamp, H., 2017. Introduction to Activity Based Costing. 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