Management Accounting Product Costing System

Question: Discuss about theManagement Accountingfor Product Costing System. Answer: Product Costing System: The term product costing is the determination of all the business expenses that pertains to the manufacture of the various different products. These are the costs that includes the purchase of the raw material, wages of the workers, costs of the transportation and the fees of the retail stocking (Small business chron, 2016). As per AASB 102, the cost of the purchase of the various inventories would include the following: Purchase price Import duties Other such taxes All the costs incurred to bring in to material to its present condition and use The cost of the conversion would include all the costs that are related with the various units of production such as the raw material and the direct labour. The fixed overheads would remain constant over the costs of production that would remain constant over the volume of the production. The allocation of the fixed production overheads is based upon the production facilities that are available (AASB, 2016). Schedule of Goods Manufactured: Schedule of cost of goods manufactured Particulars Amounts in $ Beginning raw material inventory 25,000.00 Add: cost of raw materials purchased 1,20,000.00 Less: ending raw material 24,000.00 Raw material used 1,21,000.00 Add: manufacturing overhead 57,100.00 change in work in progress inventory - Cost of goods manufactured 1,78,100.00 Schedule of Cost of Goods Sold: Schedule of cost of goods sold Particulars Amounts in $ Beginning finished goods inventory 12,500.00 Add: cost of goods manufactured 1,78,100.00 Less: ending finished goods inventory 13,600.00 Cost of goods sold 1,77,000.00 T Accounts: Raw Materials Op Bal 1 July 25,000 Purchases 1,20,000 Mat Consumed 1,21,000 Bal c/f 30 June 24,000 1,45,000 1,45,000 Manufacturing OHDS Depreciation -Factory Building 6,500 Applied OHD 53,550 Depreciation -Factory Equipment 8,900 (850 hours @63) Factory Manager's Salary 12,000 Factory Supplies 5,000 Under-applied overheads 3,550 Indirect Labour Cost 15,000 (Balancing figure) Insurance - Factory 5,000 Repair Maintenance - Factory 2,500 Land Tax-Factory 2,200 57,100 57,100 WIP Op Bal 1 July 8,000 Material Consumed 1,21,000 Direct Labour Cost 35,700 Cost of Goods Produced (Prime Cost) 1,57,200 (Balancing figure) Bal c/f 30 June 7,500 1,64,700 1,64,700 Accounts Payable Op Bal 1 July 20,000 Payment made 1,17,500 Purchases 1,20,000 Bal c/f 30 June 22,500 1,40,000 1,40,000 Finished Goods Op Bal 1 July 12,500 Cost of Goods Sold 2,21,650 Administrative expenses 12,000 (Balancing figure) Cost of Goods Produced 1,57,200 Manufacturing OHDS applied 53,550 Bal c/f 30 June 13,600 2,35,250 2,35,250 Cost of goods sold Administrative Salaries (Sales) Depreciation Sales Office General Sales Liability Insurance Sales Manager's Salary Income Summary 2,21,650 Travel Entertainment Expenses (Sales) (Final COGS) Cost of Goods Sold 2,21,650 2,21,650 2,21,650 Part C: (i) Overhead applied during the year 53,550 (ii) Calculate the total of actual indirect / overhead cost 57,100 (iii) Under applied overheads 3,550 (iv) Journal Entry Profit Loss A/c Account Debit 3,550 To Under-applied overhead..Credit 3,550 Over and Under Applied Overheads: There is always a chance that the manufacturing overheads may be less applied or more applied to the cost of the manufacturing overhead. In case, the manufacturing overhead applied to the work in progress is much more than the manufacturing overhead that has been incurred during the period, then it is termed as being over applied and the manufacturing overhead applied to the work in progress is much less than the manufacturing overhead that has been incurred during the period, then it is termed as being under applied. In both the following cases, the following entries are passed: The occurrence of the over or the under applied overheads in the business of manufacturing is always based upon the usage of the predetermined overhead rate (Accounting for management, 2016). Part D: The overheads can be over / under-applied when estimated overheads differs from the overheads actually incurred. If actually incurred overheads exceeds the estimated overheads then overheads can be under-applied and vice a versa. A company can deal with over/under applied overheads in any of the following ways: a) Charged to Costing Profit Loss Account Profit Loss A/c Account Debit 3,550 To Under-applied overhead..Credit 3,550 b) Calculate supplementary rate and charge to cost of goods sold Cost of Goods Sold Account Debit 3,550 To Under-applied overhead..Credit 3,550 c) Carry forward to the next year for adjustment Under-applied overhead Carry forward to Next Year 3,550 To Under-applied overhead..Credit 3,550 Standard Costing: The term standard costing is the cost that the company should incur when it comes to producing the goods. This is somewhat based upon the past experience of the company and the actual costs that could have been incurred in the last quarter or last year. The variations between the actual costs and the standards costs are then analysed and then appropriate actions are taken. The following are the various advantages of standard costing: There is a budget that is based on the standard costs since it is quite not possible to include the same in the exact actual cost on the day on which the budget is finalised. It is quite easy to print a report wherein there is a period end of the balance of an inventory and then the same is multiplied by the standard cost for each of the items. It becomes easy to apply the standard overheads rate instead of the adjustment of this rate in each and every months. In case the company deals with the custom products, then uses the standard costing for the purpose of quoting the price of the products that are manufactured based on the requirements laid down by the customer (Accounting tools, 2016). References: Accountingformanagement.org. (2016).Over or under-applied manufacturing overhead - computation, disposition, example | Accounting For Management. [online] Available at: https://www.accountingformanagement.org/over-or-under-applied-manufacturing-overhead/ [Accessed 22 Sep. 2016]. https://www.aasb.gov.au/. (2016).AASB 102. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB102_07-04_COMPjun09_01-09.pdf [Accessed 22 Sep. 2016]. Smallbusiness.chron.com. (2016).Product Costing vs. Cost Accounting. [online] Available at: https://smallbusiness.chron.com/product-costing-vs-cost-accounting-37642.html [Accessed 22 Sep. 2016]. www.accountingtools.com. (2016).Standard Costing. [online] Available at: https://www.accountingtools.com/standard-costing [Accessed 22 Sep. 2016].