Management Accounting Computing Appropriate Cost

Question: Describe about the Management Accounting for Computing Appropriate Cost. Answer: Introduction According the study, it is stated that computing appropriate cost for manufactured goods and services are one of the essential business activities. The allocation of cost for any particular product or services is always considered on the basis of their selling prices and amount of profitability Company is expecting from those activities. As per the AASB 102, it is considered that inventories costs are always based on cost of purchase of that particular product, cost of conversion during its selling activities and others related cost (AASB 2013). On the other hand, allocation of proper cost and expenses by supporting other related cost of production and conversion cost. Lets take an example, while production buck amount of goods within a manufacturing concern, purchase cost of indirect materials are related to production cost and cost of raw material will be included into purchase cost. It is also supportive, while determining appropriate amount of cost of products required a specific procedures and concepts which are initiated by AASB. Specific Purpose behind Establishing a Production Costing System The establishment of product costing system is beneficial for both product as well as service rendering organization. Basically this costing system is initiated for determining the cost of both manufactured products and others related services rendered by the company to their customers (Fullerton, Kennedy and Widener 2013). There are two specific objective organizations have related to product costing system. Those are basically primary objectives and secondary objectives. Primary objectives behind establishment of product costing system There are several aims and objectives which are related to production costing system implementing and providing benefits to different business entities. Those activities are basically related to determining the cost of the manufactured products and rendering services of that particular organization (James and Colella 2012). It is an important process of a manufacturing concern to allocating the proper price to avoid the losses within that particular event. Proper allocations of expenses are also required to control and monitored the operating expenses of the organization. According to the AASB regulations, it is stated that production cost required to be calculated on the basis of total manufacturing cost bear by an organization within a financial period of time (Brandon 2016). Generally consideration of unrelated costs is lead to increase the product cost of the company which is one of the major reason for organization incurring losses within a specific period of time. Ascertaining better selling prices and allocation of profitability index is always a big factor for an organization. It is also recognized that ascertaining of selling price of a produced goods is also based on the competitive pricing basis (Hofstede 2012). The overall accounting process is determining that costs of production, gross profit, and net profit for an organizational financial statement are interrelated. These activities are also helpful for a entity to make a proper decision for the benefit of the organization. So it is proved that without allocation of production costing system determination of proper profit and selling price for manufactured products of an organization is complex in nature. Secondary objectives behind usage of production cost system There are several secondary objectives of a business entity while following a production cost system into making better decision making processes. Calculation of production cost and its related expenses are necessary for an organization and production costing system is one of most appropriate way to manage those costs effectively (Hart, Wilson and Fergus 2012). There are basically different expenses and overheads which are required to be controlled and securitized by the management of a particular entity effectively. Preparation of budget, enhancement of efficiency level of an organization during their production process is also applicable for a concern for managing various related departments (Drury 2013). The particular management of an organization is required to take a appropriate decision while allocating their production related cost or measurement of profitability of an organization within a specified period of time. These product costing systems is also supportive for identif ying total contribution as well as break even cost of the organization. Schedule Preparation for Cost of Goods Produced and Cost of Goods Sold Within an Manufacturing Concern Schedule preparation for cost of goods produced The schedule for measuring and recording the cost of total goods produced is an essential statement for measurement of appropriate amount of goods manufactured within a specified period of time. This schedule also holding several cost related to computation of total cost of produced goods step wise (Collier 2015). The basic cost of produced goods are calculated on the basis of adding total direct material and direct labor cost for a specified period of time. On the other hand, the prime cost which is included material and labor cost are also added factory overhead to determine the factory cost of that particular concern, factory cost is also included with various indirect and factory related cost (Demski 2013). Production cost of a manufacturing concern always included prime cost, factory cost; work in progress during the period of production processes to monitor the total amount of completion has been done or required for a particular project. For Seafarer Kayaks, cost of goods manufactured has been adjustable by incorporating net amount of work in progress which included with factory cost (Crosson and Needles 2013). In the books of Seafarer Kayaks Schedule of Cost of Goods Manufactured Yearly Figures Particulars Amount Amount Direct Material Consumed : Raw Material Purchase $ 120000 Add : Opening Balance of Raw Material $25000 $145000 Less: Closing Balance of Raw Material $24000 $121000 Direct Labor Costs : $35700 Prime Cost $156700 Factory Overhead: Indirect Labor Cost $15000 Factory Managers' Salary $12000 Factory Supplies $5000 Depreciation - Factory Building $6500 Depreciation - Factory Equipment $8900 Insurance Factory $5000 Repairs Maintenance - Factory $2500 Land Tax - Factory $2200 $57100 Factory Cost $213800 Opening Balance of Work-in-Progress $8000 Less: Closing Balance of Work-in-Progress $7500 $500 Costs Of Goods Manufactured $214300 Source: (Created by author) Schedule Preparation for Cost of Goods Sold Within an Manufacturing Concern The schedule for preparation of cost of goods sold has been calculated on the basis of total expenses incurred relatively measurement of total units of goods sold. The sold goods are only considered in the cost of goods sold figure, rest of others is denoted as finished goods (Clarke 2012). The gross margin of the concern is determined for calculating revenue excluding total expenses and cost related to manufacturing of goods. For ascertaining the cost of goods sold for particular manufacturing activities has been adjusted with opening balance of finished goods and its closing balance simultaneously. In the books of Seafarer Kayaks Schedule of Cost of Goods Sold Yearly figures Particulars Amount Amount Costs Of Goods Manufactured $214300 Opening Balance of Finished Goods $12500 Less: Closing Balance of Finished Goods $13600 -$1100 Cost Of Goods Sold $213200 Source: (Created by author) There are various expenses which are not considered in manufacturing cost or cost of goods sold. These are indirect cost only providing impact on enhancement of sales activities of the company (Chang and Dzan 2012). On the other hand, administrative costs, employees salary and others indirect costs are related to sales process but there are no link with production process. So according to the process procedures and regulation these indirect expenses are also not included in the above mentioned schedules. Calculations of T-Accounts and Overheads T-Accounts of Seafarer Kayaks Manufacturing Concern Raw Material A/c. Date Particulars Amount (Dr.) Date Particulars Amount (Cr.) 1st July To, Balance B/F $25000 30th June By, Work-in-Progress A/c $121000 To, Accounts Payable A/c. $120000 30th June By, Balance C/F $24000 $145000 $145000 Work-in-Progress A/c. Date Particulars Amount (Dr.) Date Particulars Amount (Cr.) 1st July To, Balance B/F $8000 By, Finished Goods A/c $121500 To, Raw Materials A/c $121000 30th April By, Balance C/F $7500 $129000 $129000 Finished Goods A/c. Date Particulars Amount (Dr.) Date Particulars Amount (Cr.) 1st July To, Balance B/F $12500 By, Cost of Goods Sold A/c $120400 To, Work-in-Progress A/c $121500 30th June By, Balance C/F $13600 $134000 $134000 iii) Manufacturing Overhead A/c. Date Particulars Amount (Dr.) Date Particulars Amount (Cr.) 30th June To Bank A/c $57100 By, Cost of Goods Sold A/c $57100 $57100 $57100 ii) Accounts Payable A/c. Date Particulars Amount (Dr.) Date Particulars Amount (Cr.) 30th April To, Bank A/c. $117500 1st July By, Balance B/F $20000 By, Raw Material A/c $120000 30th June By, Balance C/f $22500 $140000 $140000 Cost of Goods Sold A/C Date Particulars Amount (Dr.) Date Particulars Amount (Cr.) 30th June To Finished Goods A/c. $120400 To Direct Labor Cost A/c. $35700 To, Manufacturing Overhead A/c. $57100 30th June By, Income Statement $213200 $213200 $213200 Applied Overhead and Actual Overhead Over / Under Valuation of Overhead Direct Labor Hours Direct Labor Hours Total Overhead Cost Predetermined Overhead 850 $63 $53,550 Actual Overhead $57,100 Under Applied Overhead Rate ($3,550) Source: (Created by author) Journal Entry for Under-Applied Overhead: Cost of Goods Sold A/c..Dr $3550 To, Manufacturing Overhead A/c $3550Cr Issue and Journal Entries For Under and Over Applied Overheads Bear by the Manufacturing Concern Generally manufacturing concerns are maintaining their books of accounts through preparation of budgets by monitoring their specified production level. Though in many cases, it is found that budgeted overhead figures estimated by the organization is different from actual incurred figures. The gap between budgeted and actual expenses is basically segmented into two categories. When budgeted figures are greater than actual one, it is considered over applied if actual is greater than budgeted, it is considered as under applied overhead (Brigham and Houston 2012). These gaps are created due to several causes are following below. Increment and decrement in actual output level. Fluctuations in actual consumption units by considering various cost factors like energy, human power and raw material. Insufficient production activities, due to that reduction in consumption levels. Strike budgetary control activities and implementing modern technology. Journal Entries for Elimination of Figure Gap For under applied overheads: Cost of Goods Sold A/c..Dr To, Manufacturing Overhead A/c..Cr For over applied overheads: Manufacturing Overhead A/c..Dr To, Cost of Goods Sold A/c ..Cr Importance of Standard Costing System There is various number of important aspects are related to standard costing system. It is mostly required for budget controlling activities of the organization, for handling their production process. With the support of this system, it is easier to track and resolve various cost related adjustments and variance between actual and budgetary costing system (Braun, Tietz and Harrison 2013). The managerial authorities of the Company Seafarer Kayaks can appropriately take the benefits of standard costing system and related processes. These processes will support the company to create strong budgetary controlling and monitoring procedures, proper reconciliation activities and appropriate system for indentifying the variances between estimated and actual expenses incurred by them with a specific period. Conclusion According to the overall analysis, it is shown that it is essential for a firm or individual to follow an appropriate product costing method. The entire process is supporting management of a organization to manage and control while setting the cost of offered products and services. The management costing is also supportive to make proper decision making strategies. On the other hand, owners of the company Seafarer Kayaks required making implementation of sufficient costing methods for continuing their manufacturing concerns operation effectively. References AASB, C.A.S., 2013. Fair Value Measurement. Brandon, G., 2016. 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