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Question 1: Management accounting and costs

The purpose of Assessment item 1 is to establish the skills needed in the workplace for costing products and services using the appropriate processes and tools and apply analytical processes to construct accounting systems and models using workplace tools. Each question uses realistic data and the professional practices similar to that found in workplaces.
Your assignment consists of different question styles including discussion questions, reports, exercises, problem questions and spreadsheet questions. It assesses learning outcomes as listed in the assignment rationale below.

Question 1 Management accounting and costs (4 marks)
Identify the five major cost elements in the cost of a product or service. Define each and give examples.

Question 2 Costing
Give five examples of products where more detailed recording of costs is required and five examples of products where averaging techniques may be appropriate.
 
Question 3 Cost concepts (4 marks)
The monthly cost of renting a manufacturing plant is
A a prime cost and an inventoriable cost.
B a prime cost and a period cost.
C a prime cost and a product cost.
D a conversion cost and a period cost
E a conversion cost and an inventoriable cost.?Explain your answer.

?Question 4 Manufacturing statement and income statement (18 marks)
Spreadsheet. See the Spreadsheet Advice PDF in Interact2 Resources and the examples in your textbook.
See the requirements within the spreadsheet template below.

Check the assignment requirements in this subject outline paying particular attention to the spreadsheet requirements. Ensure you have separate data and report areas showing only formulas. Use IF functions to allow for the possibility of either a net income or a net loss. Show row and column headings and paste both a normal view and a formula view.

 
Question 5 Cost concepts (8 marks)
Should overtime payments be treated as direct labour, or as overhead? Explain.with 2 example .

Question 6 Understanding the entries in the Materials Control account (6 marks)?The Materials Control account balances were $40 000 on 1 April and $20 000 on 30 April. During April direct materials issued to production were $70 000 and indirect materials consumed were $30 000.
Required:
Show the Materials Control account in the ledger for April and a general journal entry to record the cost materials purchased during April.

Question 7 Understanding the entries in the Accrued Payroll account (8 marks)?Salaries and wages payable to factory employees were $20 000 on 1 March and $8000 on 31 March. Gross salaries and wages paid during March totalled $50 000. March's direct labour totalled $28 000.
Required:
T-account for Accrued Payroll for March and general journal entries for recording salaries and wages earned by factory employees during March.

Question 8 Payroll: direct and indirect labour (8 marks)?J. Smith worked for 48 hours during the pay week ending Friday April 24. His normal working week consists of 40 hours, of which 35 hours were spent on production while the remaining 5 hours were non-productive idle time. Smith worked 2 hours overtime at a premium of 50% on Monday April 20 because a customer required work finished by Tuesday April 21 even if overtime had to be worked to complete it. Smith worked a further 6 hours overtime on Wednesday April 22 on other production. It is the policy of the company to pay an overtime premium of 100% after the first 3 hours on any one day. Smith’s normal wage rate is $22 per hour.
Required:
(a) Calculate Smith’s gross pay for the week.
(b) Indicate the sum to be treated as indirect labour.

Question 9 Activity Based Costing (10 marks)
Your employer is contemplating changing the existing traditional costing systems used in the business to adopt activity based costing (ABC). See your text page 81.
Prepare a business report outlining the traditional costing system and evaluate arguments for and against ABC. Use the Internet as a resource. The following resources will help you prepare and format your report:eportfolio.csu.edu.au/pebblepad/viewasset.aspx
Or see this resource. unilearning.uow.edu.au/report/4b.html

Question 10 Direct, step and reciprocal methods of overhead allocation Colin and Company has two production departments and two service departments. The budgeted costs of these departments are:

The services of S1 are allocated according to the number of employees in the other departments:
S2 has 20 employees, P1 30 employees and P2 30 employees.
The services of S2 are allocated 30% to S1, 20% to P1 and 50% to P2.

Question 1: Management accounting and costs

Certain cost elements are associated with the cost of producing a cost or service, five of which are described along with their examples as follows:

Materials:

The costs of materials are tangible goods required to produce a product. The material costs could be in the form of direct or indirect material costs. The direct costs of materials are the traceable and quantifiable costs incurred in production (Chenhall & Moers, 2015). On the other hand, the indirect materials are untraceable or it is not cost effective. For instance, an organisation manufacturing artisan crafts might take into account wood as a direct material, as the amount of wood required could be quantified easily. On the contrary, it would not be cost-effective to track glue and other fasteners in this fashion. Thus, these items could be adjudged as indirect materials.

Labour:

The amount incurred in the manufacturing process in the form of wages and salaries to the staffs is considered as the cost of labour. The cost of labour could be segregated into both direct labour and indirect labour. Wages are considered as a major part of direct labour cost, which are paid to the staffs involved with physical handling of the product (Dekker, 2016). The cost of indirect labour comprises of other wages and salaries involved in production; however, they could not be traced to units. For instance, the direct labour costs constitute of the wages for line staffs and material handlers. The indirect labour costs would include the salaries of plant supervisors, engineers of quality control and workers associated with factory maintenance.

Overhead:

The overhead costs are associated with production; however, it could not be segregated as direct materials or direct labour. In other words, the overhead costs consider all indirect material and labour costs along with untraceable costs. Some of the popular overhead costs include manufacturing rents, insurance costs and depreciation on factory equipment. In case of small-sized businesses, majority of the cost of production comprises of overhead cost (Drury, 2013). However, effective cost management practices need to be adopted for handling the overhead costs.

Direct expenses:

The expenses, which could be identified along with charging to the centre directly, are considered as direct expenses. These expenditures are charged directly to the products as portion of prime cost (Farhan, 2013). Some common forms of direct expenses include excise duty, royalty and cost involved in designing a particular pattern.

Question 2: Costing

Period costs:

Period costs are those costs, which are expensed immediately they are incurred. Some of the common period costs involved with small businesses comprise of sales commissions, advertising costs, owners’ salaries and depreciation for non-factory equipment. In addition, period costs might minimise net income and thus, the management might intend to keep track of the same to check if these costs are not higher in contrast to the expected ones.  

The products that require more detailed recording of costs include the raw materials, fuel, packaging, labour and factory depreciation. On the contrary, the products that require averaging techniques constitute of office supplies, advertising, sales commissions, office depreciation and research and development (Schuster, 2015).

The monthly cost of renting a manufacturing plant is a conversion cost and an inventoriable cost, as it is a portion of the manufacturing overhead costs. It could not be considered as a part of direct labour or prime cost, since it is not directly associated with the cost of production.

In the Books of Tendulkar Manufacturing Co.

Manufacturing Statement

for the period ended 30 September 3017

Particulars

Amount (in $)

Amount (in $)

Raw Materials Purchased

         5,00,000

Add: Opening Stock of Raw Materials

         1,10,000

Less: Closing Stock of Raw Materials

            16,000

         5,94,000

Productive Labour

         1,30,000

Inward Charges on Raw Materials

            22,000

Prime Cost

 

         7,46,000

Manufacturing Overhead:

Manufacturing Expense

            60,000

Depreciation on Machinery

            12,000

Factory Salaries

         2,00,000

Add: Accrued Salaries

            11,000

         2,11,000

Insurance

              3,000

Add: Prepaid Insurance

                 750

              3,750

Rates

              6,750

Factory Cost

 

       10,39,500

Add: Opening Work-in-Process

Material

            15,000

Labour

              9,000

Overhead Expenses

              6,000

            30,000

       10,69,500

Less: Closing Work-in-Process

Material

              7,000

Labour

              5,000

Overhead Expenses

              3,000

            15,000

Cost of Goods Manufactured

 

       10,54,500

Add: Opening Stock of Finished Goods

            70,000

Less: Closing Stock of Finished Goods

            25,000

Cost of Goods Sold

 

       10,99,500

Manufacturing statement for the year (Formula view):

Income statement for the year (Normal view):

In the Books of Tendulkar Manufacturing Co.

Manufacturing Statement

for the period ended 30 September 3017

Particulars

Amount (in $)

Amount (in $)

Sales of Finished Goods

       17,00,000

Cost of Goods Sold

       10,99,500

Gross Profit

 

         6,00,500

Operating Expenses:

Advertising

            12,000

Audit Fee

              3,000

Discount Expense

              6,000

Discount Revenue

             (4,000)

Carriage Outwards

              5,000

Insurance

              1,000

Less: Prepaid Insurance

                 250

                 750

Light and Power

            12,000

General Expenses

            23,000

Rates

              2,250

Office Salaries

         1,00,000

Add: Accrued Office Salaries

                 700

         1,00,700

Sales Commission

            40,000

Total Operating Expenses

 

         2,00,700

Operating Income

 

         3,99,800

Tax Expense

            50,000

Net Profit

 

         3,49,800

Income statement for the year (Formula view):

In the words of Fullerton, Kennedy & Widener (2014), overtime payments are the amount incurred for the overtime worked in excess of the normal rate of wages. It is treated as cost of indirect labour and such payment is incorporated in the cost of manufacturing overhead. For instance, a labour works for 48 hours each week at a rate of $8 per hour. In a specific week, if the labour works for 52 hours and the payment of each excess hour is $12, the apportionment of labour cost would be as follows:

Particulars

Amount (in $)

Direct labour (52 x 8)

416

Manufacturing overhead (4 x 4)

16

Total cost

432

At the time the overtime wages are spent on chance, as the staffs are working overtime in contrast to necessity, it could be considered as a strenuous job or a rush job. This is because it needs additional work and thus, overtime payments could be adjudged as overhead with the necessary treatment (Hemmer & Labro, 2016). For instance, it is assumed that a press operator in a plant makes $12 each hour for normal 40 working hours. During a specific worker, the operator has worked for 45 weeks and the overtime premium is $6 per hour. The labour cost would be apportioned as follows:

Particulars

Amount (in $)

Direct labour (12 x 45)

540

Manufacturing overhead (6 x 5)

30

Total cost

570

In this case, the GST rate is assumed as 10% on all purchases.

Question 3: Cost concepts

Material control and other associated ledger accounts (Normal view):

Material Control Account

Dr.

Cr.

Date

Particulars

Amount

Date

Particulars

Amount

1st April

To Balance b/d

       40,000

 By Work-in-Process Account

    1,00,000

To Accounts Payable Account

       80,000

 31st April

 By Balance c/d

       20,000

    1,20,000

 

    1,20,000

Accounts Payable Account

Dr.

Cr.

Date

Particulars

Amount

Date

Particulars

Amount

 By Material Control Account

       80,000

31st April

To Balance c/d

       88,000

 By GST Clearing Account

         8,000

       88,000

 

 

       88,000

GST Clearing Account

Dr.

Cr.

Date

Particulars

Amount

Date

Particulars

Amount

To Accounts Payable Account

         8,000

 By Balance c/d

         8,000

         8,000

         8,000

Material control and other associated ledger accounts (Formula view):

Journal entry for recording the cost of materials purchased (Normal view):

Journal Entry:

Material Control Account………Dr

 $     80,000

GST Clearing Account…………….Dr

 $       8,000

To Accounts Payable Account

 $     88,000

Journal entry for recording the cost of materials purchased (Formula view):

Accrued payroll and salaries and wages ledger accounts (Normal view):

Accrued Payroll Account

Dr.

Cr.

Date

Particulars

Amount

Date

Particulars

Amount

To Salary and Wages Account

50,000

1st March

By Balance b/d

20,000

31st  March

To Balance c/d

8,000

By Salary and Wages Account

38,000

58,000

58,000

Salary and Wages Account

Dr.

Cr.

Date

Particulars

Amount

Date

Particulars

Amount

To Bank Account

50,000

By Accrued Payroll Account

50,000

To Accrued Payroll Account

38,000

By Salary and Wages Account

38,000

88,000

88,000

Accrued payroll and salaries and wages ledger accounts (Formula view):

Journal entries for recording salaries and wages (Normal view):

Journal Entry:

Salary Account……..Dr

10,000

Wages Account……..Dr

28,000

To Accrued Payroll Account

38,000

Accrued Payroll Account…..Dr

50,000

To Salary and Wages Account

50,000

Salary and Wages Account.....Dr

50,000

To Bank Account

50,000

Journal entries for recording salaries and wages (Formula view):

Gross pay and amount of indirect labour of J. Smith (Normal view):

Particulars

Units

Working hours of J. Smith

48

Normal Working hours

40

Production time(in hours)

35

Idle time (in hours)

5

Overtime work on April 20

2

Overtime work on April 22

6

Premium for 1st three hours

50%

Premium for more than three hours

100%

Normal wage rate

 $      22

Amount paid for normal working hours

 $ 1,056

Overtime rate for 1st three hours

 $      11

Overtime rate after first three hours

 $      22

Total overtime amount for J. Smith

 $    143

Gross pay of J. Smith

 $ 1,199

Amount of indirect labour

 $    253

In this case, the amount of idle time and overtime premium has been considered as a part of indirect labour to arrive at the overall amount of the same.

With the help of costing systems, an organisation would be able to ascertain the cost associated with a specific product or service for revenue generation.  The two most prevalent costing systems include traditional costing and activity-based costing. The traditional costing primarily engages in delegating manufacturing overhead depending on the volumes of cost driver. The drivers of cost take into account the machine hours, direct material and direct labour hours. On the other hand, activity-based costing intends to apportion the manufacturing cost of a specific product in compliance with activities for production. Thus, it is crucial for the business managers to gain an insight of the merits and drawbacks of each costing system to fulfil the needs of their business organisations.

The traditional costing system indicates the apportionment of cost related to manufacturing overheads for production. It is utilised for delegation of costs associated with factory overhead depending on the produced units. This method is feasibility when there is lack of availability of time and the impact on production activities is minimal. The external usage is relatively easier for ascertaining the product valuation (Noordin et al., 2014). Activity-based costing enables in depicting accurate overview of the cost of a product. However, its use is supplementary in most of the business organisations. This costing system helps in ascertainment of activity in manufacturing a product and allocation of cost in production activity (Becker et al., 2015). The initiation of this costing system is to overcome the loopholes of the conventional costing system, since it uses drivers of cost for apportionment of indirect cost of the manufacturers.

The costing accuracy in ABC costing is greater, as the costs are assigned to products based on production. Such technique helps in eradicating the apportionment of irrelevant costs for a particular product. In addition, this costing system is easy to interpret for the internal management and standards for overhead costs. However, this system might be time-consuming as well as confusing in absence of lack of adequate knowledge on the part of the business personnel. This is because it takes into account both managerial costs and administration costs at the same time (Otley & Emmanuel, 2013). 

Direct method (Normal view):

Particulars

Material and Labour

Percentage

Total of Production Department

Indirect Costs

Percentage

Total of Production Department

P1

2,00,000

53.33%

93.33%

90,000

48.91%

86.96%

P2

1,50,000

40.00%

70,000

38.04%

S1

10,000

2.67%

6,000

3.26%

S2

15,000

4.00%

18,000

9.78%

Total

3,75,000

 

 

1,84,000

 

 

Apportionment of Cost:

Particulars

Material and Labour

Allocation from Service Department

Indirect Costs

Allocation from Service Department

Total

P1

2,00,000

                                                   43,750

90,000

                                                   42,667

3,76,417

P2

1,50,000

                                                   58,333

70,000

                                                   54,857

3,33,190

Direct method (Formula view):

Step Method:

Particulars

P1

P2

S1

S2

Material and labour

      2,00,000

      1,50,000

       10,000

       15,000

Indirect costs

         90,000

         70,000

         6,000

       18,000

Total

      2,90,000

      2,20,000

       16,000

       33,000

Add: Apportionment of S2 department

         18,194

         13,802

         1,004

Total

      3,08,194

      2,33,802

       17,004

 

Add: Apportionment of S1 department

           9,669

           7,335

Total

      3,17,863

      2,41,137

 

 

Step method (Formula view): 

Reciprocal services method (using algebraic equation):

The cost of simultaneous equation method would be used to solve the provided problem. The original cost of the service departments are provided as follows:

S1 = $16,000

S2 = $33,000

After obtaining the share from the service departments’ distribution:

S1 = $16,000 + 30% S2 [Equation 1]

S2= $33,000 + [20/(20+30+30)] S1

S2 = $33,000 + 25% S1 [Equation 2]

By placing the value of S2 in Equation 1,

S1 = 16,000 + 30% (33,000 + 25% S1)

S1 = 16,000 + 9,900 + 0.075 S1

S1 = 25,500 + 0.075 S1

S1 – 0.075 S1 = 25,500

0.925 S1 = 25,500

S1 = 25,500/0.925

S1 = $28,000

Similarly, by placing the value of S1 in Equation 2,

S2 = 33,000 + 25% (16,000 + 30% S2)

S2 = 33,000 + 4,000 + 0.075 S2

S2 – 0.075 S2 = 37,000

0.925 S2 = 37,000

S2 = 37,000/0.925

S2 = $40,000

Distribution summary:

Particulars

P1

P2

S1

S2

Material and labour

             2,00,000

       1,50,000

               10,000

        15,000

Indirect costs

                90,000

          70,000

                 6,000

        18,000

Total

             2,90,000

       2,20,000

               16,000

        33,000

Add: Distribution of S2

40,000 x 20% = 8,000

40,000 x 50% = 20,000

(40,000 x 30%) = 12,000

(40,000)

Add: Distribution of S1

28,000 * [30/(30+30+20)] = 28,000 * 37.50%

= 10,500

28,000 * [30/(30+30+20)] = 28,000 * 37.50%

= 10,500

(28,000)

28,000 * 25% = 7,000

Total

3,08,500

2,50,500

-

-

Reciprocal services method (Normal view):

Reciprocal Method:

Particulars

Allocation of S1

Percentage

Allocation of S2

Percentage

P1

30

37.50%

20

20.00%

P2

30

37.50%

50

50.00%

S1

30

30.00%

S2

20

25.00%

Total

80

 

100

 

Apportionment of Cost:

Particulars

P1

P2

S1

S2

Material and labour

             2,00,000

       1,50,000

               10,000

        15,000

Indirect costs

                90,000

          70,000

                 6,000

        18,000

Total

             2,90,000

       2,20,000

               16,000

        33,000

Add: Allocation of S2

                  8,000

          20,000

               12,000

      (40,000)

Total

             2,98,000

       2,40,000

               28,000

        (7,000)

Add: Allocation of S1

                10,500

          10,500

              (28,000)

          7,000

Total

             3,08,500

       2,50,500

                       -   

                -

References:

Becker, S. D., Wald, A., Gessner, C., & Gleich, R. (2015). The Role of Perceived Attributes for the Diffusion of Innovations in Cost Accounting: The Case of Activity-Based Costing. Comptabilité-Contrôle-Audit, 21(1), 105-137.

Chenhall, R. H., & Moers, F. (2015). The role of innovation in the evolution of management accounting and its integration into management control. Accounting, Organizations and Society, 47, 1-13.

Dekker, H. C. (2016). On the boundaries between intrafirm and interfirm management accounting research. Management Accounting Research, 31, 86-99.

Drury, C. M. (2013). Management and cost accounting. Springer.

Farhan, M. A. (2013). Cost & Management Accounting.

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

Hemmer, T., & Labro, E. (2016). Productions and Operations Management & Management Accounting.

Noordin, R., Zainuddin, Y., Mail, F., & Mail, R. (2014). Strategic Management Accounting: State-of-the-Art. Malaysian Journal of Business and Economics (MJBE), 1(1).

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

Schuster, P. (2015). Cost and Management Accounting. In Transfer Prices and Management Accounting (pp. 1-4). Springer International Publishing.

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