variances in production costs and revenues

The importance of product costs and conversion costs in both costing systems is discussed, emphasizing their significance in determining the cost of production and facilitating effective

NATIONAL ECONOMICS UNIVERSITY SCHOOL OF ACCOUNTING AND AUDITING

GROUP ASSIGNMENT

Cost Accounting Student names: Thai Chau Anh

Nguyen Duc Binh Bui Ngan Ha Nguyen Do Thuy Tien Instructor: Pham Thi Thuy Date: 30/10/2023

Table of Contents

MT ¬ Ằ ä4 aa 3

ABSTRACT

We are Biscotee Company, a cookie brand selling dark chocolate cookies In this report, we focus

on various aspects of costing and sales information related to cookie production It explores two costing methods, namely job order costing and process costing, highlighting their similarities and differences The importance of product costs and conversion costs in both costing systems is discussed, emphasizing their significance in determining the cost of production and facilitating effective pricing strategies Additionally, the document briefly touches upon variances in production costs and revenues within the job order costing system Overall, this document serves as a comprehensive guide to understanding the establishment of Biscottee Company and the cost-related aspects of cookie production

INTRODUCTION

For the business, to achieve efficiency and high revenue, it requires an appropriate strategy to analyze the market that we enter, including competitors, consumer tastes, and many other factors As the founder of BiscoCom, we need to manage the cost of production and also the profit we make The costing and sales data for generating 1,000 cookies using job order costing and process costing are the main topics

of this paper The report also compares the two costing methods and discusses their relative merits The paper also looks at production variations' effects on costs and income for the cookie production

PART 1: ESTABLISH COOKIES COMPANY

Brand name: Biscottee Company Location: Hanoi, Vietnam Biscottee Company was inspired by Mostaccioli — a famous Italian cookie type with perfect melted chocolate layer Stem from the word

‘biscotti’, which means cookie im Italian, we decided to name our business ‘Biscottee Company’ and BiscoCom in short

1.2 Mission

BiscoCom was born with the aim of showing people the real taste of chocolate cookies At our cookie business, we are committed to bringing joy to our customers in every single bite We are proud of the finest ingredients we use and the carefulness in making cookies Our mission is to create a memorable and delightful experience for our customers, while also fostering a sense of community and connection through our cookies

These days, there are a thousand kinds of cookies produced but we have decided to go with one of the traditional ones — the dark chocolate cookie with the melted choco lava inside and choco chips

on the top The main ingredient which creates the addictive flavor - dark chocolate, is what sets us apart from the other brands These melt-in-your-mouth cookies resemble the softest shortbread you've ever tasted because they are made with high-fat butter With all our passion and effort, BiscoCom believe that our cookies can satisfy even the highest standards

PART 2: COSTING AND SALE INFORMATION

2.1 Prime cost

V

MN Puspese Fleur 15000 56 840,000.00

0000 530 Š 300

9000 36 32 00 fanilla (ml) 500 1000 500,000.00 ( )

| pack for 10 100 150000 15,000,000.00 cookies

Direct labor cost

No of | Wage per hour per employees} employee (VND)

2 100,000.00 2 6 2,400,000.00

No of days | No ofhoursper) sung ¢ynp) day

2.2 Cost per cookies

BISCOTEE COMPANY

Production Cost

Material Overhead Total

W - - - -

'@[ IIICUTT 6,964,000 l , ; 00 - §.948.000

otal 6.964.000 00 | 1,600,000.00 384,000.00 - 8.948.000 00

1,000 4w 00 1,000.00

By using the process costing system, each cookie will go through three stages (departments): Mixing, Add-ins and Packaging The cost of each material used in each process will be charged to that process Manufacturing overhead cost in the Mixing Department: 190,000 VND, includes:

Fixed Costs: Depreciation expenses: 100,000 VND/ day

Variable Costs: Electric expense: 90,000 VND/ 8 hours/day

The cookies will be in the Mixing Department for a total of eight hours, in the Add-ins department for a total of four hours and in the Packaging department for a total of four hours

The cookies will only be 40% complete before they are transferred to the Add-ins Department and 90% complete before they are transferred to the Packaging Department

Cost

Cost

Cost

Assume there is no beginning inventory of any kind For 2 days, 1000 cookies were placed into production and all 1000 were fully completed at the end of day 2

According to the data below, the cost of per unit of Job #999 is 27,612VND The profit our company wants is nearly 45%, so we will earn 22,388 VND per cookie

® Job order costing

Job Order Cost Sheet

Direct Labor Date Hours Rate Total Cost per Flour 7 Oct 16 100,000.00 1,600,000.00 30% Labour cost

i §Oct 16 100,000.00 1.600.00000

‘anilla (ml) 500,000

5

23,452,000.00

1000 units Materials 23,452,000.00

Labor 32

27.01

Direct labor Cost:

- Direct Labor cost per employee per hour: 100,000 VND

- Direct labor cost per employee = 100,000 x 6 x 2 =1,200,000 VND

- Total Direct labor cost: 2,400,000 VND

Manufacturing overhead cost:

- Manufacturing overhead rate is 30% of direct labor costs

- Total manufacturing overhead cost: 720,000 VND

In the image extracted from the company’s sheet, the cost per cookie 1s 6,696.4 VND Our company,

BiscoCom, specializes in supplying biscuit products to customers both domestically and internationally

With such a large scale, we desire to earn a profit margin of nearly 45% for our sales Therefore, the

company's management decided that the selling price of one cookie would be 50,000 VND

PART 3: DIFFERENCES BETWEEN COSTING SYSTEMS

3.1 Compare and contrast the two costing methods

Both process costing and job order costing maintain the costs of direct material, direct labor, and manufacturing overhead The process of production does not change because of the costing method, both include Mixing, Add-in, and Packaging

In job order cost production, the costs can be directly traced to the job, and the job cost sheet contains the total expenses for that job Process costing is optimal when the costs cannot be traced directly

to the job For example, it would be impossible to trace the exact number of eggs in each chocolate chip

cookie The differences between the two systems are shown in the following table:

Product costs are traced to the product and

recorded on each job’s individual job cost sheet

Product costs are traced to department or processes

Each department tracks its expenses and adds

them to the job cost sheet As jobs move from

one department to another, the job cost sheet

moves to the next department as well

Each department tracks its expenses, the number of units started or transferred in, and the number of units transferred to the next department

Unit costs are computed using the job cost

sheet

Unit costs are computed using the department costs and the equivalent units produced

completed but not sold, and all incomplete jobs

completed at the per unit cost Work in process inventory is the cost per unit and the equivalent units remaining to be completed

From the table above, we can see that each costing method has its own advantages Process costing will give business owners an easier time tracking the costs of each stage than job order costing and will therefore give them more complete information about costing throughout production phases than job-order costing In addition, based on the type of costs involved, we may rapidly pinpoint the reason for any unusual rise in (or decrease in) the cost of completed goods at the point of sale

In job-order costing, managers may calculate the profit earned on individual jobs, helping them to better ascertain whether specific jobs are desirable to pursue in the future But since process costing relies

on statistical calculations such as predetermined overhead rate in each department, production statistics will

be more detailed and accurate than job-order costing

For BiscoCom, it is appropriate to apply job-order costing or process costing Job-order costing will simplify the costing process, thus reducing administrative costs for the business But as a start-up business, process costing will provide more completed and responsive information, which will enable the business to deal with production problems in the early stages This can also be beneficial if the business intends to expand the product line in the future or accept custom orders, which is highly likely due to the similarity in the ingredients in many types of cookies

3.2 Discuss product costs, conversion costs and their importance in both costing systems

materials into a finished product

The purpose of both costing methods is to track product cost This allows businesses to determine the cost of manufacturing or acquiring a product With precise cost data, companies can set appropriate prices that cover production expenses and provide a reasonable profit margin This prevents underpricing, which can lead to losses, or overpricing, which may deter potential customers For that reason, it is important to identify costs for each product and for what processes these costs accounted Comparing actual costs to estimated costs helps in evaluating the performance of different production processes Businesses can identify areas that need improvement, set performance benchmarks, and incentivize teams to achieve cost- saving goals

Conversion cost can help businesses track the expenses of production and how efficient the production processes are In process costing, determining conversion costs helps calculate the costs of equivalent units, which refers to the value of partially completed products This is important in calculating inventory value

on the balance sheet to access some KPIs such as Inventory Turnover, Inventory to Sales ratio, In job-

7

order costing, conversion cost is not a concept that is used often as manufacturing overhead is applied at a predetermined rate Overhead expenses will be based on the basis of normal costing to form a budget for the

next period”,

PART 4: VARIANCES IN PRODUCTION - COSTS AND REVENUES

PRODUCTION LEVEL

Direct

Manufacturing

Total 13,806,000.00 27,612,000.00 41,418,000.00

The table shows that even though we make different quantities of a product, the cost for making each unit remains the same at 27.612 VND

This happens because two things are connected: the cost of the materials we use and the cost of the workers who make the product When we change how many units we make, the cost of these materials and workers changes, but they change in a way that keeps the cost per unit the same

In other words, if we want to make a certain amount of profit, the total cost and the total money we make from selling the product go up or down in syne with the number of units we produce It's like they're connected and move together So, when we make more units, both our cost and our revenue go up, and when we make fewer units, they both go down

4.2 The variances in process costing costs

PRODUCTION LEVEL

500 units 1000 units 1500 units Cost: |Material Labor Mfg Overhead |Material Labor Mfg Overhead |Material Labor Mfg Overhead Beginning WIP - - - : - - Cost incurred 3,482,000.00 | 800,000.00 274,000.00 | 6.964,000.00 | 1,600,000.00 384,000.00 | 10,446,000.00 2.400,000.00 494 (000.00 Total 3,482,000.00 | 800,000.00 274,000.00 | 6.964,000.00 1,600,000.00 384,000.00 | 10,446,000.00 23 400.000.00 494,000.00 Units:

Units Completed 500.00 500.00 500.00 1,000.00 1,000.00 1,000.00 1,500.00 1500.00 1,500.00 Equivalent Units

(ending WIP) - - - - Total 500.00 500.00 500.00 1,000.00 1,000.00 1,000.00 1500.00 1500.00 1500.00

Cost per

Total cost per

unit in Mixing

department $9,112.00 §$ _ §94800 $8,893.33

The table demonstrates that when employing the process costing method in the mixing department,

both the direct material cost and direct labor cost change directly in response to the production volume

Consequently, the cost per equivalent unit remains consistent

However, it's worth noting that the company's cost per equivalent unit, given the current production

level, undergoes a significant shift More specifically, it rapidly decreases as production levels increase

This phenomenon is attributable to the manufacturing overhead costs, encompassing both variable and fixed

expenses, such as electricity expense 13.750 VND per hour and depreciation expenses at 164.000 VND

every two days, which gradually reduce as production levels expand

Hence, when the level of production output experiences a surge, the average revenue and average

profit per equivalent unit will inevitably decline for companies aspiring to attain a profit margin of 145%

over their production expenses

As a result, it becomes evident that alterations in production output levels exert a considerable

influence on the functioning of job order costing systems, process costing systems, and, subsequently, a

company's overall revenue In the light of this analysis, it is imperative for managers to carefully formulate

and choose a strategic course of action that aligns with the company's broader business strategy