Management Accounting Assignment 1

Nguyễn Thị Kiều Anh - Snow - F05014 BANKING ACADEMY, HANOI BTEC HND IN BUSINESS (Accounting) ASSIGNMENT COVER SHEET NAME OF STUDENT REGISTRATION NO UNIT TITLE ASSIGNMENT TITLE ASSIGNMENT NO NAME OF ASSESSOR SUBMISSION DEADLINE Nguyễn Thị Kiều Anh - Snow F05-014 Unit 9: Management Accounting: Costing and Budgeting Cost Information Analysis of Mr Jun Alejo Bathan 26th April 2013 I, Nguyễn Thị Kiều Anh _ hereby confirm that this assignment is my own work and not copied or plagiarized from any source I have referenced the sources from which information is obtained by me for this assignment 26 th April 2013 _ Signature Date FOR OFFICIAL USE Assignment Received By: Date: Nguyễn Thị Kiều Anh - Snow - F05014 Unit Outcomes Outcome Evidence for the criteria Feedback Assessor’s decision First attemp t Be able to analyse cost information within a business LO1 Be able to propose methods to reduce costs and enhance value within a business Classify different types of cost 1.1 Using different costing methods 1.2 Calculate costs using appropriate techniques 1.3 Analyse cost data using appropriate techniques 1.4 Prepare and analyse routine cost reports 2.1 Use performance indicators to identify potential improvement 2.2 Suggest improvements to reduce costs, enhance value and quality 2.3 LO Merit grades awarded M1 M2 M3 Distinction grades awarded D1 D2 D3 Rework Internal Verification Nguyễn Thị Kiều Anh - Snow - F05014 Outcome Evidence for the criteria Feedback Assessor’s decision Assignment ( ) Well-structured; Reference is done properly / should be done (if any) Overall, you’ve Areas for improvement: ASSESSOR SIGNATURE DATE / / DATE / / NAME: (Oral feedback was also provided) STUDENT SIGNATURE NAME : FOR INTERNAL USE ONLY VERIFIED YES NO DATE : VERIFIED BY : NAME : Internal Verification Nguyễn Thị Kiều Anh - Snow - F05014 Management Accounting: Costing and Budgeting Cost Information Analysis Prepared for: Lecturer, Mr Jun Alejo Bathan Unit 9: Management Accounting: Costing and Budgeting Banking Academy, Hanoi BTEC HND in Business (Finance) Prepared by: Nguyễn Thị Kiều Anh – Snow - F05A Registration No: ITP F05-014 Submission date: 26th April 2013 Nguyễn Thị Kiều Anh - Snow - F05014 TABLE OF CONTENT EXECUTIVE SUMMARY Management accounting is concerned with the provision of information to people within the organization to help them make better decisions and improve the efficiency and effectiveness of existing operations (Drury, 2006, p.7) This report will help the learners to understand deeply about management accounting based on analyzing cost information and proposing methods to reduce costs and enhance value within companies; these are Binh An Corporation, Hung Anh - division of Binh An Group and Manh Hung Company This report is divided into tasks: The first one is analyze the cost information within Binh An In this task, it involves parts: • Classify different types of cost incurred in Binh An company • Calculate costs using appropriate techniques • Use performance indicators to identify potential improvement • Suggest improvements to reduce costs, enhance value and quality The second task is requiring evaluating the manager’s performance based on provided information of Hung Anh company by absorption costing and variable costing income statement This task divided into parts: • Calculate costs using appropriate techniques • Analyze cost data using appropriate techniques • Prepare and analyze routine cost reports The last task mentions about the using of job costing and process costing method in Manh Hung Company This task is just makes to be more clearly for the following parts: • Calculate costs using appropriate techniques • Analyze cost data using appropriate techniques Nguyễn Thị Kiều Anh - Snow - F05014 INTRODUCTION Binh An Corporation is a family-owned enterprise that locates in Ha Tay province and produces brass musical instruments for using by high school students The company has been in business for over 10 years and grown continuously in recently years According to Mr Nguyen Minh, the owner of the Company thinks that there may be some problems in controlling the cost in the company Therefore, this report will help Binh An Corporation find out the existing problems in controlling the cost of the company and also give some suggestion to fix them and increase profits for this company Besides, in the case of Hung Anh Company - a division of Binh An Group which manufactures and sells special chromed parts and Manh Hung Company which manufactures bicycles and tricycles, based on production data and cost data, this report also helps the learners know how to use appropriate techniques for calculating and analyzing problems about cost as well as ways to solves it Nguyễn Thị Kiều Anh - Snow - F05014 Task 1: A report of cost and control the cost in Binh An company Classification of cost incurred in Binh An company Cost classification involves arranging costs into groupings of similar items in order to make stock valuation, profit management, planning, decision making and control easier (BPP, 2010) We can classify the costs incurred in Binh An company into types of cost: - Manufacturing costs (Product Costs) - Non-manufacturing costs (Period Costs) - Group of fixed costs, variable costs and Semi-variable Costs (Mixed costs) 1.1 Manufacturing costs Manufacturing costs are the costs necessary to convert raw materials into products The resulting units costs are used for inventory valuation on the balance sheet and for the calculation of the cost of goods sold on the income statement (Averkamp, n.d.) Manufacturing costs are tupically divided into categories: direct materials, direct labour, and factory overhead (manufacturing overhead) a) Direct materials Direct materials is cost of the materials which become part of the finished product (Averkamp, n.d.) For Binh An company, they produces brass musical instruments, direct materials is therefore brass sheet metal and brass tubing According to scenario: • Requisitions No 112: 250 square feet of brass sheet metal at $5 per square foot (for • job number T81)  Direct material for T81= 250 × $5 = $1,250 Requisitions No 113: 1000 pounds of brass tubing, at $10 per pound (for job number C40)  Direct material for C40 = 1000 × $10 = $10,000 The total of direct materials is $1,250 + $10,000 = $11,250 b) Direct labour Direct labour is the cost of the wages of the individuals who are physically in converting raw materials into a finished product (Averkamp, n.d.) Nguyễn Thị Kiều Anh - Snow - F05014 According to scenario: • • Direct labor: Job T81, 800 hours at $20/hour  Direct labor for T81 = 800 × $20 = $16,000 Direct labor: Job C40, 900 hours at $20/hour  Direct labor for C40 = 900 × $20 = $18,000 For Binh An company, the total direct labour is therefore $16,000 + $18,000 = $34,000 c) Factory overhead or manufacturing overhead Factory overhead refers to all other costs incurred in the manufacturing activity which cannot be directly traced physical units in an economically feasible way Factory overhead is also described as indirect manufacturing costs (Averkamp, n.d.) This types is divided into smaller types of cost below • Indirect material: Indirect materials are materials used in the production process, but which cannot be linked to a specific product or job (Citibanker, 2013) For the case of Binh An company, Indirect materials is lubricant so the cost of indirect marterial is $100 (10 gallons × $10) • Indirect labor: Indirect labor is the cost of any labor that supports the production process, but which is not directly involved in the active conversion of materials into finished products (Citibanker, 2013) For the case of Binh An company, Indirect labour included general factory cleanup $4,000 and factory supervisory salaries - $9,000 The total indirect labour is • therefore $13,000 ($4,000 + $9,000) Depreciation: Depreciation of the factory building and equipment of Binh An • company during 1st quarter amounted to $12,000 Rent expense: Rent paid in cash for warehouse space usage of Binh An Company • during 1st quarter was $1,200 Utility costs: For Binh An Company, utility cost incurred during st quarter amounted • to $2,100 Property taxes: According to scenario, property taxes on Binh An Company were • paid in cash, $2,400 Insurance: For Binh An Company, the insurance cost covering factory operations for the quarter was $3,100 1.2 Non - manufacturing cost (Period cost) Non-manufacturing costs are costs that are not related to the production of goods; they are also referred as period costs These costs have two components - Selling costs and Administrative costs (Houston, n.d.) Nguyễn Thị Kiều Anh - Snow - F05014 According to scenario: • The cost of salaries and fringe benefit for sales and administrative personnel paid • • in cash during quarter amounted to $8,000 Depreciation on administrative office equipment and space amounted to $4,000 Other selling and administrative expenses paid in cash during quarter amounted to $1,000 The total of period cost is therefore $13,000 ($8,000 + $4,000 + $1,000) 1.3 Fixed costs, variable costs and semi-variable • Fixed costs Fixed costs are costs which are incurred for a particular period of time and which, within certain activity levels, in unaffected by changes in the level of activity (BPP, n.d.) Fixed costs include some costs: rent, depreciation and administrative salaries • Variable costs Variable costs are costs which vary with the level of activity (BPP, n.d.) There are some costs are determined as the variable costs: sales commission, advertising costs, and machine lubricants • Mixed costs (Semi - variable) Mixed costs are costs which contain both fixed and variable components and so are partly affected by changes in the level of activity (BPP, n.d.) Some mixed costs are electricity and gas bill, sales representative salary Nguyễn Thị Kiều Anh - Snow - F05014 Product cost Name of cost Variable Fixed cost cost   Direct material Direct labor Period Direct Direct Manufacturing material Labor overhead $11,250 $34,000 Indirect material Indirect labor Depreciation on   $100 $13,000 factory building  $12,000  $1,200    $2,100 $2,400 $3,100 and equipment Rent expense for warehouse Utility cost Property taxes Insurance Cost of salaries and fringe cost  $8,000  $4,000  $1,000 benefits Depreciation on equipment and space Other selling and administrative expenses Total $11,250 $34,000 $33,900 Table 1: The different types of costs incurred in Binh An Company Calculation manufacturing overhead cost absorbed to jobs in the period Predetermined overhead rate is calculated by formula: Budgeted yearly total factory overhead costs 10 $13,00 Nguyễn Thị Kiều Anh - Snow - F05014 the cost of non – conformance) including Internal failure cost and External failure costs (Crosby, 1979) • Quality improvement for Binh An Company (Potential improvement) Binh An can follow total quality management (TQM) to improve quality: Benefit of TQM - Reduce of defects - Ease of problem solving - Continuous improvements - Lead to customer’s satisfaction - Generate good reputation for the company - Cost saving and profitability improvement (BPP, n.d.) When Binh An Company use TQM, it will reduce costs of poor quality, however, the cost of good quality will increase because one of basic principles in using TQM is that of cost of preventing mistakes is less than the cost of correcting them Thus, it is very important for the company is that the company should ensure that the addition costs will never outweigh the cost savings 4.2 Value Value of a product or service to a customer can therefore be considered in terms of its fitness for purpose and the prestige or esteem attached • • The value of a product has distinct aspects: - Cost value: is the cost of producing and selling an item/providing a service - Exchange value: is the market value of the product or service - Use value: is what the product or service does, the purpose is fulfills - Esteem value: is the prestige the customer attaches to a product (BPP, n.d.) Enhancing value for Binh An Company - Components and material costs: find a cheaper substitute material and eliminate unnecessary material to reduce cost of producing and selling product to attract customers - Product benefits: is used to increase the value of products because product’s values often go with benefits that it brings to customers 15 Nguyễn Thị Kiều Anh - Snow - F05014 - Prices: Product prices can higher than the competitors’ prices but high prices usually are equivalent to better quality - Brand: Create and build beautiful image for the brand is the most ways to enhance value for product and the company as well - Warranty: Warranty will increase customer’s belief after buying goods because it ensures that product will use good for time period which is written in warranty - Loyalty card (for discount): Give loyalty card for close customers to keep a good relationship with existing customers and bring and attract new customers Task 2: The income statement in Hung Anh Company Task 2a: Absorption and marginal costing Absorption costing income statement for options (producing 200,000 units or 250,000) Hung Anh Company Absorption costing income statement Sales (200,000 × $8) Less cost of goods sold Beginning inventory Add cost of goods manufactured Goods available for sales Produce 200,000 units Produce 250,000 units 1,600,00 1,600,00 1,080,00 1,080,00 Ending inventory Gross Margin Less selling and administrative expense Variable expenses Fixed expense 1,080,00 520,000 - $100,00 12,000 984,000 616,000 $100,000 112,000 $408,00 Net Income • 1,230,00 1,230,00 246,000 12,000 112,000 $504,00 Sales According to scenario, expected sales in units is 200,000 and selling price per unit is $8  Sales = Expected sales in units × selling price unit = 200,000 × $8 = $1,600,000 16 Nguyễn Thị Kiều Anh - Snow - F05014 • Beginning inventory = a) Calculation • of producing 200, 000 units Cost of goods sold - Cost of goods manufactured Manufacturing overhead cost per unit = Variable cost per unit + Fixed cost per unit = + = $5.4 Cost of goods manufactured = Manufactured units × Manufacturing overhead cost per unit = 200,000 × $5.4 = $1,080,000 - Goods available for sale = Beginning inventory + Cost of goods manufactured = + 1,080,000 = $1,080,000 - Ending inventory = (200,000 - 200,000) × $5.4 = $0  Cost of goods sold = Good available for sale - Ending inventory = 1,080,000 - = $1,080,000 • Gross Margin = Sales - Cost of goods sold = 1,600,000 - 1,080,000 = $520,000 • Selling and administrative expense - Variable expense = Variable Selling and administrative expenses per unit × Unit sales = 200,000 × $0.50 = $100,000 - Fixed expense = 12,000 (according to scenario)  Selling and administrative expenses = Variable expense + Fixed expense = 100,000 + 12,000 = $112,000 • Net income = Gross Margin - Selling and administrative expense = 520,000 - 112,000 = $408,000 b) Calculation • of producing 250,000 units Cost of goods sold - Cost of goods manufactured Manufacturing overhead cost per unit = Variable cost per unit + Fixed cost per unit = + = $4.92 Cost of goods manufactured = Manufactured units × Manufacturing overhead cost per unit = 250,000 × $4.92 = $1,230,000 17 Nguyễn Thị Kiều Anh - Snow - F05014 - Goods available for sale = Beginning inventory + Cost of goods manufactured = + 1,230,000 = $1,230,000 - Ending inventory = (250,000 - 200,000) × $4.92 = $246,000  Cost of goods sold = Goods available for sales - Ending inventory = 1,230,000 - 246,000 = $984,000 • Gross Margin = Sales - Cost of goods sold = 1,600,000 - 984,000 = $616,000 • Selling and administrative expense - Variable expense = Variable Selling and administrative expenses per unit × Unit sales = 200,000 × $0.50 = $100,000 - Fixed expense = 12,000 (according to scenario)  Selling and administrative expenses = Variable expense + Fixed expense = 100,000 + 12,000 = $112,000 • Net income = Gross Margin - Selling and administrative expense = 616,000 - 112,000 = $504,000 Marginal costing income statement for options (producing 200,000 units or 250,000) Hung Anh Company Marginal costing income statement Produce 200,000 units Sales (200,000 × $8) Less variable expenses Beginning inventory Add cost of goods manufactured Goods available for sale Less ending inventory Variable COGS Variable selling and administrative expense Contribution Margin Less fixed expenses Manufacturing overhead Selling and administrative expense 1,600,00 600,000 600,000 600,000 100,000 750,000 750,000 150,000 600,000 100,000 $480,00 12,000 492,000 $408,00 $480,00 12,000 Manufacturing overhead cost per unit = variable cost per unit = $3 18 700,000 900,000 900,000 Net Income • 700,000 Produce 250,000 units 1,600,00 492,000 $408,00 Nguyễn Thị Kiều Anh - Snow - F05014 Sales = Expected sales in units × Selling price per unit • = 200,000 × $8 = $1,600,000 Beginning inventory = • a) Calculation of producing 200,000 units Variable expenses • - Cost of goods manufactured = Manufactured units × Manufacturing overhead cost per unit = 200,000 × $3 = $600,000 - Goods available for sale = Beginning inventory + Cost of goods manufactured = + 600,000 = $600,000 - Variable cost of goods sold = Good available for sale - Ending inventory = 600,000 - (200,000 - 200,000) × $3 = $600,000 - Variable selling and administrative expense = Variable selling and administrative expense per unit × Unit sales = 200,000 × $0.50 = $100,000  Variable expense = Variable cost of goods sold + Variable selling and administrative expense = 600,000 + 100,000 = $700,000 Contribution Margin = Sales - Variable expense • = 1,600,000 - 700,000 = $900,000 Fixed expense = Fixed manufacturing overhead + Fixed selling and administrative • expense = 480,000 + 12,000 = $492,000 Net income = Contribution Margin - Selling and administrative expense • = 900,000 - 492,000 = $408,000 b) Calculation of producing 250,000 units Variable expenses • - Cost of goods manufactured = Manufactured units × Manufacturing overhead cost per unit = 250,000 × $3 = $750,000 - Goods available for sale = Beginning inventory + Cost of goods manufactured 19 Nguyễn Thị Kiều Anh - Snow - F05014 = + 750,000 = $750,000 Variable cost of goods sold = Good available for sale - Ending inventory - = 750,000 - (250,000 - 200,000) × $3 = $600,000 Variable selling and administrative expense = Variable selling and administrative - expense per unit × Unit sales = 200,000 × $0.50 = $100,000  Variable expense = Variable cost of goods sold + Variable selling and administrative expense = 600,000 + 100,000 = $700,000 • Contribution Margin = Sales - Variable expense = 1,600,000 - 700,000 = $900,000 • Fixed expense = Fixed manufacturing overhead + Fixed selling and administrative expense = 480,000 + 12,000 = $492,000 • Net income = Contribution Margin - Selling and administrative expense = 900,000 - 492,000 = $408,000 Explanation for difference raised Through income statement above, it is easy to recognize that both of two costing methods have the same net income is $408,000 in the case of producing 200,000 units However, in the case of producing 250,000 units, there is a difference in the number of net income • In absorption costing, the net income = $504,000 • In marginal costing, the net operating income = $408,000 To explain this difference, there is a comparison between some data of the cost of goods sold, ending inventory, and period expense Cost of goods sold Absorption costing Variable manufacturing costs Fixed manufacturing costs Total Marginal costing Variable manufacturing costs Fixed manufacturing costs Ending inventory Period expenses Total 600,000 150,000 - 750,000 384,000 984,000 96,000 246,000 - 480,000 1,230,000 600,000 150,000 - 750,000 - - 480,000 480,000 20 Nguyễn Thị Kiều Anh - Snow - F05014 Total 600,000 150,000 480,000 1,230,000 Table 4: Comparing between two income statement of two method Variable costing net operating income 408,000 Absorption costing net income 504,000 = = 1.92 96,000 Add: Fixed manufacturing overhead costs deferred in inventory (50,000 × 1.92) Table 5: The different in net income of income statement The table shows that there are differences in the fixed manufacturing costs from the two methods In absorption costing, there is an absorbed fixed overhead cost of $96,000 which is incurred in the ending inventory This makes the difference between the two methods Discussion the relative usefulness of the variable costing income statements versus the absorption costing income statements for decision making and for evaluating the manager’s performance Variable costing is also called marginal costing method It is usually compared with absorption costing method Variable costing is a costing technique where only variable cost or direct cost will be charged to the cost unit produced Variable costing also shows the effect on profit of changes in volume and type of output by differentiating between fixed & variable costs Variable cost is charged to product and treated as a product cost while fixed cost treated as period cost and written off to the profit and loss account (Audra, n.d.) The advantage of variable costing • Cost control: By avoiding arbitrary allocation of fixed overhead, efforts can be concentrated on maintaining a uniform and consistent marginal cost useful to the various levels of management • Simplicity: Marginal costing is simple to understand and operate, can be combined with other forms of costing such as standard costing, budgetary costing without difficulty 21 Nguyễn Thị Kiều Anh - Snow - F05014 • Elimination of varying charge per unit: fixed overheads are not charged to the cost of production due to this the effect of varying charges per unit is avoided (Hub, 2009) Task 2b: Overhead apportionment Preparation a cost distribution sheet using the sequential (step-down) method to apportion the cost the service departments to main production departments a) Definition of Step-Down method The step-down method, widely used, allocates costs of service departments to both production and service departments It is a method for allocating service department costs that recognizes that some service departments support the activities in other service departments as well as those in operating departments The sequence typically starts with the service department that provides the greatest amount of service to other departments (chegg, n.d.) b) Calculation Factory overhead Maintenance (3,207.70) After apportion maintenance overhead Power (2,995.81) Overhead of production department after reapportionment • Stamping Plating Power 9,768.40 1,727.99 11,496.39 1,497.91 6,559.80 697.99 7,257.79 1,497.91 2,214.10 781.71 2,995.81 12,994.3 8,755.7 Total square = Stamping department + Plating department + Power department = 19,500 + 7,875 + 8,820 = 36,195 • Stamping department = × 100% = 53.87% • Plating department = × 100% = 21.76% • Power department = × 100% = 24.37% • Total expense of maintaining department = $3,207.70 • Maintenance Maintenance costs are apportioned using the percentages given so 53.87% goes on stamping, 21.76% to plating, and 24.37% to power Stamping 3,207.70 × 53.87% =1,727.99 22 Nguyễn Thị Kiều Anh - Snow - F05014 Plating 3,207.70 × 21.76% = 697.99 Power 3,207.70 × 24.37% = 781.71  After apportion maintenance overhead Stamping 9,768.40 + 1,727.99 = 11,496.39 Plating 6,559.80 + 697.99 = 7,257.79 Power 2,214.10 + 781.71 = 2,995.81 • Power According to scenario, the power department expenses are then allocated equally to the stamping and plating departments Stamping = Plating = = 1,497.91  Overhead of production department reapportionment Stamping 11,496.39 + 1,497.91 = 12,994.3 Plating 7,257.79 + 1,497.91 = 8,755.7 Comment on the possible distortions can arise from overhead apportionment Possible distortions can arise from overhead apportionment such as: Allocation of overhead of the maintenance floor space can become less reasonable (broken machinery, shortage of materials) lead to deviation overhead of two production department, and calculate wrong level of activities Therefore, the apportionment cannot be said to be fully logical or scientific and the result of such apportionments are the best only approximations (Bhar, 2008) Task 3: Using the job costing and process costing method in Manh Hung Company Calculation costs using appropriate techniques a) Computation of the equivalent unit of production for materials and conversion Units completed and transferred out to the next department Ending work in process: Materials: 800 units @ 100% complete Conversion: 800 units @ 25% complete Equivalent units of production in during the month of May Materials Conversion 1,200 1,200 800 200 2,000 1,400 The equivalent units of production is the sum of units transferred out and the equivalent units of ending work in process • Units transferred out 23 Nguyễn Thị Kiều Anh - Snow - F05014 According to data from scenario: Work in process units, May (Beginning work in process) is 500 units; Units started into production is 1,500 units and work in process units, May 31 (Ending work in process) is 800 units Because units transferred out to the next department is calculated by formula: Units transferred out to the next department = Units in beginning work in process + Units started into production - Units ending work in process Therefore, units transferred out to the next department is 1,200 units (500 units + 1,500 units - 800 units) • Ending work in process Ending work in process of materials is 800 units (800 units x 100 % compete) and ending work in process of conversion is 200 units (800 units x 25% complete) Thus, the equivalent units of production for materials are 2,000 (1,200 units + 800 units) and the equivalent units of production for conversion is 1,400 units (1,200 units + 200 units) b) Computation of the cost per equivalent unit Cost to be accounted for Cost Beginning work in process (May 1) Costs added during May Total cost (a) $33,000 $102,00 $135,00 Equivalent units of production (b) Cost per equivalent unit, (a) ÷ (b) $82.50 Materials cost $15,000 50,000 Conversion costs $ 18,000 52,000 $ 65,000 $ 70,000 2,000 1,400 $ 32.5 $ 50 Cost per equivalent unit is calculated by following formula: Cost of beginning work in process inventory + Costs added during the period Cost per equivalent unit = Equivalent units of production • Materials cost According to data from scenario, beginning work in process of materials is $15,000 and added during month of materials cost is $50,000 The total cost is therefore 24 Nguyễn Thị Kiều Anh - Snow - F05014 $65,000 As calculated in parts above, equivalent units of production of materials is 2,000 units Thus, cost per equivalent unit of materials cost is $32.5 ($65,000 ÷ 2,000 units) • Conversion costs According to data from scenario, beginning work in process of conversion is $18,000 Because conversion cost is calculated by formula: Conversion cost = Direct labor + Manufacturing overhead Added during month of conversion cost is therefore $52,000 ($18,320 + $33,680) with direct labor is $18,320 and manufacturing overhead is $33,680 The total cost is $70,000 As calculated in parts above, equivalent units of production of conversion is 1,400 units Thus, cost per equivalent unit of conversion cost is $50 ($70,000 ÷ 1,400 units) c) Determine the total cost of ending work in process inventory and the total cost of units transferred to the next department Materials Ending work in process inventory: Equivalent units of production Cost per equivalent unit Cost of ending work in process inventory Units completed and transferred out: Units transferred to the next department Cost per equivalent unit Cost of units transferred out • Conversion Total 800 $32.5 200 $50 $26,000 $10,000 $36,000 1,200 $32.5 $39,000 1,200 $50 $60,000 $99,000 The total costs of ending work in process inventory As calculated parts above equivalent units of WIP Closing Balance of materials is 800 units and that of conversion is 200 units Besides, cost per equivalent unit of materials is $32.5 and that of conversion is $50 The cost of ending work in process inventory of materials therefore is $26,000 (800 units x $32.5) and that of conversion is $ 10,000 (200 units x $50) Thus, the total cost of ending work in process inventory is $36,000 ($26,000 + $10,000) 25 Nguyễn Thị Kiều Anh - Snow - F05014 • The total costs of units transferred out As calculated parts above, units transferred to the next department of both materials and conversion is 1,200 The cost of units transferred out of materials is $39,000 (1,200 units x $32.5) and that of conversion is $60,000 (1,200 units x $50) Thus, the total cost of units transferred out is $99,000 ($39,000 + $60,000) Using different costing methods a) The main differences between Job costing and Process Costing The following table shows specific different points between two kinds of method Applicability Job costing Process costing Job costing is applied to ascertain Process costing is applied to the cost of a specific order received ascertain the cost of standardized The quality and quantity of materials products produced in mass So, and Cost Collection labor and other facilities naturally, materials, labor and between jobs vary other facilities remain indifferent Job costing uses cost sheet and Process costing accumulates accumulates manufacturing costs for manufacturing Time period costs for each job or batch separately departments or processes Job costing has no time frame It Process costing has a time frame ends after the completion of a of certain months or years for particular job so that costs are which costs are accumulated Unit cost ascertainment accumulated for each job Job costing obtains unit cost by Process cost divides total dividing the total cost of the job by departmental process costs by the the job order units Final value of costing departmental process output to derive the unit cost A final value of the costs can be A final value of the costs is calculated beforehand calculated only at the end of the complete process Using Job costing is typically used by Process costing is used by the industries that manufacture industries that are involved in customized and heterogeneous mass production of homogenous products products Table 6: The differences between Job costing and Process Costing (Sources: accountinglearning.blogspot.com) b) The reason why Manh Hung should use process costing 26 Nguyễn Thị Kiều Anh - Snow - F05014 According to table above, it is easy to understand the differences between Job costing and Process costing From that, Manh Hung company should choose process costing because the following reasons: First of all, Manh Hung Company manufactures bicycles and tricycles so it is the fact that this industry is involved in mass production of homogenous products Secondly, the costs involved in the processes are only calculated by the end of the complete process That means only when the product is completed, then all the costs involved in production of this item can be carried out Thirdly, the related data used to calculate the costs of bicycles production includes: production data in units and costs data Moreover, there are both direct and indirect costs that incurred in production process In short, from all the reasons above, Manh Hung Company should use process costing as the most appropriate technique CONCLUSION To concluded, understanding the different types of costs and know how to classify it play an important role in any business This research help learners and readers have a deeply 27 Nguyễn Thị Kiều Anh - Snow - F05014 understanding about different types of cost and way to analyze the cost information through the case of Binh An company Bases on main costing methods which are absorption costing and variable costing, and know differences in using job costing and process costing, it is easy to recognize the need of costing method in decision making and manager’s performance of all companies Finally, this report also helps give out ways to identify potential improvement for reducing costs, enhancing value and quality which is necessary for company to increase profitability 28 Nguyễn Thị Kiều Anh - Snow - F05014 REFERENCES accountinglearning (n.d.) 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Retrieved from http://www.investopedia.com/articles/fundamental/04/042804.asp#axzz29wnaympC 29 [...]... period 3 .1 Income statement Binh An Corporation Income statement for the period 1st quar.200x 30,400 17 ,025 Items Sales Cost of goods sold 11 4th quar 200x -1 28,300 14 ,10 0 Nguyễn Thị Kiều Anh - Snow - F05 014 +/- Under/Over absorbed cost Gross Margin Operating cost (Administrative and selling cost) Net Income a) (1, 800) 15 ,17 5 14 ,200 13 ,000 13 ,200 2 ,17 5 1, 000 1st quar.200x For Job number T 81 • Sales... Power (2,995. 81) Overhead of production department after reapportionment • Stamping Plating Power 9,768.40 1, 727.99 11 ,496.39 1, 497. 91 6,559.80 697.99 7,257.79 1, 497. 91 2, 214 .10 7 81. 71 2,995. 81 0 12 ,994.3 8,755.7 Total square = Stamping department + Plating department + Power department = 19 ,500 + 7,875 + 8,820 = 36 ,19 5 • Stamping department = × 10 0% = 53.87% • Plating department = × 10 0% = 21. 76% • Power... Stamping 9,768.40 + 1, 727.99 = 11 ,496.39 Plating 6,559.80 + 697.99 = 7,257.79 Power 2, 214 .10 + 7 81. 71 = 2,995. 81 • Power According to scenario, the power department expenses are then allocated equally to the stamping and plating departments Stamping = Plating = = 1, 497. 91  Overhead of production department reapportionment Stamping 11 ,496.39 + 1, 497. 91 = 12 ,994.3 Plating 7,257.79 + 1, 497. 91 = 8,755.7 2 Comment... = 17 ,025 Over absorbed cost = (1, 800) (Table 2) • Gross Margin = Sales – Cost of goods sold - Over absorbed cost  Gross Margin = 30,400 - 17 ,025 - (1, 800) = 15 ,17 5 • Operating cost (Administrative & Selling cost) = 13 ,000 (table 1) • Net income = Gross margin - Operating cost  Net income = 15 ,16 5 - 13 ,000 = 2 ,17 5 b) 4th quar 200x -1 According to scenario - Sales = 28,300 - Cost of goods sold = 14 ,10 0... expenses Fixed expense 1, 080,00 0 520,000 - $10 0,00 0 12 ,000 984,000 616 ,000 $10 0,000 11 2,000 $408,00 0 Net Income • 1, 230,00 0 1, 230,00 0 246,000 12 ,000 11 2,000 $504,00 0 Sales According to scenario, expected sales in units is 200,000 and selling price per unit is $8  Sales = Expected sales in units × selling price unit = 200,000 × $8 = $1, 600,000 16 Nguyễn Thị Kiều Anh - Snow - F05 014 • Beginning inventory... trombones in job number T 81 were sold on account for $800 each  Sales = × $800 = 30,400 • Cost of goods sold Direct material = 250 × $5 = $1, 250 Direct labor = 800 × $20 = $16 ,000 Manufacturing overhead = 800 × $ 21 = $16 ,800  Total manufacturing cost = $1, 250 + $16 ,000 + $16 ,800 = $34,050 According to scenario, during the first quarter of 200X, the firm worked on Job number T 81, consisting of 76 trombones... Variable Selling and administrative expenses per unit × Unit sales = 200,000 × $0.50 = $10 0,000 - Fixed expense = 12 ,000 (according to scenario)  Selling and administrative expenses = Variable expense + Fixed expense = 10 0,000 + 12 ,000 = $11 2,000 • Net income = Gross Margin - Selling and administrative expense = 616 ,000 - 11 2,000 = $504,000 2 Marginal costing income statement for 2 options (producing 200,000... Selling and administrative expense 1, 600,00 0 600,000 600,000 600,000 10 0,000 750,000 750,000 15 0,000 600,000 10 0,000 $480,00 0 12 ,000 492,000 $408,00 0 $480,00 0 12 ,000 Manufacturing overhead cost per unit = variable cost per unit = $3 18 700,000 900,000 900,000 Net Income • 700,000 Produce 250,000 units 1, 600,00 0 492,000 $408,00 0 Nguyễn Thị Kiều Anh - Snow - F05 014 Sales = Expected sales in units...  Manufacturing overhead absorbed T 81 = $ 21 × 800 = 16 ,800 Manufacturing overhead absorbed C40 = $ 21 × 900 = 18 ,900  Total manufacturing overhead absorbed = 16 ,800 + 18 ,900 = 35,700 • Actual manufacturing overhead = $33,900 (table 1) Table 2: Valuation of absorbed overhead Overhead incurred (actual) Overhead absorbed Over-absorption of overhead $33,900 $35,700 $1, 800 As can be seen in the table above,... Sales = 28,300 - Cost of goods sold = 14 ,10 0 - Operating cost (selling and administrative cost) = 13 ,200 • Gross Margin = Sales - Cost of goods sold  Gross Margin = 28,300 - 14 ,10 0 = 14 ,200 • Net income = Gross Margin - Operating cost  Net income = 14 ,200 - 13 ,200 = 1, 000 12 Nguyễn Thị Kiều Anh - Snow - F05 014 3.2 Calculate and evaluate indicator of productivity, efficiency and effectiveness In order