New Age Caravan Manufacturer of Caravans month of April 20xx

Question: Discuss about the New Age Caravan Manufacturer of Caravans. Answer: Product Costing System- Product Costing is a system ofAccounting where all the costs related to a product are accumulated and assigned as the cost of producing the required number of products. The various costs generally includes cost of purchasing raw materials required for the manufacture of the product, direct and indirect wages paid to the workers for their labor, various overheads like the production overhead, administrative overhead, sales and marketing overhead etc. These various costs are used by the business to plan different business strategies, plans and policies for setting the final profit percentage on the product, requirement of required advertisement for promotion of the product etc. On the whole, the major objective of product costing is to maximize profits. For example, the business may decide as to whether it should use cheaper raw material or should reduce the wages rate or should work on the efficiency of machines. Thus, it is very helpful in decision making and taking vital decisions f or the business.(Lister, n.d.) Though product costing has been widely adopted and its advantages can maximize profits but still the traditional approach of the system sometimes nullifies its advantages because products have been modernized and there is a lot of improvement in shipping and transportation techniques which has affected the methods of calculating different costs. Further, the requirement for stocking of materials has also reduced. This is because of availability of speedy availability of materials more with the immersion of e-commerce in the industries. This makes the old calculation methods irrelevant for the business. The other major changing factor is the short-term customization of products. The manufacturing entities are now more focused on providing greater customer satisfaction by providing customized products. This gives rise to introduction of short-term production plans for the business and creates problem in allocation of various fixed costs to one particular production plan. Thus, an overa ll view needs to be adopted in such situation which is quite different from what we do in product costing.(Edwards, n.d.) Schedule of Accounts:- Cost of goods Manufactured = $489000 Cost of goods Sold = $696720 The above cost does not include the expenses for Advertising expenses and Travel and Entertainment Expenses of sales executives which have been duly shown in the last year accounts. This is so because these expenses needs to be shown on actual expenditure incurred basis which may vary highly from one period to another. Since, the current months actual expenditure on advertising and travel entertainment is not known the expenses have not been recorded in the cost accounts. However, an assumed expenses based on previous years expenditure may be included in the General Expenses of the financial accounts to nullify the effect and prevent overstatement of profit. (See the appendix for detailed calculations) Accounts for the month of April- The completed accounts for the month of April give the following information:- Raw Materials Op Bal 1 April 12000 WIP 180000 Accounts Payable 184000 Bal 30 April 16000 196000 196000 WIP Op Bal 1 April 4500 Finished Goods 489000 Raw Material 180000 Wages 182000 Manufacturing OHDS 156000 Depreciation- Factory Building 8000 Factory Equipment 16000 Factory Insurance 14000 Repair Maintenance 8000 Land Tax 4500 Balance 30 April 84000 573000 573000 Finished Goods Op Bal 1 April 11000 Cost of goods sold 484000 WIP 489000 Balance 30 April 16000 500000 500000 iv) Manufacturing OHDS Op Bal 1 April 0 WIP 156000 Actual OHDS 158500 Under applied OH 2500 158500 158500 Accounts Payable Op Bal 1 April 12000 Raw Material 184000 Bank 180000 Balance 30 April 8000 192000 192000 Cost of Goods Sold Op Bal 1 April 0 Profit Loss 696720 Finished Goods 484000 Indirect Labor Costs 122720 Sales Salaries 90000 Balance 30 April 0 696720 696720 The overheads to be applied = $158500 The overheads actually applied = $156000 Therefore, there is under application of $2500 in the job. Under/Over Applied Overheads- Overheads can be over or under applied based on the actual overheads incurred during the period and the application of overhead to the related job. Generally, every business calculated its overhead rate based on some predetermined formula. The business is using the overhead rate of $30 per hour based on the information provided by the employees and previous managers. This overhead rate is based on the normal labor hours worked during a year. This rate is generally computed at the beginning of a period using the estimated information available and is used for application of overhead throughout a working period.(Management, n.d.) We have actually incurred overheads for $158500 for the month of April. However, according to the predetermined rate of $30 per labor hour the overhead to be applied comes to $156000 (5200hours multiplied by $30). Thus, an under application of $2500 comes for the month of April in the books. There can be a number of ways for handling the over or under application of overheads in a manufacturing process by the business. The two most prominent methods are:- Allocation to different cost heads- Under this method, the total overhead under or over applied at the end of the year is allocated to different cost heads i.e. to the work in progress, finished goods and cost of goods sold accounts. This allocation is based on predetermined absorption rate as decided by the business. The calculation in this method is little complex but the treatment is very logical. Allocation to Cost of goods Sold- The next method is to allocate total overheads under or over applied at the end of the year to the Cost of goods Sold accounts only. This method is very easy and gives the final effect of the overhead through single entry. ABC Costing Analysis- Activity Based Costing commonly known as ABC Costing is a system for allocation of total overheads incurred during a period to different jobs. Unlike Product Costing, in which the total overheads incurred are allocated to different jobs on the basis of some fixed predetermined rate which is generally the normal working hours of the business, Activity Based Costing allocates the overheads on the basis of different cost drivers. Cost drivers are the real cause of the overhead. Using different cost drivers, different rates are calculated for different cost drivers and then the overheads are allocated to only those jobs which have some relation with the cost drivers and the related costs. Thus, it is more logical way of allocating the manufacturing overheads to different products than the traditional product costing. New Age Caravans is engaged in the manufacture of single kind of a product and all its costs are related to one job only. Thus, whatever the costs will be incurred is added to the cost of the single job so that appropriate profit target can be calculated and earned. Hence, the applicability of ABC system is not suitable as the allocation of overheads based on cost drivers will be ultimately the same which is in the present system because there are no other jobs available for diversion of costs. Therefore, the business should continue with the current system of allocating overheads @ $30 per hour and should choose for ABC only when different products with different jobs can be identified within the manufacturing process.(Coach, n.d.) Bibliography Coach, A., n.d. Activity Based Costing. [Online] Available at: https://www.accountingcoach.com/activity-based-costing/explanation [Accessed 19 May 2017]. Edwards, J., n.d. JD Edwards World Product Costing and ManufacturingAccounting Guide. [Online] Available at: https://docs.oracle.com/cd/E26228_01/doc.93/e21775/ch_ov_prod_cost_mfg_acc.htm#WEAMA108 [Accessed 19 May 2017]. Lister, J., n.d. Product Costing vs. Cost Accounting. [Online] Available at: https://smallbusiness.chron.com/product-costing-vs-cost-accounting-37642.html [Accessed 19 May 2017]. Management, A.f., n.d. Over or under applied manufacturing overhead. [Online] Available at: https://www.accountingformanagement.org/over-or-under-applied-manufacturing-overhead/ [Accessed 19 May 2017].