Allocation Of Overhead Costs – Traditional Vs ABC Approach

Calculation of Overhead Rate – Traditional Costing

PART A

a)	Overhead Rate	=	Total Overheads Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
	(As per Traditional Costing)		Total Direct Labor Costs

		=	$ 960,000	($ 640000 + $ 320000)
			$ 600,000	($ 180000 + $ 420000)

	Overhead Rate per $	=	1.6	per $ of labor costs


	Allocation of Overhead Costs
	(As per Traditional Costing)		Vegie Grow	Flower Food

	Director Labour Costs	(Given)	$ 180,000	$ 420,000
	Overhead Rate per $	(Calculated Above)	1.6	1.6
	Allocated Overheads		$ 288,000	$ 672,000

PART B

b)	Overhead Rate for Processing	=	Total Overheads of Processing
	(As per ABC Approach)		Total No of Kilograms

		=	$ 640,000	(Given)
			$ 512,000	kg

	Overhead Rate per kg	=	1.25	per kg

	Overhead Rate for Packaging	=	Total Overheads of Packaging
	(As per ABC Approach)		Total No of units Packaged

		=	$ 320,000	(Given)
			$ 200,000	units

	Overhead Rate per unit	=	1.6	per units

	Allocation of Overhead Costs
	(As per ABC Approach)		Vegie Grow	Flower Food

	Kilograms Processed	(Given)	192000 kg	320000 kg
	Overhead Rate per kg	(Calculated Above)	1.25	1.25
	Allocated Overheads of Processing		$ 240,000	$ 400,000

	Units Packaged	(Given)	90000 units	110000 units
	Overhead Rate per kg	(Calculated Above)	1.6	1.6
	Allocated Overheads of Packaged		$ 144,000	$ 176,000

	Total Allocated Overheads		$ 384,000	$ 576,000

PART C

Cost driver for activity polls will selected on the discretion of the management of the company. The appropriate cost driver will be selected on the basis of associated variables relating to the manufacturing overheads incurred. The appropriate cost driver selection can be done with appropriate parameters which are identification of cost object, identified and investigate potential cost driver with associate expense, calculation correlation of cost driver with overheads, measurement of cost with use of cost driver and effect on management control over cost driver and overheads.

QUESTION 2

a)	Overhead Rate for Scheduling and Travel	=	Total Overheads of Scheduling and Travel
			Total Hours of Travel

		=	$ 85,000	(Given)
			1250	hours

	Overhead Rate per hour	=	68	per hour

	Overhead Rate for Setup time	=	Total Overheads of Setup time
			Total No of setups

		=	$ 90,000	(Given)
			600	hours

	Overhead Rate per hour	=	150	per hour

	Overhead Rate for Supervision	=	Total Overheads of Supervision
			Total Direct Labor Costs

		=	$ 60,000	(Given)
			$ 400,000	($ 100000 + $ 300000)

	Overhead Rate per $	=	0.15	per $ of labor costs


	Allocation of Overhead Costs
			Commercial	Residential

	Scheduling and Travel Hours	(Given)	750 hours	500 hours
	Overhead Rate per hour	(Calculated Above)	68	68
	Allocated Overheads of Scheduling and Travel	$ 51,000	$ 34,000

	Setup time	(Given)	350 hours	250 Hours
	Overhead Rate per hour	(Calculated Above)	150	150
	Allocated Overheads of Setup Time		$ 52,500	$ 37,500

	Director Labor Costs	(Given)	$ 100,000	$ 300,000
	Overhead Rate per $	(Calculated Above)	0.15	0.15
	Allocated Overheads of Supervision		$ 15,000	$ 45,000

	Total Allocated Overheads		$ 118,500	$ 116,500

PART B

b)	OPERATING INCOME TUDOR DESIGNS
		Commercial	Residential

	Revenues		$ 300,000		$ 480,000
	Less:
	Direct Material Costs	$ 30,000		$ 50,000
	Direct Labor Costs	$ 100,000		$ 300,000
	Overheads Costs as per ABC approach	$ 118,500	$ 248,500	$ 116,500	$ 466,500

	Operating Income		$ 51,500		$ 13,500

PART C

The controller of the company should allocate the overheads costs on the basis of ABC approach where she should allocate the cost of indirect manufacturing overheads according to their cost drivers so that both the product line will show the accurate results in terms of profitability.

PART 2

QUESTION 1

	Oceania Limited
a)	Statement of Net Income

		Spotter	Snooker	Stunner	Total
	Sales	$ 300,000	$ 500,000	$ 200,000	$ 1,000,000
	Less: Variable Expenses	$ 150,000	$ 200,000	$ 145,000	$ 495,000
	Contribution	$ 150,000	$ 300,000	$ 55,000	$ 505,000
	Less: Separate Fixed Costs	$ 30,000	$ 80,000	$ 35,000	$ 145,000
	Income before common Fixed Costs	$ 120,000	$ 220,000	$ 20,000	$ 360,000
	Less: Common Fixed Costs	$ 90,000	$ 150,000	$ 60,000	$ 300,000
	Net Income	$ 30,000	$ 70,000	$ (40,000)	$ 60,000

PART B

b)	Oceania Limited
	Statement of Net Income in case Stunner Discontinue

		Spotter	Snooker	Total
	Sales	$ 300,000	$ 500,000	$ 800,000
	Less: Variable Expenses	$ 150,000	$ 200,000	$ 350,000
	Contribution	$ 150,000	$ 300,000	$ 450,000
	Less: Separate Fixed Costs	$ 30,000	$ 80,000	$ 110,000
	Income before common Fixed Costs	$ 120,000	$ 220,000	$ 340,000
	Less: Allocated Common Fixed Costs	$ 112,500	$ 187,500	$ 300,000
	Net Income	$ 7,500	$ 32,500	$ 40,000


	Allocation of Common Fixed Costs on remaining Product Line

	Fixed Cost rate per $ of sales	=	Total Common Fixed Costs
			Total Sales of Product Lines

		=	$ 300,000
			$ 800,000

	Fixed Cost rate per $ of sale	=	$ 0.38

		Spotter	Snooker
	Sales	$ 300,000	$ 500,000
	Fixed Costs Rate	$ 0.38	$ 0.38
	Allocated Fixed Costs	$ 112,500	$ 187,500

PART C

Oceania Ltd should not stop the Stunner Product Line. The running of Stunner Product Line will give additional $ 20000 ($ 60000 -$ 40000) of Net Income to the company.

QUESTION 2

PART A

a) 1)	Equivalents units of Production – Tennis rackets

		Units	Equivalents Units
			Material	Conversion Costs
			%	Units	%	Units
	Work in Process units, July 1	500	0%	0	40%	200
	Started during the month	400	100%	400	100%	400
	Work in Process units, July 31	600	100%	600	40%	240
	Total Units	1500		1000		840



			Units
	Opening Work in Process		500
	Units started in Production		1000
	Less: Closing Work in Process		600
	Completed Units / Units Transferred	900

	Completed units		900
	Less: Opening Work in Process	500
	Started and completed during month	400

a) 2)			Materials	Conversion Costs

	Total Costs		$ 3,150	$ 3,420
	Equivalent Units		1000	840
	Per Unit Cost		$ 3.15	$ 4.07


	Cost per Equivalent Unit	=	$ 7.22


	Opening Conversion Costs		$ 600
	Direct Labor		$ 1,580
	Manufacturing Overheads		$ 1,240
	Total Conversion Costs		$ 3,420

	Opening Material Cost		$ 750
	Added during month		$ 2,400
	Total Material Costs		$ 3,150

a) 3)			Units Transferred	Process at the end

	Material Units		400	600
	Per unit Cost		$ 3.15	$ 3.15
	Material Cost		$ 1,260	$ 1,890

	Conversion Cost Equivalent Units	600	240
	Per unit Cost		$ 4.07	$ 4.07
	Conversion Costs		$ 2,442.86	$ 977.14

	Total Costs		$ 3,702.86	$ 2,867.14

PART B

Tasman Company Limited
Production cost Report
for the month ended on July 31, 2017
		Physical Units	Equivalents Units
Quantities			Material	Conversion Costs

Units to be accounted for
Work in Process, July 1		500
Units started into production		1000
Total Units		1500

Units accounted for
Transferred Out
From Wok in Process, July 1		500	0	200
Started and Completed in July	400	400	400
Units transferred out		900
Work in Process, July 31		600	600	240
Total Units		1500	600	240

Costs
			Material	Conversion Costs	Total
Units Costs
Costs in July			$ 3,150	$ 3,420	$ 6,570
Equivalent Units			1000	840
Unit Cost			$ 3.15	$ 4.07	$ 7.22

Cost to be accounted for
Work in Process, July 1			$ 750	$ 600	$ 1,350
Started into Production			$ 2,400	$ 2,820	$ 5,220
Total Costs					$ 6,570

Cost Reconciliation Schedule

Cost accounted for
Transferred Out Units
During the process
Material	(400 units X $ 3.15)		$ 1,260.00
Conversion Costs	(600 units X $ 4.07)		$ 2,442.86	$ 3,703

Work in Process, July 31
Material	(600 units X $ 3.15)		$ 1,890
Conversion Costs	(240 units X $ 4.07)		$ 977	$ 2,867

Total Costs					$ 6,570

PART C EXECUTIVE SUMMARY

Each user of the financial statements of the company has its own specifications and the expectations and it is the duty of the company to present their financial statements in such a manner that the users will be able to take their decision and the necessary action in due course of time. The presentation includes the financial reporting and the accounting information. The report has been framed with the three main aims. The first aim of the report is to understand as to what are the meaning of the accounting information and the financial reporting. The second main aim is to understand as to how both of the concepts are linked with detailing the results of the functions of the company. The last aim is to analyze how both of the concepts will help in enhancing the corporate governance of the company. With these aims and consideration, the report is being prepared having the appropriate headings and sub headings.

INTRODUCTION

Financial statements are the pillar of the organization of the basis of which many investors including the potential investors come for investing into the business of the company. If that particular pillar is weak then there will be the possibility that the company will in near future will be break down otherwise there will be the surety that the company will survive for future years to come. As the title suggests the report has been revolved around the two main concepts which are referred to as the accounting information and the financial reporting.

Allocation of Overhead Costs – Traditional Costing

The two quotations as mentioned in the question has been analysed in detail. The report has started with the meaning and the features of the accounting information. Then the meaning and the features of the financial reporting has been discussed. Thereafter the meaning of the corporate governance along with its significance in the company has been detailed and then the critical evaluation has been done as to how the two concepts of the accounting information and the financial reporting helps in the enhancing the corporate governance in the company. The report after the critical evaluation has been ended with the conclusion and recommendation. The data has been obtained from the reliable sources/

ACCOUNTING INFORMATION

MEANING

Accounting is the process whereby the following steps are taken:

Recording of all the transactions that takes place
Classifying the transactions with regard to the nature
Summarizing the above in the prescribed manner

So as to interpret the results of the transactions so entered thereof. The transaction that has been so recorded, classified and summarized shall be of financial in nature. Non financial transactions are not recorded in any manner in the books of accounts. In other words, the accounting is the process of presenting the results of the transactions in the significant manner of the relevant period (Revsine, 2011).

FEATURES AND USES

The accounting information has the following features:

It ensures the correct recording of all the transactions entered into by the company
It ensures the inclusion of only the financial transactions in the books of accounts rather than the non financial transaction
It caters the varying needs of the users of the accounting information and helps in bridging the gap between the information required by the users and information given by the accounting process.

The accounting information main use is that it helps the users of the information to take an informed decision and accordingly take the corrective action.

FINANCIAL REPORTING

MEANING

Financial reporting is defined as the step which starts from the end of the process of the accounting. It deals with the disclosure of the information in financial terms about the company to the various stakeholders of the company. The financial reporting is generated from the data obtained from the accounting process and if the data is reliable then the reporting will also be reliable otherwise the bad information will be provided to the users of the financial information which in turn will not be fruitful for the company.

Thus, financial reporting is the act which affects the decision making power of the various users of the financial report.

FEATURES AND USES

Following are the main feature of the financial reporting:

The financial reporting is done in accordance with the defined accounting standards and accounting policies.
The presentation of the financial reporting shall be made in the defined format as prescribed by the different statutes.
It deals with the useful information and ensures in giving the information as required by the various stakeholders of the company (Aduda, 2013).

The main use of the financial reporting is that it helps the various stakeholders of the company to have the meaningful decision.

CORPORATE GOVERNANCE

MEANING

Corporate means company and the governance means a mechanism through which the particular set of functions or the activities can be controlled. The term corporate governance is thus the mechanism whereby all the activities and functions of the company perform in the defined and the controlled manner. It is not related to the top level management of the company rather it consists of the members who have the power to form the policies and systems in the company and able to control the functioning of the company (Allen, 2012).

Calculation of Overhead Rate – ABC Approach

ENHANCEMENT WITH ACOUNTING INFORMATION AND FINANCIAL REPORTING

Each and every company is required to give the corporate governance statements. It details as to what is the composition of the board and how they are performing their functions and similar areas. Many companies in the last decade have been collapsed only because of the bad corporate governance due to which the severe accounting frauds have been committed by those companies. The major accounting frauds and the bad corporate governance has been highlighted in Lehman Brothers, HIH Insurance, ABC Learning, One Tel, Enron, Tyco and World Com and many more.

The case of the Enron has been widely known by the name of enronitis. This is has been named as the lethal virus only because of the fact that it has led wave of shock in the market and in the different industries due to which the other companies have started checking their own system as to whether their corporate governance is weak or strong. One failure on the part of the corporate governance is that then chief financial officer of the company has opened his own firms and has started doing the business with the company and also simultaneously has removed the amount which is required to be received from that firm by the company.

The extent of the power exercised by the chief financial officer is not good for the health of the company as this power is in excess. It is worth mentioning that in the year of 2002, it has been made clear that the Enron has fraudulently tried to manipulate the tricks in the places where the California has bought the electricity. It has also been said that the board composition of the company has been very bad as all the members does not have the good moral character and always engage themselves in the fraudulent activities (Dibra, 2016). The same has happened in the Lehman Brothers where the reverse repo transaction as against the accounting standard is being carried out and the same has been informed after 10 years. Thus, it shows that these like companies have the bad corporate governance in system.

If the financial reporting in these companies would have been good and represents the true and fair view of the financial position and the financial performance of the company then such corporate governance failure would not have happened in the accounting industry.

For enhancement of the financial reporting, the regulatory authorities have taken many measures including the introduction of the Auditing and Assurance Standard number 701 dealing with the communication of the key audit matters with the client in the independent auditor’s report.

If the financial reporting is good, then the chances of having the frauds in the accounting field will be very less and which in turn give the impression of having the sound and good corporate governance system in place.

In this manner, if the accounting information and the financial reporting is done in the manner as prescribed by the statutes and the financial performance and the position has been correctly stated then it will of course adds to the value of the corporate governance as present in the company.

The accounting information and the financial reporting are the two concepts which have been detail throughout the report. Many collapses have been occurred because of the error in the financial statements of the company which has been reported to the stakeholders for their reporting purposes. On analyzing the financial reporting, the importance of having the good corporate governance have been detailed and how the financial reporting helps in increasing the value of the corporate governance. The same has been evaluated critically with reference to the two quotations. At the end it has been concluded that the true and fair financial reporting along with the useful information enhances the corporate governance.

RECOMMENDATION

It is recommended that the companies shall have the system of having the good corporate governance and for that the financial reporting shall be done in accordance with the needs of the stakeholders of the company and the requirements of the applicable statutes including the accounting standards, auditing and assurance standards.

Aduda, (2013), “An empirical test of competiting corporate governance theories”, Accounting Review, 12(5), 54-59.

Allen, (2012). “A Comparative Theory of Corporate Governance”, Financial Institutional Journal, 51(6), 1-27.

Dibra R, (2016), “ Corporate Governance Failure: The case of Enron and Parmalat”,

Revsine, C., (2011), “Financial Reporting and Analysis”, Journal of Accounting, 25(6), 55-6

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