The cost of manufacturing statement has been shown below (Heminway, 2017).
|
Violet Manufacturing Company |
||
|
Statement of cost of goods manufactured |
||
|
For the year ended December 31,2018 |
||
|
Details |
Amount (Rs.) |
Amount (Rs.) |
|
|
|
|
|
Raw Materials inventory, January 1 |
89000 |
|
|
Raw Materials purchases |
731000 |
|
|
Less: Raw Materials inventory, December 31 |
59000 |
|
|
Raw Materials used |
761000 |
|
|
Less: Indirect Materials Used |
45000 |
|
|
Direct Materials Used |
716000 |
|
|
Direct labor |
474000 |
|
|
Manufacturing overhead: |
||
|
Indirect labor |
150000 |
|
|
Council Rates |
90000 |
|
|
Maintenance and repairs expense |
60000 |
|
|
Factory utilities expense |
10000 |
|
|
Depreciation expense – factory building |
125000 |
|
|
Depreciation expense – factory equipment |
60000 |
|
|
Insurance on factory and equipment |
40000 |
|
|
Electricity for the factory |
70000 |
|
|
Total manufacturing overhead |
605000 |
|
|
Total Manufacturing Cost |
1795000 |
|
|
Add: Work in process inventory, January 1 |
0 |
|
|
Less: Work in process inventory, December 31 |
40000 |
|
|
Cost of goods manufactured |
1755000 |
|
|
Note: Income Tax expenses are to be ignored in the calculation of cost of goods manufactured |
The company’s cost of sales and the gross profit for the year ended 31st December 2018 has been shown below (Goldmann, 2016):
|
Violet Manufacturing Company |
||
|
Income statement |
||
|
For the year ended December 31,2018 |
||
|
Details |
Amount (Rs.) |
Amount (Rs.) |
|
Sales |
2,105,000 |
|
|
Cost of goods sold: |
||
|
Finished goods inventory, January 1 |
35,000 |
|
|
Cost of goods manufactured |
1,755,000 |
|
|
Cost of goods available for sale |
1,790,000 |
|
|
Less: Finished goods inventory, December 31 |
40,000 |
|
|
Cost of goods sold |
1,750,000 |
|
|
Gross margin (Sales – Cost of goods sold) |
355,000 |
|
|
Operating expenses: |
||
|
Selling & administrative expenses |
269,000 |
|
|
Total operating expenses |
269,000 |
|
|
Income from operations |
86,000 |
The cost of sales in the given case is 1750000+269000 = 2019000
- In the given case, most of the costs are direct costs which can be allocated to the departments using a suitable base, whereas the building lease has not been allocated yet. The same can be allocated based either on the number of employees or the square metres(Belton, 2017). Square metres would be a more logical allocation considering the area used by different departments. Based on the same understanding, the total costs assigned to each department is as follows:
|
Particulars |
Support maintenance |
Administration |
Operating books |
Other media |
Total |
|
Salaries |
20,000 |
40,000 |
50,000 |
70,000 |
180,000 |
|
Supplies |
5,000 |
5,000 |
15,000 |
25,000 |
50,000 |
|
Library cost (on basis of sq. mt.) |
4,800 |
4,800 |
11,520 |
2,880 |
24,000 |
|
Total |
29,800 |
49,800 |
76,520 |
97,880 |
254,000 |
- The allocation using direct method is as follows:
|
Particulars |
Support maintenance |
Administration |
Operating books |
Other media |
Total |
|
Salaries |
20,000 |
40,000 |
50,000 |
70,000 |
180,000 |
|
Supplies |
5,000 |
5,000 |
15,000 |
25,000 |
50,000 |
|
Library cost |
4,800 |
4,800 |
11,520 |
2,880 |
24,000 |
|
Total |
29,800 |
49,800 |
76,520 |
97,880 |
254,000 |
|
Allocation |
|||||
|
Support maintenance |
-29,800 |
23840 |
5960 |
0 |
|
|
(in ratio of 1200:300) |
|||||
|
Administration |
-49,800 |
33200 |
16600 |
0 |
|
|
(in ratio of 2:1) |
|||||
|
Total |
0 |
0 |
133,560 |
120,440 |
254,000 |
- The allocation using step down method is as follows:
|
Particulars |
Support maintenance |
Administration |
Operating books |
Other media |
Total |
|
Salaries |
20,000 |
40,000 |
50,000 |
70,000 |
180,000 |
|
Supplies |
5,000 |
5,000 |
15,000 |
25,000 |
50,000 |
|
Library cost |
4,800 |
4,800 |
11,520 |
2,880 |
24,000 |
|
Total |
29,800 |
49,800 |
76,520 |
97,880 |
254,000 |
|
Allocation 1 |
|||||
|
Administration |
12,450 |
-49,800 |
24900 |
12450 |
0 |
|
(in ratio of 1:2:1) |
|||||
|
Total |
42,250 |
0 |
101,420 |
110,330 |
254,000 |
|
Allocation 2 |
|||||
|
Support maintenance |
-42,250 |
0 |
33800 |
8450 |
0 |
|
(in ratio of 1200:300) |
|||||
|
Total |
0 |
0 |
135,220 |
118,780 |
254,000 |
- The allocation as per reciprocal method is as follows. It is also called the algebraic method. The 2 equations for allocation are as follows(Choy, 2018):
Let the support and administrative department be represented by X and Y respectively.
X = 29800 + 0.25Y…. Eq 1
Y = 49800 + 0.25X…..Eq 2
Substituting the value of Y in equation 1:
X = 29800 + 0.25(49800+0.25X) = 29800 + 12450 + 0.0625X
0.9375X = 42250
X = 45066
Y = 49800 + 11267 = 61067
|
Particulars |
Support maintenance |
Administration |
Operating books |
Other media |
Total |
|
Salaries |
20,000 |
40,000 |
50,000 |
70,000 |
180,000 |
|
Supplies |
5,000 |
5,000 |
15,000 |
25,000 |
50,000 |
|
Library cost |
4,800 |
4,800 |
11,520 |
2,880 |
24,000 |
|
Total |
29,800 |
49,800 |
76,520 |
97,880 |
254,000 |
|
Allocation 1 |
|||||
|
Support maintenance |
-45,067 |
11,267 |
22,533 |
11,267 |
0 |
|
Administration |
15266.65 |
-61066.6 |
36639.96 |
9159.99 |
0 |
|
Total |
0 |
0 |
135,693 |
118,307 |
254,000 |
The answers with respect to Sydney Surfboard Company has been shown below:
|
Estimated overhead allocation rate for machining Department = |
|
Budgeted manufacturing overhead cost/Budgeted manufacturing Direct machine hours |
|
$ 5000000/200000 Hours |
|
$ 25/Hour |
|
Estimated overhead allocation rate for Finishing Department = |
|
Budgeted manufacturing overhead cost/Budgeted manufacturing Direct Labor Cost |
|
$ 3000000/2000000 Hours |
|
$ 1.5/Labor |
|
Total Overhead Cost to job 602 |
||||||
|
Particulars |
Machining Department |
|
Finishing Department |
|||
|
$ |
|
$ |
||||
|
Direct Material |
6500 |
1500 |
||||
|
Direct Labor Cost |
250 |
5500 |
||||
|
Manufacturing Overhead Cost |
||||||
|
35 Machine Hour*$25 |
875 |
|||||
|
$5500 Labor Cost*1.5 |
8250 |
|||||
|
Total Manufacturing Cost of Job 602 |
7625 |
15250 |
||||
|
Total Overhead allocated to machining Department |
$875 |
|||||
|
Total Overhead allocated to finishing Department |
$8,250 |
|||||
|
Total Overhead Cost to job 602 |
$9,125 |
|
Total Manufacturing Cost of Job 602 |
Amt. |
|
For Machining Department |
7625 |
|
For Finishing Department |
15250 |
|
Total Manufacturing Cost of Job 602 |
22875 |
|
Total Number of Units |
200 Units |
|
Total Cost of Per Units ($) |
114.375 |
- There are various factors which affect the volume of production in the given period. Some of these factors are availability of the raw materials, availability of the natural resources, capital availability, dependency and availability of labour, technology, transport facilities and the political conditions, climate and the efficiency of the policies of the government and finally and most importantly the efficiency of the people. In case the above factors are favourable, the volume of production will increase and vice versa(Alexander, 2016).
- The company uses and can use 2 different allocation bases depending on the situation as different types of costs needs to be allocated in different fashion. For example, for some of the costs the machine time used or the labour hours may be an appropriate key for allocation whereas in some other cases, the allocation may be on the basis of the number of products or the pieces. The basic idea behind using different allocation base is to have appropriate cost allocation mainly to give the correct costing of the product and thus the financial view(Linden & Freeman, 2017).
|
Fresh Fruit |
||
|
Cost of Production Report (Department Mixing) |
||
|
For the Year ended March |
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|
1. Quantity Schedule: |
Litres |
Litres |
|
Units Started In Process |
||
|
Units Completed And Transferred to Bottling Department |
7500 |
|
|
Units still In Process |
Nil |
|
|
7500 |
||
|
2. Cost charged to department: |
Amount ($) |
Amount ($) |
|
Material |
129000 |
|
|
Labour |
50400 |
|
|
Fixed Overhead |
58500 |
|
|
Cost charged to department |
237900 |
|
|
3. Equivalent Unit Produced |
Litres |
Litres |
|
Material |
7500 |
|
|
Labour |
7500 |
|
|
Fixed Overhead |
7500 |
|
|
4. Cost Per Unit |
Amount ($) |
Amount ($) |
|
Material ($129000/7500) |
17.2 |
|
|
Labour ($50400/7500) |
6.72 |
|
|
Fixed Overhead ($58500/7500) |
7.8 |
|
|
Cost Per Unit |
31.72 |
|
|
5. Cost Accounted for as follows: |
Amount ($) |
Amount ($) |
|
Transferred to Finished Stock (7500 Litters* $31.72) |
237900 |
|
|
Work in process |
||
|
Material |
Nil |
|
|
Labour |
Nil |
|
|
Fixed Overhead |
Nil |
|
|
Cost Accounted For |
237900 |
|
|
Cost Per Litre of Fruit Drink |
$31.72 |
|
Fresh Fruit |
||
|
Cost of Production Report (Department Mixing) |
||
|
For the Year ended March |
||
|
1. Quantity Schedule: |
Bottles |
Bottles |
|
Units received from Mixing Department |
Nil |
|
|
Units Completed And Transferred to Packaging Department |
30000 |
|
|
Units still In Process |
Nil |
|
|
30000 |
||
|
Amount ($) |
Amount ($) |
|
|
|
237900 |
|
|
Material |
45000 |
|
|
Labour |
23700 |
|
|
Fixed Overhead |
6000 |
|
|
Cost charged to department |
312600 |
|
|
Bottles |
Bottles |
|
|
Material |
30000 |
|
|
Labour |
30000 |
|
|
Fixed Overhead |
30000 |
|
|
Amount ($) |
Amount ($) |
|
|
|
31.72 |
|
|
|
||
|
Material ($45000/30000) |
1.5 |
|
|
Labour ($23700/30000) |
0.79 |
|
|
Fixed Overhead ($6000/30000) |
0.2 |
|
|
Cost Per Unit |
34.21 |
|
|
Amount ($) |
Amount ($) |
|
|
Transferred to Finished Stock (30000 bottles* $34.21) |
1026300 |
|
|
Work in process |
||
|
Material |
Nil |
|
|
Labour |
Nil |
|
|
Fixed Overhead |
Nil |
|
|
Cost Accounted For |
1026300 |
|
|
Cost Per filled bottle produced by bottling department including the cost of solution produced by mixing department = $34.21 |
|
Fresh Fruit |
||
|
Cost of Production Report (Department Mixing) |
||
|
For the Year ended March |
||
|
1. Quantity Schedule: |
Bottles |
Bottles |
|
Units received from Bottling Department |
30000 |
|
|
Units Completed And Transferred to Store Room |
30000 |
|
|
Units still In Process |
Nil |
|
|
30000 |
||
|
2. Cost charged to department: |
Amount ($) |
Amount ($) |
|
Cost received from Bottling Department |
|
1026300 |
|
Material |
15000 |
|
|
Labour |
12900 |
|
|
Fixed Overhead |
27000 |
|
|
Cost charged to department |
1081200 |
|
|
3. Equivalent Unit Produced |
Bottles |
Bottles |
|
Material |
30000 |
|
|
Labour |
30000 |
|
|
Fixed Overhead |
30000 |
|
|
4. Cost Per Unit |
Amount ($) |
Amount ($) |
|
Bottling Department ($1081200/30000) |
|
36.04 |
|
Cost added by Packaging Department |
|
|
|
Material ($4=15000/30000) |
0.5 |
|
|
Labour ($12900/30000) |
0.43 |
|
|
Fixed Overhead ($27000/30000) |
0.9 |
|
|
Cost Per Unit |
37.87 |
|
|
5. Cost Accounted for as follows: |
Amount ($) |
Amount ($) |
|
Transferred to Finished Stock (30000 bottles* $37.87) |
1136100 |
|
|
Work in process |
||
|
Material |
Nil |
|
|
Labour |
Nil |
|
|
Fixed Overhead |
Nil |
|
|
Cost Accounted For |
1136100 |
|
|
Cost Per packed bottle produced by packaging department including the cost of filled bottles produced in the bottling department = $37.87 |
- The information from the above 3 requirements reinstate the fact that the value is being added when the product passes through different departments. In each of the department, mixing, bottling as well as packaging of the product, the value is being added at each of the levels which would not be calculated otherwise unless the process costing method is used. The above calculation is also evident of the fact that the output revenue of one department forms the cost of other department(Jefferson, 2017).
- The journal entries with regards to the above transactions in the month of March are:
|
In the books of Fresh Fruit |
||||
|
General Journal |
||||
|
Date |
Particulars |
Dr./Cr. |
Amt ($) |
Amt ($) |
|
March |
Work in Progress – Mixing |
Dr. |
237,900 |
|
|
To Raw Material |
Cr. |
237,900 |
||
|
March |
Work in Progress – Bottling |
Dr. |
1,026,300 |
|
|
To Raw Material – Mixing |
Cr. |
1,026,300 |
||
|
March |
Finished Goods |
Dr. |
1,136,100 |
|
|
To Work in Progress – Bottling |
Cr. |
1,136,100 |
Conclusion
The various concepts have been used and the different cost solutions have been solved. We have come to know that the cost planning and processes like the job costing and process costing is very important and critical from the perspective of the proper costing of the goods and products. Cost allocation is again mainly to get the correct cost allocation between the different departments of the organization. Finally, the cost of manufacturing statement is very necessary for knowing the status of the financial books and what is the cost of producing the goods which will help in decision making (Trieu, 2017).
References
Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4), 411-431.
Belton, P. (2017). Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd. Retrieved from https://www.routledge.com/Competitive-Strategy-Creating-and-Sustaining-Superior-Performance/Belton/p/book/9781912128808
Choy, Y. K. (2018). Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, 145. doi:https://doi.org/10.1016/j.ecolecon.2017.08.005
Goldmann, K. (2016). Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, 4, 103-112. Retrieved from https://doi.org/10.1007/978-3-319-39919-5_9
Heminway, J. (2017). Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents. SSRN, 1-35.
Jefferson, M. (2017). Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland . Technological Forecasting and Social Change, 353-354.
Linden, B., & Freeman, R. (2017). Profit and Other Values: Thick Evaluation in Decision Making. Business Ethics Quarterly, 27(3), 353-379. doi:https://doi.org/10.1017/beq.2017.1
Trieu, V. (2017). Getting value from Business Intelligence systems: A review and research agenda. Decision Support Systems, 93, 111-124.
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