Direct Tracing vs Driver Tracing
Taking into consideration the different types of costs incurred to manufacture motor cell it seems that using direct tracing would be most effective method to assign cost of each activity to the motor manufacturing cell. Tracing costs directly would result in appropriate costing of cells manufactured.
In case selection of driver tracing generally the quantity of raw materials used or number of direct labour hours needed can be used as potential driver to trace costs. Generally, the assumptions such as the costs are related to direct materials used or number of labours used is the main foundation behind tracing manufacturing overheads to products (Ganesan, 2015).
Direct tracing is the method where costs are directly traced to different costs objects whereas in driver tracing the cost drivers are traced to assign cost to products manufactured. In direct tracing, cost of products are ascertained more accurately compared to cost of products determined using driver tracing method.
Part 1:
|
Particulars |
Amount ($) |
Amount ($) |
|
Closing raw materials in hand (30 November) |
20,000.00 |
|
|
Add: raw materials used in production during November |
39,000.00 |
|
|
59,000.00 |
||
|
Less: Opening raw materials in hand (01 November) |
17,000.00 |
|
|
Raw materials purchased during the month of November |
42,000.00 |
Amount of raw materials purchased during the month of November as can be seen in the table above is $42,000.
Part 2:
|
Particulars |
Amount ($) |
Amount ($) |
|
Beginning work in process |
9,000.00 |
|
|
Less: |
||
|
Direct labour costs (300 x 10) |
3,000.00 |
|
|
Manufacturing overhead (300 x 8) |
2,400.00 |
|
|
5,400.00 |
||
|
Direct material costs in the beginning work in process |
3,600.00 |
The cost of direct materials included in the beginning work in process is $3,600 as per the above calculation.
Part 3:
|
Particulars |
Amount ($) |
|
Manufacturing overhead costs applied during November |
26,400.00 |
|
Pre-determined overhead rate |
8 Per direct labour |
|
Number of direct labours worked during November |
|
|
(Manufacturing overhead cost applied / Pre-determined overhead rate) |
3300 hours |
Number of direct labour hours working in the month of November has been calculated by dividing the manufacturing overhead costs applied with the predetermined overhead rate and the resultant number of labour hours worked during the month is 3,300 hours.
Part 4:
|
Particulars |
Amount ($) |
Amount ($) |
|
Ending working in process |
11,000.00 |
|
|
Less: Direct material costs |
4,700.00 |
|
|
Direct labour costs in the ending inventory |
6,300.00 |
Direct labour costs included in the closing inventory is $6,300 as per the calculation made in the table above.
Part 5:
|
Particulars |
Amount ($) |
Amount ($) |
|
Opening finished goods |
50,000.00 |
|
|
Opening work in process |
9,000.00 |
|
|
59,000.00 |
||
|
Add: Materials used during the month |
39,000.00 |
|
|
98,000.00 |
||
|
Add: Manufacturing overhead applied |
26,400.00 |
|
|
124,400.00 |
||
|
Less: Closing finished goods |
44,000.00 |
|
|
Closing work in process |
11,000.00 |
|
|
55,000.00 |
||
|
Cost of goods manufactured during November |
69,400.00 |
Taking into consideration the cost of raw materials, labour cost and manufacturing overhead the amount of cost of goods manufactured during the month of November is $69,400.
Part 6:
Manufacturing overhead incurred during November is $28,000 whereas manufacturing overhead applied during the period is $26,400. Thus, manufacturing overhead is under-applied by $1,600.
|
Date |
Account titles and explanations |
Debit ($) |
Credit ($) |
|
Finished goods |
1,280.00 |
||
|
Work in process |
320.00 |
||
|
Manufacturing overhead |
1,600.00 |
||
Process costing is generally used in manufacturing industry however, a company operating service industry can also use process costing in case similar services are provided in large volume to the customers. An example in service industry is the telecommunication service provider which can use process costing to ascertain cost of services provided.
There are number of examples of manufacturing organisations using process costing. Organizations manufacturing chemicals, refining oil are few of the many organizations that can use process costing to ascertain cost of their products.
Process costing in case of manufacturing industries would use the proportionate amount of raw materials, proportionate amount of direct labour and manufacturing overheads to determine the cost of work in progress. However, in case of service industry ascertaining cost of work in progress would be significantly different as there is no cost of materials hence, it is primarily consists of the proportionate cost of services incurred to complete the proportionate service provision. It is easier to calculate the cost of work in progress for manufactured goods compared to calculation of work in progress for process costing of services.
|
Amounts are in $ |
||
|
Particulars |
Mineral analysis |
Soil Analysis |
|
Directly incurred overhead costs |
900,000.00 |
800,000.00 |
|
Computing department: |
||
|
Mineral Analysis (200000 x 385/700) |
110,000.00 |
|
|
Soil Analysis (200000 x 315/700) |
90,000.00 |
|
|
Engineering department: |
||
|
Mineral Analysis (400000 x 530/1000) |
212,000.00 |
|
|
Soil Analysis (400000 x 470/1000) |
188,000.00 |
|
|
Total costs |
1,222,000.00 |
1,078,000.00 |
|
Mineral analysis |
Soil Analysis |
|
|
Computing department |
||
|
Mineral Analysis (200000 x 385/700) |
110,000.00 |
|
|
Soil Analysis (200000 x 315/700) |
90,000.00 |
|
|
Usage ratios |
||
|
(110000 x 100/200000) |
55% |
|
|
(90000 x 100/200000) |
45% |
|
|
Engineering department: |
||
|
Mineral Analysis (400000 x 530/1000) |
212,000.00 |
|
|
Soil Analysis (400000 x 470/1000) |
188,000.00 |
|
|
Usage ratios |
||
|
(212000 x 100/400000) |
53% |
|
|
(188000 x 100/400000) |
47% |
Thus, usage ratio of computing department is 55% for MA and 45% for SA. In case of engineering department the usage ratio is 53% for MA and 47% of SA.
Economic order quantity is the quantity of goods to be ordered in each order to minimize the inventory costs of an organization. Economic order quantity (EOQ) is calculated by using the following formula:
Where, S= set up cost per order (Ordering cost per order); D= Demand per year and H= Holding costs per unit per year.
Accordingly, EOQ in this case is 5,656.85 per order, i.e. 5657 bottle per order (Weygandt, Kimmel & Kieso, 2015).
Part (2):
Assuming that the company is ordering 5657 bottle per order which is the calculated economic order quantity then the amount of savings in annual inventory costs would be as following:
|
Particulars |
Amount ($) |
Amount ($) |
|
Annual inventory costs with EOQ |
||
|
Holding costs (5657 x 0.50)/2 |
1,414.25 |
|
|
Ordering costs |
||
|
Number of orders (40000/5657) |
8.00 |
|
|
Ordering costs (100 x 8) |
800.00 |
|
|
Annual inventory costs |
2,214.25 |
|
|
Existing annual inventory costs |
3,000.00 |
|
|
Savings in annual inventory costs (3000 – 2214.25) |
785.75 |
|
Ordering cost per order |
100.00 |
|
Holding cost per bottle per year |
0.50 |
|
Annual demand (150 x 350) |
52,500.00 |
Where, S= set up cost per order (Ordering cost per order); D= Demand per year and H= Holding costs per unit per year.
EOQ for the above will be 6481 bottles per order.
References:
Ganesan, R. (2015). Managerial Cost Accounting. In The Profitable Supply Chain (pp. 259-265). Apress, Berkeley, CA.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. John Wiley & Sons.
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