Chapter 2 Tutorial Solutions Discussed In Week 3

In an ideal situation, information for decision making should be both perfectly relevant and precisely accurate. However, in reality, such information is often too difficult or too costly to obtain. The degree to which information is relevant or precise often depends on the degree to which it is qualitative or quantitative. (Horngren et al, 2008) Since primary classification of costs on the income statement are by three major management functions: manufacturing, selling, and administrative, it will be definitely most relevant accounting information for Guillermo to consider. Some income statements track fixed and variable costs using the contribution approach, whereas others adopt the absorption approach that considers all direct and indirect manufacturing costs to be product costs. Both, the contribution approach and the absorption approach can be relevant for decision making. However, the key to decision making is not relying on a hard and fast rule about what to include and what to ignore. (Horngren et al, 2008) Thus, Guillermo will need to analyze all pertinent costs and revenues to determine what is and what is not relevant for his particular decision.

volume of production of individual products and level of overhead, activity-based costing allowsfinding individual relationships between volume of production and different overheads. It becomespossible due to combining overheads into cost pools and allocating these cost pools to products inproportion to selected cost drivers that reflect these individual relationships between volume of production and level of overheads.Wilkerson should pool overheads into five groups (cost pools): machine-related expenses, setuplabor cost, receiving and production control, engineering, packaging and shipment. The next step ischoosing most appropriate cost drivers that reflect the relationship between volume of productionof individual products and level of overheads. Machine hours are the most natural cost driver formachine-related expenses. Both setup and receiving, and production control activities are changedin proportion to number of production runs. Engineering cost can be allocated in proportion tohours of engineering work, whereas packaging and shipment activity is driven by the number of shipments

Based on the explanation on page 201 below are the details of each cost and respective category:

At the end of the year, the company closes out the balance in the Overhead account to Cost of Goods Sold. The cost of goods sold (after adjusting for under- or overapplied overhead) is

  Accounts receivable – gross   Allowance for doubtful debts  Accounts receivable – net     Plant at cost – gross   Accumulated depreciation  Plant at cost – net     Land at fair value    Development costs ‐ gross  Accumulated amortisation  Development costs – net     Interest receivable    Provision for long service leave    Asset revaluation reserve    Accumulated depreciation for income tax $  200,000  (10,000) 190,000    600,000  (120,000) 480,000    600,000  200,000  (80,000)  120,000 20,000    60,000   100,000    240,000

The relevant cost for materials already in inventory (11.00/kg) and used regularly would be the purchase (12.50/kg replacement price).

The current method of apportioning production overheads based on direct labour hours can be described as a traditional approach to product costing. In a manufacturing company’s financial statements, each item produced must be allocated some of the production overheads to make the statements compliant. Sometimes the individual costs of these items can be calculated incorrectly based on overall production overhead and the system of allocating in place, however the overall financial statement can still be accurate. This traditional method of allocating the production

The full cost of a manufactured product or line of products includes direct labor, material, variable overhead, and fixed costs. Direct labor and material are normally observed and measured by manufacturing and maintained as "standards." The overhead costs are reported by responsibility centers, such as departments or plants. The difficult decision is what to do about allocating overhead costs to products or territories.

Are all the costs that are not included in p product costs. These costs are expensed on the income statement in the period in which they are incurred. All Selling, General and Administrative Costs a e considered are co s de ed to be pe od costs period costs.

Product costs can be used both as “cost of goods manufactured” when the companies are incurring goods and as a “Cost of goods Sold” when the companies are selling the goods. Direct material cost includes all the cost that are used in the manufacturing of product; direct labor cost includes the cost of the labor that are physically in touch with product manufacturing and manufacturing overhead includes the cost other than direct material and labor cost like indirect materials, indirect labor, factory equipment depreciation. In manufacturing company’s balance sheet current assets of inventory includes cost of raw materials, work in progress and finished goods. Period Costs in manufacturing companies will include sales commissions, advertising costs, office salaries, property taxes, research and development, insurance, depreciation, selling

Maria Crane’s argument that manufacturing overhead costs should be reported as inventory costs until sold is uninformed. Her argument does not consider segment reporting in the various measures of the businesses manufacturing process. The argument thus does not allow the measurement and quantification of the contribution margin obtained from the sale of the company’s products manufactured at a particular time. In addition, her recommendation does not give segmented data the ability to be reported on an external basis thus allowing the evaluation of residual income (Accounting Tools, 2016a).

There are many concepts of cost in an organization. Costs also are used in different business applications, such as financial accounting, cost accounting, budgeting, capital budgeting, and valuation. Consequently, there are different ways of categorizing costs according to their relationship to output as well as according to the context in which they are used. Following this summary of the different types of costs are some examples of how costs are used in different business applications.

Under the new cost system, two broad sources of costs were identified: manufacturing and SM&A. All costs within these categories were reclassified as either volume driven or order driven. Hence, four cost pools were set up.

In order to determine and take a dispassionate view about what lies beneath the surface of accounting figures, a financial analyst has to make use of different management accounting techniques. Cost techniques have a precedence over the other techniques since accounting treatment of cost is often both complex and financially significant. For example, if a firm proposes to increase its output by 10%, is it reasonable to expect total cost to increase by less than 10%, exactly 10% or

Although the traditional product costing systems are a requirement imposed by GAAP, investors, financial reporting, and other accounting rules and regulations, it has some disadvantages and no longer provides better decision making or a strong link between strategy and operations for managers. The system fails to allocate nonmanufacturing cost like administrative expenses. During the time traditional costing methods were created, direct labour was the biggest cost of production, but today, the system is outdated (Johnson, R. 2014). Manufacturing companies today now use machines and computers for their productions; this has led to a decreased use of labour in manufacturing processes and the development of other costing systems such as activity-based costing (Pondent, 2014). Unlike traditional, ABC costing systems assign resource costs to