If done right, I believe that all of the costs can be allocated to each of the three products through both direct and overhead costs. The only direct costs that are being included currently are labor and manufacturing costs. I broke up overhead into overhead based off direct labor and overhead based on units sold. Overhead based on direct labor includes the cost of the Product Development Support Center, interest expenses, and general and administrative expenses. The Product Development Support Center failed to account for hours spent on each product, which will not only complicate the product cost calculations, but also the calculation of capitalization expenses later on. The Development Support Center will be most used during the peak (i.e. most hours) time of development for each product, and hours worked will probably be the best way to divvy up the costs of the support center. The money invested in the company is being used on developing each product right now. I figured interest would best be divvied up by hours to attribute the interest expense to the product using the most of the investment. Similar to the reasons stated before general and administrative costs are going to be associated with the most prominent product, and that is best seen through hours. (Figure A) Overhead based on units sold includes only sales and marketing. Sales and marketing will be targeted mostly towards the products that are already on the market, and so units sold is the best way to associate the cost with each product. (Figure A) Estimate Total Product Cost for Each of the Three Products The estimated total product cost for Secret Agent for the year of 2003 are $563,036. This consist of direct labor/manufacturing costs and the al... ... middle of paper ... ...and investors to invest. No shareholder or investor wants to see that the company they are putting their money into is not performing as they had hoped. Furthermore, by having more investors AdCom will be able to expand its product lines and grow their company. Works Cited Financial Accounting Standards Board. (1985). Statement of Financial Accounting Standards No. 86. Norwalk. Retrieved April 7, 2014, from http://www.fasb.org/cs/BlobServer?blobkey=id&blobnocache=true&blobwhere=1175820922177&blobheader=application%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-Disposition&blobheadervalue2=189998&blobheadervalue1=filename%3Dfas86.pdf&blobcol=url Investopedia. (n.d.). CFA Level 1: Assets - Effects of Capitalizing Vs. Expensing. Retrieved from Investopedia: http://www.investopedia.com/exam-guide/cfa-level-1/assets/capitalizing-expensing.asp
Financial statement analysis: theory, application and interpretation / Leopold A Bernstein and John J. Wild 6th edition Mc Graw Hill 1998
Wilkerson uses a simple cost accounting system in which each unit is charged for direct labor and material costs in addition to overhead costs, which are allocated depending on the percentage of production-run direct labor usage. Under this system, the overhead percentage set by Wilkerson was 300%. This standardized system, however, did not reflect the specific complexities of each
After these overhead costs are assigned, the costs can be allocated to the various retail stores based on their consumption of the good (e.g. the number of musical works they stock and sell).
Marshall, M.H., McManus, W.W., Viele, V.F. (2003). Accounting: What the Numbers Mean. 6th ed. New York: McGraw-Hill Companies.
Activity Base Costing hereafter referred to as ABC and Traditional Product Costing Methods are used for the sole purpose of utilizing cost information to make strategic decisions that affect fixed and variable. Even though ABC is used by manager for making strategic decisions, it is not used independently. It is utilized to supplement official costing systems that are used for preparing external financial reports. (Garrison, Noreen, & Brewer, 2010) In the Traditional Product Costing Method emphasis is put on absorption cost used by manufacturing companies to calculate unit cost for the purpose of valuing inventories and determining cost of goods sold for external financial reports. (Garrison, Noreen, & Brewer, 2010) Traditional Product Costing determines cost of goods sold by combining direct material, direct labor and manufacturing overhead. Having the accurate cost information assist manager in numerous ways to plan, control, and evaluate decisions. With the right information as a part of the planning process companies can determine whether it can or should compete in certain markets. Using the information to control operations a company can analyze relationship between production levels and costs determining whether to increase or decrease production levels of certain products. Furthermore this control data can help with future operations plans because it can determine if the increased costs of additional production would less than the revenue that would be derived from sales of the products. Finally the evaluation process allows the company can compare actual cost against budgeted cost and identify both progress and problems for subsequent management action. (Albrecht, Stice, Stice...
Traditionally, cost accountants arbitrarily add a broad percentage of expenses onto the direct costs to allow for the indirect costs. However, as the percentages of indirect or overhead costs rise, this technique becomes increasingly inaccurate because the indirect costs are not caused equally by all the products. For example, one product might take more time in one expensive machine than another product, but since the amount of direct labor and materials might be the same, the additional cost for the use of the machine would not be recognized when the same broad 'on-cost' percentage is added to all products.
Delta Air Lines is one of the biggest airlines in the world and continues to grow, due to the constant innovation they bring. Activity-based costing (ABC) systems have a two-stage procedure often used when companies are distributing overhead costs to the respective product or service. In the first step, the activities are described and the overhead costs are placed into cost pools. In the second step, the overhead costs are distributed to a product line from each cost pool (Hilton). In the figure below, you will see an example of the two stages of the ABC system.
Chapter Overview A. Overview of Variable and Absorption Costing. At least two methods can be used in manufacturing companies to value units of product for accounting purposes—absorption costing and variable costing. These methods differ only in how they treat fixed manufacturing overhead costs. Variable Costing. Variable costing includes only variable production costs in product costs. Direct materials, direct labor and variable manufacturing overhead costs would ordinarily be included in product costs under variable costing. Fixed manufacturing overhead is not treated as a product cost under this method. Rather, fixed manufacturing overhead is treated as a period cost and is charged against income each period. Absorption Costing. Absorption costing treats all production costs as product costs, regardless of whether they are variable or fixed. Under absorption costing, a portion of fixed manufacturing overhead is allocated to each unit of product. B. Comparison of Absorption and Variable Costing. When comparing absorption costing and variable costing income statements, a number of points should be noted: Deferral of fixed manufacturing costs under absorption costing. Under absorption costing, if inventories increase then a portion of the fixed manufacturing overhead costs of the current period is deferred to future periods in the inventory account. When the units are later taken out of inventory and sold, the deferred fixed costs flow through to the income statement as part of cost of goods sold. Differences in inventories under the two methods. The ending inventory figures under the variable costing and absorption costing methods are different. Under variable costing, only the variable manufacturing costs are included in inventory. Under absorption costing, both variable and fixed manufacturing costs are included in inventory. 3.Suitability for CVP analysis. An absorption costing income statement is not well suited for providing data for CVP computations since it makes no distinction between fixed and variable costs. In contrast, the variable costing method classifies costs by behavior and is very useful in setting-up CVP computations. C. Extended Comparison of Income Data. Exhibit 7-3 in the text presents a comparison of absorption costing and variable costing income statements over three years in which production is constant but sales vary. Exhibit 7-6 in the text also presents comparative income statements over three years but holds annual sales constant and varies annual production.
2. Cost of goods -- Includes all the costs related to the sale of products in inventory.
Hence, the practical aspect of managerial accounting is to reduce decision making risks, prevent defects, detect fraud, and effectively use corporate resources (Needles, Powers & Crosson, 2014). Managerial accounting helps managers improve company’s operational performance by providing information about Raw Materials Inventory, Work-in-Process Inventory, and Finished Goods Inventory, Cost of Goods Manufactured, and Cost of Goods sold (Nobles, Mattison & Matsumura, 2014). For example, Winnebago Industries, Inc. which is a manufacturer of recreational vehicles (RVs) and motorhomes, has the period costs and the product costs (Nobles, Mattison & Matsumura, 2014). Product costs are direct materials, direct labor, and manufacturing overhead. Since so many components are used in the finished product, the company’s managers must keep detailed records of inventory and other costs incurred to build its recreational vehicles (Nobles, Mattison & Matsumura, 2014). Thus, Winnebago Industries, Inc. uses “managerial accounting to help track costs and make decisions about production” (Nobles, Mattison & Matsumura, 2014, p. 960). In addition, managerial accounting is used “in service and merchandising companies to determine the cost per service and cost per item. Calculation of unit costs can help managers determine the sales price to charge
2. Increase accuracy in the product cost calculating. While using ABC, direct materials and direct labours can be classified into products, manufacturing overhead will be classified into homogeneous cost pool. Then, apportioned the manufacturing overhead into products according to reasonable distribution cost standard. The standard of cost allocation become more direct and specific leading to many traditional uncontrollable indirect cost change into controllable direct cost. And this provide more accurate information to cost control.
They account for different variables which include product sales, expenses on labor and production expenses (Lanen,
Production overheads are indirect costs that are incurred during manufacturing of goods or providing service. They include indirect materials, indirect wages and indirect expenses.
Traditional costing is very straightforward and somehow not difficult to imply. The manager can easily access and track all the direct costs which related with a certain product, which are the labor and direct material costs. A short and simple way to allocate overhead costs is through using direct labor hours. It would be very complex by assigning overhead costs to various products.