Production Costing System

Describe about the Management Accounting for Business Finance for Corporate.

The production costing system is the process of assigning inventory costs and production costs based on the expenses that are used to buy or produce inventory. It is important for the company to use appropriate costing system in order to record all their information(Elliott and Elliott, 2008). Therefore, it is the process to track and analyze all the expenses that are incurred during the production and sale of the products. It helps the company to store and analyze cost information as well as providing significant information that helps to prepare future business plan. Product costing system helps to increase the efficiency of the business especially when variable costing assigns only the units of the product the variable costs associated with the creation (Elliott and Elliott, 2008). Without an appropriate [product costing system it would be difficult for the company to analyze the flow of cash and determining whether the ongoing project has been successfully accomplished or not. The manager of the company makes decisions on the basis of return on investments and the amount of profit the company can obtain from the sale of the product. The product costingsystem shows all the information that helps the manager to make decisions(Fifield and Power, 2011).The development of product refers to the manufacturing of new and innovative product. Product costing can be a valuable resource while designing a new product line as it allows the manufacturing department to evaluate costs associated with the development of the product

AASB 102 inventories are equal to the IAS 2. The objective of the AASB is to describe the inventories accounting and applies to the reporting organizations that prepares financial statements in both non for profit and for profit sectors(Helbæk, Lindest and McLellan, 2010). The conversion cost of inventories includes costs that are directly related to the production together with allocation of the production overheads are as follows:

• Direct labor used in the process of production
• Direct materials that directly enter into the process of production are converted into the finished goods(Hillier, 2010).
• Fixed overheads such as factory management costs or depreciation
• Variable overheads such as indirect labor and indirect materials

Direct costing is referred to as specialized form of the cost analysis that particularly uses variable cost in order to make appropriate decisions. Direct costing does not includes fixed cost that are assumed to be associated with time periods in which the costs were incurred. It helps the management department to take short term decisions (Holton, 2012).The variables overheads are allocated to units based on the use of the production facilities. The unallocated variances, for an example idle plant should be recognized as expense in profit or loss in the incurred period. The preparation of the financial statements will help to determine and evaluate the financial position of the company(Moles, 2011). 

Direct Materials Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Amount ($)
Beginning raw material inventory	25000
Purchase of raw material	120000
Raw material available	20000
Closing raw material inventory	-24000
Raw materials transferred to production	141000
Direct labour	35700
Indirect labour cost	15000
Factory supplies	5000
Insurance	5000
Repair & maintenance	2500
Land tax	2200
Total manufacturing costs	206400
Beginning work in progress	8000
Closing work in progress	-7500
Cost of goods manufactured	206900

Cost of goods sold

	Amount ($)
Cost of goods sold
Beginning finished goods inventory	12500
Cost of goods manufactured	206900
finished goods inventory	-13600
Cost of goods sold	205800

Cost of goods manufactured is referred to total expenses required for the production of products which includes variable and fixed costs that incurs during a specific period of time. It helps to determine the cost of goods sold in the income statement. Cost of goods sold is the direct costs that are associated with the production of the product sold by the company. The amounts include material cost used to manufacture product as well as direct labor used.   The items that have been removed are depreciation, advertising expense, manager’s salary, travel and entertainment expense as because the costs are not associated with the production of goods.  The goods of manufactured schedule include all the items that are used during the production process(Paramasivan and Subramanian, 2009). The preparation of the financial statements will help to determine and evaluate the financial position of the company.         

AASB 102 Inventories

Template T accounts

The production department requires investment and resources in order to manufacture products. The production department required raw materials, labour and financial investment. The increases in sale of product will help to increase the profitability of the company. The preparation of cost accounts will help to estimate and evaluate the total cost required for the production of the product. The company will be able to estimate its performance by analyzing the sales and cost of the production.    

Raw Materials

Particulars	Debit ($)	Particulars	Credit ($)
Balance b/d	25000	Raw material used	121000
Raw material used	120000
Purchases		Balance c/d	24000
Total	145000	Total	145000

Work in progress

Particulars	Debit ($)	Particulars	Credit ($)
Balance b/d	8000	Expenses	500
		Balance c/d	7500
	8000		8000

Finished goods 

Particulars	Debit ($)	Particulars	Credit ($)
Balance b/d	12500
Production cost	1100
		Balance c/d	13600
	12500		12500

Accounts Payable

Particulars	Debit ($)	Particulars	Credit ($)
		Balance b/d	20000
		Cash	2500
Balance c/d	22500
	22500		22500

Cost of goods sold

Particulars	Debit ($)	Particulars	Credit ($)
Beginning finished goods inventory	12500	Cost of goods manufactured	206900
Balance c/d	208000	finished goods inventory	13600
	220500		220500

i)

Manufacturing overhead

Particulars	Debit ($)	Particulars	Credit ($)
Actual overhead	35700	Applied overhead	53550
Balance c/d	17850
Total	53550	Total	53550

ii)

Indirect costs

Particulars	Debit ($)	Particulars	Credit ($)
Administrative (Sales) salaries	24000
Advertising expense	12000
Travel and entertainment (sales) expense	14100
		Balance c/d	50100
Total	50100	Total	50100

iii) Difference between over or under applied overhead is (applied overhead – actual overhead), (53550-35700=17850). Therefore, it shows that the overhead is over applied.

iv)

Particulars	Debit ($)	Credit ($)
Cash	17850
Applied overhead		17850

A under applied or over applied manufacturing overhead expenses is referred to as the difference between the production overhead cost that is applied on the work in progress and the production overhead cost that is incurred during a period of time.  Therefore, the application of over applied or under applied can be determined if the production manufacturing cost that is applied to the work in process is more than production overhead cost incurred actually during a period(Shapiro, 2006). The difference between the estimation is known as the over applied production overhead.  If the production overhead cost that is applied to the work in progress is less than production overhead cost incurred actually during a period. Therefore, the differences between them is known as the under applied production overhead. The company should focus on strategies in order to deal with under or over applied overhead. The decision is based on many factors that should be considered while estimating the overhead such as expected time length in order to complete the process of manufacturing, anticipating the shared overhead costs and other factors that lead the organization to determine and analyze the amount of production overhead per unit(Smart, Megginson and Gitman, 2004). The most difficult part of manufacturing product and allocating the cost are uneven circumstances that may arise while operating the manufacturing process as well as affecting the overall development of the company. The accountants of the company charges the production overhead expenses to the inventories on the number of hours the machines uses in the process of production and estimating the rate. An appropriate allocation of the resources will help to deal with the situation of under applied or over applied of overhead.  The company should focus on strategies in order to deal with under or over applied overhead(Spiceland, Sepe and Nelson, 2011). The production overhead includes all the expense of cost of goods sold that cannot be attributed to product being produced. The overhead expenses statement shows all the expenses that are incurred by a company during a specific period time. It includes variable costs, fixed costs, direct expenses and indirect expenses. The under applied and over applied of production overhead arises when the manufacturing overhead that is budgeted does not match with the actual manufacturing overhead. The main role of the managers is to control the cost of production as well as matching the set result with the actual result. An effective cost control system helps to manage all the operations of the organization as well as enhancing the performance of the company(Stittle and Wearing, 2008). The overheads can be controlled and the manufacturing department plays a significant role in the management of the cost that incurred during specific period of time. The management of costs and other expenses helps to determine and evaluate the efficiency level of a company. The management department is responsible to control and manage the cost of the company.      

Particulars	Debit ($)	Credit ($)
Cash	17850
Applied overhead		17850

Direct Costing

The standard costing system is a part of the cost accounting that assists the managers to manage all the costs of the organization incurred during a period of time. The standard costs are commonly associated with the production costs which include direct labor costs, manufacturing overhead, material costs of the company(Tripathi, 2008). It is a significant accounting tool that helps the accountants to evaluate the costs and minimizing the errors by suggesting appropriate acting and determining variance in the accounts(Wild, 2005). The managers and staff members of Seafarer Keyaksshould implement standard costing system within their organization in order to establish an efficient cost centers and assigning the responsibilities to different department within the organization that will help to increase the efficiency of the delegation of the authority(Wolf, 2008). The preparation of the cost accounts is very much important such as cost of goods and cost of goods manufactured in order to determine and evaluate the costs incurred by a company during a period of time. An effective standard costing system develops the reappraisals techniques and materials that lead to minimum unfavorable variances(Zopounidis, 2008). Therefore, the managers of the company will be able to determine the products that are not processing as per the projected plan.

The procedures of the cost control can be simplified with the help of standard costing system within the departments and provides a wide platform to manage all the operations such as costs, direct expenses, indirect expenses and other costs. The financial plan of an organization depends on effective and efficient costing system as well as also helps in inventory evaluation, marginal costing and budgeting. The cost management shows the expenses incurred by a company during a period of time(Fifield and Power, 2011). The production process cost and other overhead expenses are also estimated with the help of production costing system. The overrate can be estimated of Seafarer Keyaks can be calculated on the basis of labor hours, raw materials, payroll, payment to the supplier etc. It can be managed with the help of standard costing system.The direct labour cost, direct material cost, other cost and their actual costs are compared to the set standards(Helbæk, Lindest and McLellan, 2010). The costing system enables to compare the actual cost with the set standards as well determining and analyzing the variances differences. The analysis of the variances differences will help the managers to determine and evaluate their weaknesses as well as improving their cost control system, cost management system and operational efficiencies. The inventory balances can also be analyzed and printing the report to evaluate the inventory during a period of time(Paramasivan and Subramanian, 2009). The preparation of financial statements helps an organization to analyze their financial performance during a specific period of time.Therefore, the managers of the company should implement standard costing system in order to estimate the cost incurred during a period of time and comparing the actual result with the set results. The management of operations and accounting process increases the cost effectiveness as well as implementing adequate system. The managers of Seafarer Kaykas should manage their operations and cost with the help of standard costing system(Shapiro, 2006). It will also allow the managers to formulate the pricing and production policies and rules as well planning for future objectives, costs, budgets and production process. The inventory evaluation will become easier as well a managing all the expenses, liabilities and revenues. The preparation of the financial statements will help to determine and evaluate the financial position of the company.  The production process of the company includes cost of materials, labour, salaries, factory expenses and other associated costs(Spiceland, Sepe and Nelson, 2011). The finance department plays a significant role in the management of funds and resources of the company.

References

Berk, J. and DeMarzo, P. (2007). Corporate finance. Boston: Pearson Addison Wesley.

Elliott, B. and Elliott, J. (2008). Financial accounting and reporting. Harlow: Financial Times Prentice Hall.

Fifield, S. and Power, D. (2011). Managerial finance. [Bradford, UK]: Emerald.

Helbæk, M., Lindest, S. and McLellan, B. (2010). Corporate finance. New York: McGraw-Hill.

Hillier, D. (2010). Corporate finance. London: McGraw-Hill Higher Education.

Holton, R. (2012). Global finance. Abingdon, Oxon: Routledge.

Moles, P. (2011). Corporate finance. Hoboken, N.J.: Wiley.

Paramasivan, C. and Subramanian, T. (2009). Financial management. New Delhi: New Age International (P) Ltd., Publishers.

Shapiro, A. (2006). Multinational financial management. New York: J. Wiley & Sons.

Smart, S., Megginson, W. and Gitman, L. (2004). Corporate finance. Mason, Ohio: Thomson/South-Western.

Spiceland, J., Sepe, J. and Nelson, M. (2011). Intermediate accounting. New York: McGraw-Hill Irwin.

Stittle, J. and Wearing, B. (2008). Financial accounting. Los Angeles: SAGE Publications.

Tripathi, M. (2008). Auditing and finance management. New Delhi: Navyug Publishers and Distributors.

Wild, J. (2005). Financial accounting. Boston: McGraw-Hill/Irwin.

Wolf, M. (2008). Fixing global finance. Baltimore, Md.: Johns Hopkins University Press.

Zopounidis, C. (2008). Managerial finance. [Bradford, England]: Emerald.