Product Costing Analysis For Sewing Easy Ltd
- December 28, 2023/ Uncategorized
1
|
Statement of Cost- Traditional Approach |
||
|
Particulars |
Basic Model |
Advance Model |
|
Units produced and sold |
1,600 |
1,500 |
|
Direct Material cost per unit |
325 |
560 |
|
Direct Labour cost per unit |
150 |
260 |
|
Total Material Cost |
5,20,000 |
8,40,000 |
|
Total Labour cost |
2,40,000 |
3,90,000 |
|
Total Allocated Overhead cost |
1,43,750 |
1,06,250 |
|
Total Cost |
9,03,750 |
13,36,250 |
|
Cost Price Per unit |
565 |
891 |
|
Allocation of Overhead-Traditional approach |
|
|
Particulars |
Amount |
|
Inspection |
20,000 |
|
Assembly |
90,000 |
|
Production Scheduling |
1,05,000 |
|
Machine set-up |
35,000 |
|
Total Overhead to be allocated |
2,50,000 |
|
Total Machine Hours consumed |
8,000 |
|
Overhead per Machine Hour |
31 |
|
– Overhead Allocted to Basic Model |
1,43,750 |
|
– Overhead Allocted to Advance Model |
1,06,250 |
2.
|
Statement of Cost- ABC approach |
||
|
Particulars |
Basic Model |
Advance Model |
|
Units produced and sold |
1,600 |
1,500 |
|
Direct Material cost per unit |
325 |
560 |
|
Direct Labour cost per unit |
150 |
260 |
|
Total Material Cost |
5,20,000 |
8,40,000 |
|
Total Labour cost |
2,40,000 |
3,90,000 |
|
Total Allocated Overhead cost |
75,506 |
1,74,494 |
|
Total Cost |
8,35,506 |
14,04,494 |
|
Cost Price Per unit |
522 |
936 |
|
Allocation of Overhead-ABC Approach |
|||||
|
Particulars |
Inspection |
Assembly |
Production Scheduling |
Machine set-up |
Total Cost |
|
Cost |
20,000 |
90,000 |
1,05,000 |
35,000 |
2,50,000 |
|
Units |
950 |
8,000 |
550 |
350 |
|
|
Cost per unit |
21 |
11 |
191 |
100 |
|
|
Units for Basic Model |
200 |
4,600 |
50 |
100 |
|
|
Units for Advance Model |
750 |
3,400 |
500 |
250 |
|
|
Total Overhead for Basic Model |
4,211 |
51,750 |
9,545 |
10,000 |
75,506 |
|
Total Overhead for Advance Model |
15,789 |
38,250 |
95,455 |
25,000 |
1,74,494 |
3.
|
Statement of Profit and Loss- Tradition Approach |
||
|
Particulars |
Basic Model |
Advance Model |
|
Sales |
10,84,500 |
16,03,500 |
|
Less: |
||
|
Total Material Cost |
5,20,000 |
8,40,000 |
|
Total Labour cost |
2,40,000 |
3,90,000 |
|
Total Allocated Overhead cost |
1,43,750 |
1,06,250 |
|
Other Operating Expenses for Advance model |
||
|
– Selling and Administration expenses |
– |
1,40,600 |
|
– Interest Expense |
– |
25,200 |
|
– Office Rent |
– |
35,900 |
|
Profit |
1,80,750 |
65,550 |
|
Calculation of Sales Price Per unit- Tradition Approach |
||
|
Particulars |
Basic Model |
Advance Model |
|
Cost per unit |
565 |
891 |
|
Add: profit margin 20% |
113 |
178 |
|
Sale Price Per unit |
678 |
1,069 |
|
Statement of Profit and Loss- ABC Approach |
||
|
Particulars |
Basic Model |
Advance Model |
|
Sales |
10,02,607 |
16,85,393 |
|
Less: |
||
|
Total Material Cost |
5,20,000 |
8,40,000 |
|
Total Labour cost |
2,40,000 |
3,90,000 |
|
Total Allocated Overhead cost |
75,506 |
1,74,494 |
|
Other Operating Expenses for Advance model |
||
|
– Selling and Administration expenses |
– |
1,40,600 |
|
– Interest Expense |
– |
25,200 |
|
– Office Rent |
– |
35,900 |
|
Profit |
1,67,101 |
79,199 |
|
Calculation of Sales Price Per unit- ABC Approach |
||
|
Particulars |
Basic Model |
Advance Model |
|
Cost per unit |
522 |
936 |
|
Add: profit margin 20% |
104 |
187 |
|
Sale Price Per unit |
627 |
1,124 |
The interest of the buyer is towards the advance model and not towards the basic model of the sewing machine (Atkinson, 2012). The costing method adopted by the company is the traditional costing method. Since, the company follows the traditional approach- the overhead has been allocated based on the consumption of the machine hours (Berry, 2009). However, this is not considered to be a practical way of costing because there is no usage of actual consumption while doing the apportionment (Mattessich, 2016). If the company would have adopted ABC model then the price of the sewing machine would have been $1124. The buyer knows the fact that the cost that actually belongs to the advance model has been charged to the basic model wrongly (Boyd, 2013). As the buyer is aware of this fault in the costing system he has preferred advance model to basic model.
4.
|
Particulars |
Budgeted |
Expenses per unit |
|
No of units produced |
2,000 |
|
|
Direct Material |
5,000 |
2.50 |
|
Direct Labour |
2,500 |
1.25 |
|
Direct Expenses |
2,500 |
1.25 |
|
Overhead Expenses |
3,000 |
1.50 |
|
Particulars |
Actual |
Expenses per unit |
|
No of units produced |
1,900 |
|
|
Direct Material |
5,200 |
2.74 |
|
Direct Labour |
2,600 |
1.37 |
|
Direct Expenses |
2,500 |
1.32 |
|
Overhead Expenses |
3,200 |
1.68 |
Overhead is the indirect cost associated with the production of goods. However, these costs are not directly measurable (Datar M. S., 2015). The company does not know about the actual overhead till the production is complete. Therefore, the management of the company estimates the overhead expenditure and recovers that amount from the customers accordingly. There is a high chance that the amount recovered from the customers is not equal to the actual overhead, this is because that the overhead that is applied is an estimate and not an actual value (Datar S. , 2016).
If the overhead applied is more than the actual overhead then it is known as over recovery whereas if the actual overhead exceeds applied overhead then it is a case of under recovery. The treatment of under/ over recovery of overheads are done as follows
- The most widely used methods of treating overhead is by charging the under/over recovery to the profit and loss account.
- The under/over absorption can be carried forward to the subsequent year.
- The last and the most difficult method is to adjust the under/ over absorption is by the way of distributing it among the existing units
5. The benefits of the ABC system are as follows:
- The reliable data that has been obtained from this approach helps the management in the process of decision making.(Girard, 2014)
- A proper track of the activities that are carried out can be kept which helps the management in controlling cost.
- The company has a proper knowledge of the costs that are involved which encourages the company to make maximum and optimum utilisation of its capacity.
- It helps in the pricing of the product correctly as the management is able to trace the costs involved.(Holtzman, 2013)
The limitations of this approach are as follows:
- This approach involves lot of time and effort because all the data relating to the cost has to be collected in order to make proper allocations.(Horngren, 2012)
- This approach needs the information about the usage of resources. It is not easy to measure or quantify the usage of resources every time.(McLaney & Adril, 2016)
- The adoption of this approach is usually avoided by the service industry because they do not involve production of units. Therefore, it is usually adopted by the manufacturing companies only.(Hubig, 2013)
