Purpose of Product Costing System

It is seen that any organizational entity who provides service and manufacturing activities have to depend on the root cost of its commodities for the process of decision making. The profit margin and the selling price are both computed by looking at the cost of the product (DRURY 2013). Therefore, it is seen that the firms provide intense concentration on discovering the actual cost of the product.

It is seen that product costing method is an accounting process, which is used to discover the cost of any commodity by bearing in mind expenses of the business that are associated with the manufacturing system either partially or fully. The expenditures that are in consideration mainly include the salaries of the labour and production employees, production and labour cost, transportation expenditure, raw materials and  costs that are related to the storing of the finished goods and raw materials (Saunders and Cornett 2014). The cost of production is depicted with the help of three stages. The direct labour cost, direct cost of materials and other direct expenses are grouped to bring out the prime cost of the commodity. It is seen that the prime cost is added further with the supplementary indirect labour and material production cost and manufacturing unit associated expenses and the overall amount is then discovered to be the net value of work-in-progress for a distinct time period. This is known as the cost of goods manufactured. The cost of goods manufactured is added with the total finished goods amount that is manufactured in a distinct period to depict the Cost of Goods Sold (Passarini et al. 2014).

The depicted amount with respect to the cost of goods sold is utilised to bring out the basic selling price and to bring out the profit edge of the producing organization.

The primary aim of the product costing system is to bring out the overall production cost amount as well as the cost per unit recognized to produce the commodity. The business units apart from this make use of the production costing system in order to accomplish the various other objectives that are secondary in nature. The objectives that are secondary in nature are explained below:

Accuracy

It is seen that the product costing system can be utilised for discovering the precise cost of production and the inventory cost (Kokubu and Kitada 2015). It especially is seen to be helpful for allocating the cost per unit of the variable and the fixed expenditure accurately.

Project Tracking

This is the method that is used to compare the predicted costs that are assigned to several stages of manufacturing with the real costs that have been gained. It is seen that without the production costing system, it will be unbearable to depict whether the production is functioning according to the expectations or not (Fleischman and Parker 2017).

Decision Making

The method of product costing is usually utilised for several significant methods of undertaking decisions. It is seen that there are distinctly various items of cost, which are literally huge enough to establish a direct effect on the profit (Bebbington, Unerman, and O’Dwyer 2014). In order to undertake any decisions that are associated to enhance the revenue, the managers can utilise the system of product costing in order to minimize the effect of the large cost over the profits.

Accuracy

Project Development and Planning

While undertaking certain new planning or projects for the new products, it is seen that product costing system can be utilised for predicting the estimated cost of the project. This aids the management to discover the project profitability and they can even construct significant forecast that are in association to the factor cost of the project (Schaltegger and Zvezdov 2015).

Schedule of Cost of Good Manufactured

The cost of good manufactured schedule is constructed to determine the real cost of the goods, which are acquired because of product manufacturing or associated to the process of manufacturing. The intension of the schedule is to understand the cost that is associated with the manufacturing of the product so that adequate steps can be taken in order to gain knowledge about the overall cost (Fayard 2015). The goods manufacturing cost that is discovered with the help of the schedule is exploited to evaluate the Cost of Goods Sold, which is again used to calculate the profit or the loss out of the revenue from sales that is obtained by the operational unit. Therefore, the cost of manufacture schedule is the cradle of the cost of product manufacturing and is even may be regarded as the initial stage for the computation of profit or loss.

The Cost of Good manufactured schedule for the month of April and for the last year of New Age Caravans are depicted below:

In the books of New Age Caravans
Schedule of Cost of Goods Manufactured
	Previous Year	April
Particulars	Amount	Amount	Amount	Amount
Direct Material Consumed :				$180,000
Raw Material Purchase	$180,000
Add : Opening Balance of Raw Material	$12,000
	$192,000
Less: Closing Balance of Raw Material	$12,000	$180,000
Direct Labor Costs		$182,000		$182,000
PRIME COST		$362,000		$362,000
Factory Overhead:				$156,000
Indirect Labor Cost	$118,000
Depreciation – Factory Building	$8,000
Depreciation – Factory Equipment	$16,000
Insurance Factory	$14,000
Repairs & Maintenance – Factory	$8,000
Land Tax – Factory	$4,500	$168,500
FACTORY COST		$530,500		$518,000
Opening Balance of Work-in-Progress	$4,500		$4,500
Less: Closing Balance of Work-in-Progress	$33,500	($29,000)	$33,500	($29,000)
COSTS OF GOODS MANUFACTURED		$501,500		$489,000

As explained above, it is seen that cost of goods manufactured is depicted with the help of three stages. The first step involves the raw materials that have been directly consumed and cost of the direct labour that is paid for the process of manufacturing, which is provoked in order to describe the prime cost (Salako and Yusuf 2016). The volume of raw material that is used is originated by adding the overall raw material that is purchased for the time period with the help of the opening balance derived for the raw materials and subtracting the closing balance of the raw material from the overall value.

The prime cost is attached with the various other manufacturing costs that are indirect in nature and the expenditure that are associated with the factory, which amounts to the Factory Cost. The factory cost that is obtained is attached to the work-in-progress opening balance and is then subtracted by the work-in-progress closing balance (Bhimani et al. 2013). The net result obtained from this modification is referred to as the Cost of Total Finished Goods Manufactured.

According the information that is given in the case study with respect to New Age Caravans, the cost of goods manufactured by the firm for the previous year and the present month of April accounts to $501500 & $489000 respectively.

Cost of Goods Sold Schedule

The cost of goods sold schedule describes the product cost that are sold in the market during a distinct financial period. It is seen that all the commodities that are produced during the specified time are not sold to the in the market completely (Becker et al. 2015). It is seen that few amount of the finished goods remains unsold and these are the items that are treated as the closing balance of the Finished Goods Inventory. The revenue derived from sales that is obtained for a specific time period is only inclusive of the cost of the product that has been sold. Therefore, while depicting the profit that is derived from the unsold goods cost need not be added in the overall cost of goods (Schmidt, Götze and Sygulla 2015).

Project Tracking

Hence, the Cost of Goods Manufactured, which is inclusive of the goods that are sold and the ones that are unsold, is not taken for granted during the computation of the profit. As discussed earlier, the amount is even added with the finished goods inventory opening balance and then is subtracted from the finished goods inventory closing balance to obtain the real product cost that is sold during a specific period of time (Wan et al. 2015).

The table below depicts that Cost of Goods sold Schedule for New Age Caravans:       

In the books of New Age Caravans
Schedule of Cost of Goods Sold
	Last Year	Current month of April
Particulars	Amount	Amount	Amount	Amount
Cost of Goods Manufactured		$501,500		$489,000
Under-Application of Overhead				$12,500
Adjustment for Finished Goods:
Opening Balance of Finished Goods	$11,000		$11,000
Less: Closing Balance of Finished Goods	$16,000	($5,000)	$16,000	($5,000)
COST OF GOODS SOLD		$496,500		$496,500

It is seen that there are several items of cost regarding the last year that are taken into consideration for the construction of the schedule. The costs that are included in the schedule include Advertising Expenses, Sales Salary, Administrative Salary, General Liability Insurance and Depreciation of the Office Equipment. The costs that have been discussed above are primarily expenses that are associated with the Office and Administration and Sales and Marketing. The revenue that is obtained after adjusting the cost of goods sold along with the sales profit is known as the gross profit of the firm (Guenther et al. 2015). The net profit is computed after adjusting the marketing, office, sales, administration and various other non- manufacturing associated expenses with the gross profit. Furthermore, the intention of the cost of goods sold has been to display the real production cost and not the overall organizational cost. Therefore, these distinct non-factory and non-producing associated expenses are eliminated for the computation of the Cost of Goods Manufactured and the Cost of Goods Sold Schedule.

Dr.	Accounts Payable A/c.	Cr.
Date	Particulars	Amount	Date	Particulars	Amount
30-Apr	To, Bank A/c.	$180,000	1-Apr	By, Balance B/f	$12,000
				By, Raw Materials A/c.	$160,000
			30-Apr	By, Balance C/f	$8,000
		$180,000			$180,000
Dr.	Finished Goods A/c.	Cr.
Date	Particulars	Amount	Date	Particulars	Amount
1-Apr	To, Balance B/f	$11,000	30-Apr	By, Cost of Goods Sold A/c.	$484,000
30-Apr	To, WIP A/c.	$489,000	30-Apr	By, Balance C/f	$16,000
		$500,000			$500,000
Dr.	Work-in-Progress A/c.	Cr.
Date	Particulars	Amount	Date	Particulars	Amount
1-Apr	To, Balance B/f	$4,500	30-Apr	By, Finished Goods A/c.	$489,000
	To, Raw Materials A/c.	$180,000	30-Apr	By, Balance C/f	$33,500
	To, Direct Labor Cost A/c.	$182,000
	To, Manufacturing Overhead A/c.	$156,000
		$522,500			$522,500

Dr.	Raw Material A/c.	Cr.
Date	Particulars	Amount	Date	Particulars	Amount
1-Apr	To, Balance b/f	$12,000	30-Apr	To, WIP A/c.	$180,000
	To, Accounts Payable A/c.	$160,000
30-Apr	To, Balance c/f	$8,000
		$180,000			$180,000
Dr.	Cost of Goods Sold A/c.	Cr.
Date	Particulars	Amount	Date	Particulars	Amount
30-Apr	To, Finished Goods A/c.	$484,000	30-Apr	By, Income Statement A/c.	$496,500
	To, Manufacturing Overhead A/c.	$12,500	30-Apr	By, Balance c/f	$0
		$496,500			$496,500
Dr.	Manufacturing Overhead A/c.	Cr.
Date	Particulars	Amount	Date	Particulars	Amount
30-Apr	To Bank A/c.	$168,500	30-Apr	By, WIP A/c.	$156,000
			30-Apr	Cost of Goods Sold A/c.	$12,500
		$168,500			$168,500

vi) Over / Under Valuation of Overhead:-
	Direct Labour Hours per annum	Direct Labour Hours per month	Total Overhead Cost per annum	Overhead Cost month	Overhead cost per unit
Predetermined Overhead	60000	5000	$        1,800,000	$      150,000	$          30.00
Actual Overhead		$              5,200		$      168,500	$          32.40
Under Applied Overhead Rate					$           2.40

The process of over and under applied overhead is a general topic to the forecasting of the cost of production process. If is generally seen that the overheads that are determined according to the assumptions are different from the real overhead that is obtained. It is impossible to pre-determine the precise cost very time by relying on the earlier structures if cost and planning for the future. Therefore, various standards of cost accounting have constructed methods, processes and concepts in order to deal with such conditions.

When the predicted overhead decrease than the incurred real overhead, the variance is referred to as Under-Applied Overhead. If the actual overhead derived is lower than the predicted overhead, then this condition is known Over-Applied Overhead. Even though this is a very common event, a thing should be reminded that the differentiation should not be very high. In case of such conditions, then it can be determined that the budget has not been prepared accurately or the prices associated with any cost items that may have transformed radically (Christopher 2016).

With respect to the process of cost accounting, the variances are adjusted to the associated items of inventory during the closing of the accounting time period. In case of under-applied overhead, the shortcomings in the budgeted value are regulated by raising the valuation of the associated inventories and in case of over-applied overheads; the inventory value is reduced subsequently.

Decision Making

According to the provided data that is given in the case study, the manufacturing unit that is derived per unit, which is incurred practically, is greater than the budgeted manufacturing overhead per unit, which is found to be $156000. Therefore, this figure requires to be treated as Under-Applied Overhead. The under-applied manufacturing overhead that is discovered requires to be amended with the help of the journal entry that has been depicted below:

Cost of Goods Sold A/c……Dr

     Work-in-Progress A/c………Dr

     Finished Goods A/c…………Dr

To, Manufacturing Overhead A/c

In case the amount is discovered to be over-applied overhead, then it would be necessary to reverse the journal entry and that would be depicted in the journal entry that is given below:

Manufacturing Overhead A/c…….Dr

To, Cost of Goods Sold A/c

To, Work-in-Progress A/c

To, Finished Goods A/c 

The ABC method, even known as Activity Based Costing is an innovative conception that is concerned with the maintenance of the record and valuation of inventory. The ABC process recognizes the individual drivers of cost that are in association to the manufacturing process and assigning the cost items by relying on the cost drivers to determine more precise cost of production.

ABC process is mostly pertinent to the manufacturing units that produce multiple products or with the operational units where the manufacturing system is inclusive of various stages. The cost that is associated with the exploitation of ABC process is discovered to be higher than the various other traditional inventory costing processes (Strumickas and Valanciene 2015).

The case study that is in consideration does not give out any information with respect to the manufacturing procedure or the various numbers of commodities associated with New Age Caravans. Therefore, it is predicted that the organization manufactures single line commodities and its manufacturing process is not a very complex one. In these circumstances given in the case study, the ABC inventory process will not give out any added benefits and will rather raise the expenditure.

Reference List

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