Administrative Overhead Allocation

The provided assignment content discusses the concepts of traditional costing and standard costing systems in accounting. The first part presents a scenario where a company has expenses such as advertising, depreciation, insurance, and salary, with a total expense of $67,300. The solution to this problem involves calculating overheads applied during the year, actual indirect costs for the year, and under-applied overheads. Journal entries are also presented to eliminate over- and under-absorbed overheads. The second part discusses standard costing systems, which provide budgeted costs, prices, and profits by using engineering tools. This system works as a controlling tool, allowing organizations to analyze variations and take corrective steps. It is noted that standard costing requires accurate budgeting of all components, taking industry benchmarks into account.

1
INTRODUCTION TO MANAGEMENT ACCOUNTING

2
Table of Contents
Solution to (b) 3-4
Solution to (c) 5-6
References 7

3
Introduction
The Seafarer Kayaks is engaged in the manufacturing of the various Kayaks, Firms oil accounts were not
able to continue due to its disability and hence as a new accountant i have been appointed. The report will
address the owner the importance of the product costing system. Also it explains how the standard costing
will help firm to find more accurate control. It is to be noted that for any company determination of price
comes under the critical business decision. For determination of the price the actual cost of the price
should be known accurately and for that product costing system require. Standard costing system on
another hand works as controlling tool , the report also analyse how it will be useful to the company.

4
A brief description of the purpose of a product costing system and why it is necessary.
It is to be noted that one of the main purpose of the product costing system is to allocate the particular
cost to particular product or service as the case may be. For the company who has variety of product line of
different nature in such case it is very difficult track the cost of each product and hence the product costing
system is arise. The product costing system can be simple or complex according to the inputs of the
manufacturing units. The more number of inputs make it complex, and in such case proper database
management is required. The cost benefit analysis must be done before implementing the product costing
system.
It is to be noted that to take any decision for particular product , the organisation must have knowledge of
its correct costing . The decision like pricing , Expansion , Product Mix Decision and Make or buy decision
can be taken correctly only if one do have knowledge of cost structure and component. Here the need
arises for the product costing system. There are many cost Accumulation system like job costing , Process
Costing , Activity based costing , back flush Costing Etc
The AASB 102 Specifically talks about the measurement and valuation of the inventory. It requires to have
value of inventory as cost or Net realizable value whichever is lower. Now to value the inventory the
organisation must have correct bifurcation of the all product. So we can say indirectly to follow the AASB
102 the company having different line of product must follow the product costing system. Para 10-22 of the
AASB 102 specify what component will be used to make the valuation of the inventory. It should be noted
that the product costing system should be developed that it compliance with Accounting standard.

5
Solution to (b):
Schedule of Cost of Goods Manufactured
Particulars Amount (in $) Amount (in $)
Direct Materials used:
Opening Inventories 25,000
Purchases 1,20,000
Less: Closing Inventories -24,000 1,21,000
Direct Labour(850 Direct Labour Hours * $42 per
Direct Labour Hour) 35,700
Overheads:
Manufacturing Overheads(850 Direct Labour
Hours * $63 per Direct Labour Hour) 53,550 53,550
Add: Opening Work in Process 8,000
Less: Closing Work in Process -7,500
Cost of Finished Goods manufactured 2,10,750
Schedule of Cost of Goods Sold
Particulars Amount (in $) Amount (in $)
Cost of Finished Goods manufactured for the
year 2,10,750
Add: Finished Goods - Opening Stock 12,500
Less: Finished Goods - Closing Stock -13,600 -1,100
Cost of Goods sold 2,09,650
Explanation for exclusion of some cost items from the Schedules:
As the expenses listed below are directly related to the Sales activity which is undertaken after
manufacturingactivity is complete, the same does not form part of manufacturing costs.Also such
costs form part of the Inventory cost carried in Balance Sheet as per AASB 102.
Costs related to Sales Activity excluded from Cost of Goods Manufactured:
Cost Item Amount

6
Administrative (Sales) Salaries $ 24,000
AdvertisingExpense $ 12,000
Depreciation - Sales Office $ 1,800
General Sales Liability Insurance $ 2,400
Sales Manager's Salary $13,000
Travel and Entertainment $14,100
Total $67,300
Solution to (c):
(i) Overhead Applied during the year:
Predetermined Overheads/ Overheads Applied(850 Direct Labour Hours * $63) = $53,550
(ii) Total Actual Indirect/Overheads Cost for the year:
Particulars Amount in $
Depreciation - Factory Building 6,500
Depreciation - Factory Equipment 8,900
Factory Managers
Salary 12,000
Factory Supplies 5,000
Indirect Labour Cost 15,000
Insurance - Factory 5,000
Repairs and Maintenance - Factory 2,500
Land Tax - Factory 2,200
Total 57,100
(iii) Under Applied Overheads ($57,100 - $53,550) = $3,550
(iv) Journal Entry to dispose the Under Absorption of Factory Overheads:
Particulars Debit($) Credit($)
Costing Profit and Loss Account 3,550
Manufacturing Overheads 3,550
(Being under absorption of Overheads charged to Costing Profit and Loss Account)

7
T Account Updated Balances:
To Bal b/f 25,000$ By Cost of Goods Sold 1,21,000$ To Bal b/f 8,000$ By Finished Goods 2,10,750$ To Bal b/f 12,500$ By Cost of Goods Sold 2,09,650$
To Raw Materials 1,21,000$
To Accounts Payable 1,20,000$ By Bal c/f 24,000$ To Direct Labour 35,700$ To WIP 2,10,750$
To Manufacturing 53,550$ By Bal c/f 7,500$ By Bal c/f 13,600$
Overheads
1,45,000$ 1,45,000$ 2,18,250$ 2,18,250$ 2,23,250$ 2,23,250$
To Actual Overheads 57,100$ By Cost of Goods Sold 53,550$ To Bank A/c 1,17,500$ By Bal b/f 20,000$ To Cost of Goods Sold 2,09,650$ By Costing Profit and Loss 2,09,650$
(Overheads applied) Account
By Costing Profit and 3,550$ To Bal c/f 22,500$ By Raw Materials 1,20,000$
Loss Account
57,100$ 57,100$ 1,40,000$ 1,40,000$ 2,09,650$ 2,09,650$
Raw Materials WIP Finished Goods
Manufacturing Overheads Accounts Payable Cost of Goods Sold

8
(d)
It should be noted that there are two type of cost Direct cost and Indirect cost , cost which are in
nature of indirect can be classified as overhead . Now in traditional costing on predetermined over
head recovery are decided by considering various factors. And same are used to determine the cost
of the product an to allocate the overheads. If the actual overhead cost is more that the expected cost
of the particular component then it is consider underabsobed cost and wise versa.
Journal entry to eliminate the Over Applied Overhead
Factory Overhead Dr XXXX
To Cost of Goods Sold Cr XXX
Journal entry to eliminate the under Applied Overhead
By Cost of Goods Sold XXXX
To Cost if goods Sold Cr XXXXX
(e) Standard Costing System
The standard costing system, the name itself give us idea what it reveals. It should be noted that he
standard costing system gives the budgeted Cost , Price and profit by using engineering tools to
determine such drivers. The standard costing system works as controlling tool . It gives the pre-
determined cost structure based on reliable sources, those are compared with the actual result of the
organisation. The variations are analysed and the corrective steps are the taken. So we can say it
works as best control tool for an organisation.
In Seafarer Kayaks the company is dealing in different product line and to keep control over cost one need
to set a standard against which comparison can be made. Company can prepare Kayaks standard for

9
different component and then can compare with the actual result , The management can know the exact
area where the deviation is taken place as against the expectation . The corrective tool can be taken based
n such variance analysis. And hence we can say that it works best control tool for the cost of the product.
The company is following the Norma cost system which does not give the value added data to take the
decision, however standard costing gives the best production of data to take the appropriate steps on
variation.
However one need to take care that standard costing requires budgeting all component in accurate manner
by taking industry benchmarks,. As if the projected cost are no correct , any action based on such data will
be wrong action.

10
References:
cost of goods sold – Accounting In Focus. Accountinginfocus.com. Retrieved 12 September 2016,
from http://accountinginfocus.com/tag/cost-of-goods-sold/
Cost of Goods Sold on an Income Statement: Definition & Formula - Video & Lesson Transcript |
Study.com. (2016). Study.com. Retrieved 12 September 2016, from
http://study.com/academy/lesson/cost-of-goods-sold-on-an-income-statement-definition-
formula-quiz.html
Schedule of Cost of Goods Manufactured, Schedule of Cost of Goods Sold, The Income Statement,
Reviewing Cost of Flow Concepts for a Manufacturer, Critical Thinking About Cost Flow -
Introduction to Managerial Accounting - Academic library - free online college e textbooks.
(2016). Academlib.com. Retrieved 12 September 2016, from
http://academlib.com/612/accounting/schedule_cost_goods_manufactured
The Cost of Goods Manufactured Schedule. Cliffsnotes.com. Retrieved 12 September 2016, from
https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-ii/managerial-and-
cost-accounting-concepts/the-cost-of-goods-manufactured-schedule
Under/Over-Absorption of Overheads (Accounting Treatment). (2015). YourArticleLibrary.com:
The Next Generation Library. Retrieved 12 September 2016, from
http://www.yourarticlelibrary.com/accounting/overheads/underover-absorption-of-overheads-
accounting-treatment/52596/