Cost Accounting: Value Chain Analysis, Cost of Goods Manufactured, Job Costing, and Activity Based Costing

This article covers various topics in cost accounting such as value chain analysis, cost of goods manufactured, job costing, and activity based costing. It explains the advantages and disadvantages of activity based costing. The article also provides insights into KVK Industries' supply chain management issues.

Cost Accounting
Cost Accounting
Name of Student:

COST ACCOUNTING
PART A
(1) Value Chain Analysis and Supply Chain Management.
In The process of Value Chain Analysis firms identify the primary activities and their secondary
activities that add value to the final product. Firms analyses those activities to increase
differentiation or reduce costs. All the activities that a firm undertakes from procuring inputs to
converting them into output are a part of value chain analysis. It’s a strategic tool that a firm uses
to analyze its internal activities. The main goal is to identify the most valuable activities (i.e.
activities that can provide firm a cost or differentiation advantage over its competitors). If a firm
enjoys a competitive advantage then the firm is more likely to enjoy a better reputation in the
market, more trust of customers by performing those activities in a better manner than the
competitors. Whereas if a firm enjoys a cost advantage then, firm would be able to produce the
goods at lower cost than others and earn higher profits. (Jurevicius, 2018)
The techniques, tools and concepts of value chain applies to all the organizations that produce or
sell a product or provides any service.
As per Porter, for Value Chain analysis, business activities can be classified under two
categories:
A. Primary Activities.
1. Inbound Logistics, it includes warehousing and handling of materials.
2. Operations; conversion of inputs to final products.
3. Outbound Logistics; distribution and processing of order.
4. Sales and Marketing; pricing, channel management and communication.
5. Service; installation and repairs

COST ACCOUNTING
B. Support Activities.
1. Firm Infrastructure; includes, general management, finance, planning, legal and
accounting.
2. Human Resource Management; recruitment of employees, rewards and promotions of
staff.
3. Procurement; purchasing of supplies, raw materials, assets and other consumables.
4. Technology Development; Research and developments and know how.
Primary activities are incidental in the production of goods and providing services whereas,
support activities are indirectly linked to production but are necessary for a smooth functioning.
The entire connected network of people, resources, organization, technologies and activities
involved in the sale and manufacture of a product or service is known as supply chain. It starts
from delivering raw materials to a manufacture from the supplier and ends with delivery of final
product/service to the customer. Supply Chain management includes management of flow of
services and goods and all processes that convert raw materials to final products. Proper SCM
can decrease costs and increase the revenue.
KVK industries is a leading manufacturer of the product that it exports which provides KVK
industries a competitive advantage over others. But due to the lack of proper supply chain
management and value chain analysis the industry is losing a lot of money, which it needs to
investigate to reduce its costs. KVK has only created a proper network with its suppliers’
company but not with the distributors, which indicates that KVK is only focusing on one of its
supply chain management part and ignoring the other end of the chain. Which has led to increase

COST ACCOUNTING
in the costs. KVK needs to implement a complete value chain analysis so that the firm can
analyze its most valuable activity. Firms should follow the following steps :
1. Identify the activities of the firm as Primary and Support.
2. Identify the importance of every activity in total production cost.
3. Cost drivers of all the activities should be identified.
4. Links between all the activities should be identified.
5. Opportunities that reduce cost should be identified.

COST ACCOUNTING
(2) (i) Schedule for Cost of Goods Manufactured
(2) (ii) Income Statement for KVK Industries
Particulars
Amount($
)
Sales 398,000
Less: Cost of Goods Sold 343,000
Gross Profit 55,000
Less: Selling and Administrative
Expenses
Selling Expenses 15,450
Administrative Expenses 9,560 25,010
Operating Profit (EBIT) 29,990
Interest -
Earnings Before Taxes 29,990
Taxes -
Earnings available to Common
Shareholders 29,990
Particulars
Amount($
)
Direct Materials
Beginning Raw Materials Inventory a 26,000
Add: Purchases of raw materials b 140,000
Deduct: Ending Raw Materials Inventory c 12,000
Direct Materials used in production d = a+b-c 154,000
Direct Labor e 154,000
Manufacturing Overhead f 25,000
(Indirect labour + Factory Insurance +
Depreciation on Machinery + Machinery
Repairs + Factory Utilities + Misc.
Manufacturing overheads)
Total Manufacturing costs g = d+e+f 333,000
Add: Beginning WIP Inventory h 16,000
Deduct: Ending WIP Inventory I 18,000
Cost of Goods Manufactured for the
Year j = g+h-i 331,000
Add: Beginning Finished Goods Inventory K 40,000
Deduct: Ending Finished Goods Inventory L 28,000
Cost of Goods Sold m = j+k-l 343,000

COST ACCOUNTING
Dividends -
Net Income 29,990
(3) (i) & (ii) Total cost for product M
Period Expected
units to
be
produced
(units)
Variable
cost per
unit ($)
Total Variable
Cost
(Units*Variable
cost p.u.)
Fixed
Cost (To
be divided
equally)
Total Cost
($)
Total
Cost
($)
(per
unit)
First quarter 100,000 30 3,000,000 200,00
0
3,200,00
0 32
Second Quarter 200,000 30 6,000,000 200,00
0
6,200,00
0 31
Third Quarter 500,000 30 15,000,000 200,00
0
15,200,00
0 30.4
Fourth Quarter 400,000 30 12,000,000 200,00
0
12,200,00
0 30.5
Total 36,800,00
0
(4
) Calculation of Operating Income
Number of products produced and
sold(units)
1,20
0
1,5
00
Information Existing
situation
After promotional
activities
undertaken
Sales Revenue $240,000 $300,000
(Selling Price p.u. x No. of Units)
Less: Variable Cost $57,600 $72,000
Gross Profit $182,400 $228,000
Less: Fixed Cost $40,000 $50,000
Operating Profit $142,400 $178,000

COST ACCOUNTING
Decision: Since, Incremental Profit after promotional activities is $35,600. Therefore, company
should opt for promotional activities.
PART B
(1) Computation of Overhead Rate
Particulars
Assembly
departmen
t
Finishing
departmen
t
a Direct labor 105,000 75,000
b Manufacturing overhead 135,000 103,000
c Machine-hours 4,500 475
d Direct labor hours 7,000 6,250
Labor cost (a/d) per hour 15 12
Manufacturing overhead per Machine
hours (b/c) 3 216.84
Overhead Rate for Assembly department is $3 per machine hour
Overhead Rate for Finishing department is $12 per labor hour

COST ACCOUNTING
(2) Computation of Job Costing
Job No. 555 (500 Chairs)
Particulars
Assembly
departmen
t
Finishing
department Total
Cost of materials used on job 1,70
0 1,125 2,825
Direct labor cost 2,02
5 1,800 3,825
Direct labor hours 13
5 150 -
Machine-hours 6
3 25 -
Overhead Cost 18
8 1,800 1,988
(62.5*3) (150*12)
Grand Total 8,63
8
*Note - Overhead rate is used from part (1) above.
Total Cost for Job No. 555 is $8,638
Cost per unit ($8,638/500) is $17.276

COST ACCOUNTING
(3
) Activity Based Costing
Under the Activity Based Costing methodology costs are assigned to the activities
contrary to assigning the costs to services or products. This is a different method form
traditional absorption method which used to allocate the costs on products/services based
on machine hours or labor hours. ABC is a more modern absorption costing method that
provides an accurate method of costing.
Advantages
 Accurate Costing of Product – ABC brings reliability and accuracy in product costing by
focusing on cause and effect relationship. It recognizes that costs are caused by activities and
not by products.
 Unit cost utilization rather than total cost
 Facilitates Benchmarking
 Supports scorecards and performance management.
 Enables supply chains, costing of processes.
 Makes visible non-value added and waste - ABC helps in cost reduction and identifies
the activities that does not add any value to product/service.
 Makes decision making better – ABC improves decision making process as a more reliable
data of product costing is used.
Disadvantages
 ABC is a complex and expensive method as compared to the traditional methods of Costing.
 Cost driver selection is a difficult task
 Not suitable method of costing for a smaller firm.
 Difficulties in measurement.

COST ACCOUNTING
References
AccountingCoach.com. (2018). Manufacturing Overhead Costs | Explanation |
AccountingCoach. [online] Available at: https://www.accountingcoach.com/manufacturing-
overhead/explanation [Accessed 23 Nov. 2018].
Corporate Finance Institute. (2018). Cost of Goods Manufactured (COGM) - How to Calculate
COGM. [online] Available at:
https://corporatefinanceinstitute.com/resources/knowledge/accounting/cost-of-goods-
manufactured-cogm/ [Accessed 23 Nov. 2018].
En.wikipedia.org. (2018). Supply chain. [online] Available at:
https://en.wikipedia.org/wiki/Supply_chain [Accessed 23 Nov. 2018].
Investopedia.(2018). Supply Chain Management (SCM). [online] Available at:
https://www.investopedia.com/terms/s/scm.asp [Accessed 23 Nov. 2018].
Jurevicius, O. (2018). Looking at your Value Chain will make you Smarter. [online] Strategic
Management Insight. Available at: https://www.strategicmanagementinsight.com/tools/value-
chain-analysis.html [Accessed 23 Nov. 2018].
Resource.cdn.icai.org.(2018).[online]Available at:
https://resource.cdn.icai.org/18905sm_finalnew_cp1a.pdf [Accessed 23 Nov. 2018].

COST ACCOUNTING
Your Article Library. (2018). Advantages and Demerits of Activity Based Costing (ABC).
[online] Available at:http://www.yourarticlelibrary.com/accounting/costing/advantages-and-
demerits-of-activity-based-costing-abc/52617 [Accessed 23 Nov. 2018]