Costing System Management Accounting Report 2022

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student:
Name of the University:
Authors Note:

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MANAGEMENT ACCOUNTING
Executive summary:
A detailed discussion along with analysis on the job costing system is provided in this document
to understand the importance of appropriate costing system in determining the cost of products
correctly. Connectta Limited is a furniture manufacturer shall use an appropriate costing method
for costing purpose. The report below makes it clear that the job costing system in place within
the company is not exactly appropriate for the company as the product cost calculated from the
costing system does not properly reflect the actual cost of the furniture manufactured by the
company.

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Contents
Executive summary:........................................................................................................................1
Introduction:....................................................................................................................................3
Part 1:...............................................................................................................................................3
Part 2:...............................................................................................................................................4
Part 3:...............................................................................................................................................5
Part 4:...............................................................................................................................................7
Part 5:...............................................................................................................................................8
Part 6:.............................................................................................................................................10
Conclusion:....................................................................................................................................11
References:....................................................................................................................................12

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Introduction:
The selection of an appropriate costing system for an organization is the responsibility of the
management of the organization. Looking at the sheer importance of an effective costing system
in place to calculate the cost of manufacturing it must be given the top priority by the
management to firstly select a suitable costing system for the company’s manufacturing activities
and operations. Taking into consideration the nature of manufacturing operations of Connetta
lets discuss the appropriateness of the current costing system in place within the company.
Part 1:
In order to determine the unit cost of any individual product a manufacturer must use either of
two costing methods, i.e. job order cost system or process costing. In case of production of
furniture since there was no different processes used to produce the finished goods the
management of Connetta Limited has decided to use job costing to ascertain the unit cost of
indidviauls product of the company (Askarany, 2011).
When a company accumulates manufacturing costs firstly in three accounts, namely raw
materials, factory labor and manufacturing overheads. Secondly, these costs after accumulation
are transferred to work in process and finally to finished goods then use of job costing is
appropriate to determine the unity cost of individual products manufactured by the company. A
company that manufactures custom made machines, designs custom made machine tools,
constructs custom designed building, manufactures ships, and aircrafts etc. shall use job costing
method to ascertain the unit cost production (Eldenburg and Wolcott, 2009).

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Part 2:
Since the jobs completed are December is fully identical for computers caddy and chairs as in
work in process for November thus, no part of the opening work in process in respect of
computers caddy and chairs are to be included in computation of closing work in process as on
31st December. However since no opening WIP for printer stands have been completed at the end
of December hence, the entire opening WIP of printer stand shall be included in computation of
closing WIP in December. Taking into consideration the raw materials issued and requisitioned
along with labor cost the closing WIP is calculated below as on 31st December (Esmalifalak,
Albin and Behzadpoor, 2015).
December
Job no (A) Opening
WIP
(B)
Materials
(C) Purchase
parts
(D)
Labour
cost
Closing WIP
(A+BC+D)
CC723 51,0
00.00
104,
000.00
122,400.
00
277,400.00
CH291 3,0
00.00
10,
800.00
43,200.
00
57,000.00
PS812 250,
000.00
124,0
00.00
87,
000.00
200,500.
00
661,500.00
Closing WIP 995,900.00

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The total work in process as at the end of December is $995,900 as per the calculation. It is
important to note that there are number of assumptions which have been made to calculate the
closing work in process of December. One of the important assumptions is as following:
It has been assumed that no indirect cost and manufacturing overheads are included in the
closing WIP of the company. Accordingly, the above calculation has been made.
Part 3:
As per the information about the amount of cost of chairs included in the finished inventory of
the company as on December 31 is calculated in the following table.
Items of costs Units Cost ($)
Finished inventory of chair as at 30th
November
19400 units
@35 each 679,000.00
Opening WIP 15000 431,000.00
7,578.67
14,848.00
22,000.00
Total cost of completed chairs 34400 1,154,426.67
671,178.29
483,248.37
Overheads
Production overheads on the basis of pre-determined rate
Less: Weighted average cost of chairs sold in December
Cost of chairs in finished goods
Cost of completed chairs as at the end of December
Addition: Cost incurred to complete additional chairs in the month of
Labour (Indirect)
Cost of supervision
Thus, cost of completed chairs included in the inventory at the end of the year as per the above
calculation is $483,248.37. Again number of assumptions have been made in calculating the cost
of finished chairs included in the end inventory as on 31st December are enumerated below.

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I. Opening WIP in December, i.e. WIP of 30th November were 100% complete in
respect of direct materials and direct labor. Thus only indirect labor cost and
supervision costs were necessary to complete the chairs included in opening WIP.
II. Only the requisitions of December and labor cost incurred in the month have been
added to calculate the cost of finished chairs included in the closing inventory
(Lorente and Lorente, 2013).
Part 4:
The cost accounting treatment pays specific attention on the method of allocating overheads
properly. Often allocation of overheads leads to over and under application. In such case
accounting treatment must carefully record such over or under application of overheads to ensure
that the profit and loss account correctly reflects the actual profit earned or loss incurred from
sale of such products. Also the finished inventory shall be properly valued by correctly recording
the over and under application of overheads (Lucey, 2009).
In case of Connetta the company has incurred actual overhead of $252,000 in the month of
December in addition to $4,140,000 actual overhead incurred till the month of November. The
table below shows the actual overhead incurred for the entire year along with over applied
overhead for the year.

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Overheads incurred ($)
Actual overhead incurred in December 252,000.00
Add: Overhead incurred till the month of
November 4,140,000.00
Total overhead incurred 4,392,000.00
Budgeted overhead 4,500,000.00
Overhead over applied (4500000 -
4392000) 108,000.00
Thus, it is clear that the above computation that the actual overhead of the company for the year
was lower compared to the budgeted overhead hence, overhead applied on the basis of
predetermined overhead rate of $5 per machine hour with 900000 machine hours has resulted in
over application of overhead. As a result the cost of closing inventory of finished goods are
overvalued thus, the profit of the company will also be overstated since the cost of finished
inventory is inflated. Since, the overhead actually incurred in the year is lower than the budgeted
overhead the management should use the actual overhead to allocate the overhead finished goods
to calculate the cost of goods manufactured and subsequently the cost of inventory. Thus, the
overhead has been over applied (Raab and Zemke, 2016).
Part 5:
The overhead allocation in costing, whether job costing or processing costing, is a very critical
part of cost accounting. Error in allocation of overhead in the cost of production can affect the
cost of finished goods resultantly the operating profit and losses of an organization. Hence,
special care and attention should be given on the method of allocating production overheads
correctly. The accounting treatment for production overheads under and over applied are
discussed briefly below.

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Firstly, the accounting treatment of allocation of production overhead is dependent on whether
the allocation is on the basis of traditional costing method such as use of a pre-determined
overhead rate or on the basis of activity based costing where the overheads are pooled in
different cost pools and then the cost drivers are identified on the basis of different costs are
allocated to the production of goods. In this case the production overheads are allocated as per
traditional method using machine hour rate as the basis. The alternative accounting treatments
for over and under applied production overheads are explained below.
In case over application of overheads:
The overhead shall be applied in the cost of finished goods on the basis of actual overhead
incurred in case the actual overhead is lower than the budgeted overheads. The profit disclosed in
the profit and loss statement shall not be overstated by allocating the overheads on the basis of
actual overheads incurred. Since the production overheads actually incurred by Connetta Limited
is lower than the budgeted overhead hence, the management should allocate and record the
accounting entries on the basis of actual production overheads (Raab and Zemke, 2016).
In case under applied overhead:
An organization might end up incurring excess overheads than the budgeted overheads. In that
case the management should use the budgeted overhead to determine the cost of each unit of
production. The difference between the actual production and budgeted production overheads,
shall be directly debited in the profit and loss account of the company to record the excess
overheads incurred in production. This will ensure both that the abnormal production overheads
are not included in the cost of finished goods and at the same time accounting for the same by

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directly debiting the excess amount of production overheads over and above the budgeted
production overheads in the profit and loss account (Askarany, 2011).
Treating the production overheads as indirect costs:
Another alternative accounting principle is to treat the production overheads as indirect costs and
not including the same in calculating the unity cost of production. Debiting the entire production
overheads directly in the profit and loss statement of an organization is another alternative.
However, the cost of finished goods ascertained using this method would not reflect the actual
cost of finished goods.
Part 6:
Activity Based Costing system (ABC) is an alternative costing technique that provides a
reasonable method to account for production overheads in a scientific and rational manner. ABC
method uses cost drivers and cost pools by identifying the drivers that drive the indirect costs.
These indirect costs are pooled together in different cost pools and on the basis of cost drivers
the costs are allocated to the units of production. As a result the production overheads are
correctly allocated in the units of production on a scientific basis as opposed to just using a
predetermined overhead rate to allocate production overheads in the units of production. The
inherent limitation in traditional costing method makes it impossible to correctly ascertain the
cost of each unit of finished goods especially in organizations where significant amount of
production overheads are incurred. With use of ABC method it is possible to overcome these
limitations and accordingly the management would be in better position to take important
decisions such as pricing of products and determining the suitable profit margins etc (Todic,
2014).

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Thus, using ABC method it would be possible to overcome number of limitations of traditional
costing method.
Conclusion:
Concluding from the above it can be stated that the use of appropriate costing methods is equally
important to an organization as other facets of accounting and financial reporting. It is important
to take into consideration the nature of activities and business operations of an organization to
use a suitable costing method to correctly ascertain the cost of each unit of finished goods to take
important business decisions.

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References:
Askarany, D. (2011). Interaction between Target Costing and Activity-Based Costing: Is Target
Costing a True Costing Technique?. SSRN Electronic Journal, 4(6), pp.87-89.
Eldenburg, L. and Wolcott, S. (2009). Cost management. 3rd ed. Hoboken, N.J.: Wiley, pp.17-
36.
Esmalifalak, H., Albin, M. and Behzadpoor, M. (2015). A comparative study on the activity
based costing systems: Traditional, fuzzy and Monte Carlo approaches. Health Policy and
Technology, 4(1), pp.58-67.
Lorente, C. and Lorente, L. (2013). Microsoft Dynamics NAV financial management. 4th ed.
Birmingham, UK: Packt Pub., pp.36-67.
Lucey, T. (2009). Costing. 6th ed. Australia: South-Western Cengage Learning, pp.23-69.
Raab, C. and Zemke, D. (2016). Activity-Based Costing in the Restaurant Industry: What's Past
Is Prologue. The Journal of Hospitality Financial Management, 24(2), pp.133-146.
RUAN, Y. and ZHOU, L. (2017). The Research on Management Accounting Tools—Based on
the Comparison Between Activity-based Costing and Traditional Costing. DEStech Transactions
on Engineering and Technology Research, 4(amsm), pp.12-37.
Todic, V. (2014). Determination production costs and service using ABC method. Tehnika,
69(1), pp.65-68.