Overhead Allocation & Activity Based Costing

This assignment delves into the complexities of overhead allocation within a job order costing system. It examines scenarios of both over- and under-applied overhead, outlining practical treatments and emphasizing the benefits of adopting an activity based costing (ABC) system. The case study focuses on Turramurra Furniture, a manufacturing company seeking to improve its cost management strategies through ABC implementation.

Management Accounting

TABLE OF CONTENTS
a. Describing circumstances when a job order costing system proves to be suitable..................3
b) Presenting Work in Process (WIP) Account of Turramurra Furniture at 30 June 2017.........3
(c) Calculate the cost of the chairs in the Finished Goods Inventory..........................................3
(d) Computation of over or under-applied overhead for the year................................................4
(e) Outline two different treatments for the over or under-applied overhead balances under job
order costing system....................................................................................................................6
(f) Presenting action that needs to be taken when under or over-application of overhead is
material........................................................................................................................................6
(g) Suggesting firm whether it should undertake ABC system or not.........................................6
REFERENCES................................................................................................................................8

a. Describing circumstances when a job order costing system proves to be suitable
From assessment, it has identified that job order costing system is suitable for the
manufacturing companies which produces and offer different types of products. Specifically,
there are mainly three systems on that considered under job costing system namely material,
labor and overhead (Job costing, 2017). It is suitable for the firm whose manufactured products
are different fron each other. In the context of Turramurra Furniture, job costing system is
highly suitable because it manufactures and offers different types of products or services to
customers include storage equipment, printer stand, chair & desk. Under job costing, by using
following formula firm can determine per unit cost such as:
Unit cost = Total cost applicable to job / Number of units in the job
b) Presenting Work in Process (WIP) Account of Turramurra Furniture at 30 June 2017
Calculation of WIP
Particulars Figures ( in $)
Opening stock (in process) 1591000
raw material consumed 43000
direct labor cost 591100
factory overhead 87000
23121000
Less: closing stock 31800
WIP 23,08,9200
(c) Calculate the cost of the chairs in the Finished Goods Inventory
Computation of unit cost when quantity of chair is 15000:
Particulars
Figures ( in
$)
Figures ( in
$)
Work in process inventory 431000

Add:
Direct material 13800
Direct labor 43200
Manufacturing overhead (4400 * 5) 22000 79000
Total cost 510000
Unit cost = Total cost / Unit completed
(510000 /
15000) 34
Calculation of Total Cost of finished inventory:
Particulars Figures ( in $)
Remaining finished good 13400
Unit cost 34
Total cost of Finished goods inventory 455600
(d) Computation of over or under-applied overhead for the year
Given that: Budgeted figures
Particulars Figure (in $)
Estimated machine hours 900000
Estimated manufacturing overhead 4500000
Predetermined overhead rate (Per machine
hour)
5

Computation of actual manufacturing overhead and machine hours
Particulars From 1st July to 31st
May
For the month of
June
Total
Machine hours 8350000 49900 884900
Actual Manufacturing
overhead
4105000 217000 4322000
Particulars Figure (in $)
Actual hours taken 884900
Per machine hour rate ( Estimated or budgeted) 5
Total manufacturing overhead applied 4424500
Determination of under and over-applied overhead:
Manufacturing overhead
Figures (in
$)
Total manufacturing overhead incurred 4322000
Total manufacturing overhead applied 4424500
Over applied overhead (Overhead incurred > applied) 102500
Interpretation: The above depicted table shows that annual incurred overhead is higher
than applied one. Thus, over-applied situation amounted to $102500 exhibits that Turramurra

Furniture failed to make appropriate estimation regarding overhead in against to the need or
requirement.
(e) Outline two different treatments for the over or under-applied overhead balances under job
order costing system
In order to deal with the situation of over-applied overhead that assessed above
Turramurra Furniture needs to undertake following measure such as:
Over-applied overhead
 Adoption of ABB technique: Turramurra Furniture should use activity based budgeting
or costing system which in turn helps in avoiding the issue of over-applied overhead and
ensures suitable allocation of financial resources.
 Assessment of reasons: There are several aspects which may cause of over-applied
overhead such as estimation about increasing production and labor cost etc. Thus, firm
needs to make focus on identifying reasons related to over-applied overhead which in
turn helps in allocating suitable financial resources to each activity (Under or over-
applied overhead, 2017).
(f) Presenting action that needs to be taken when under or over-application of overhead is
material
According to the case situation, on the occurrence of situation pertaining to under or over
applied overhead amounted to $40000 accounting personnel of Turramurra Furniture needs to
write off the same. In accordance with such aspect by allocating the figure of under or over
applied overhead in the closing balance of cost of goods sold, work in process and finished
goods firm can deal with the concerned situation in a prominent way (Kaplan and Atkinson,
2015).
(g) Suggesting firm whether it should undertake ABC system or not
Given case situation presents that Turramurra Furniture is highly concerned with the
application of overhead and now wishes to undertake activity based costing system. Hence,
considering the modern budgeting tools or options it is suggested to the firm that employ the
system of ABC which is highly applicable and appropriate for manufacturing units. Moreover,
such costing system lays emphasis on dividing the products of company in core activities and

then assigns cost to the same (Simons, 2013). Hence, in this, cost is assigned on the basis of
actual consumption and relative driver. Thus, in the context of new product range, Turramurra
Furniture would become able to allocate overhead expenses in an appropriate manner by using
activity based costing system. There are some advantages and disadvantages associated with the
system of activity based costing which company needs to keep in mind while undertaking ABC
system.
Advantages
 Cost reduction and profit maximization
 Decline in redundant business activities or practices (Advantages and disadvantages of
ABB, 2017)
 Facilitates appropriate allocation of cost and thereby helps in setting suitable prices
Disadvantages
 ABB system is not appropriate for small sized business units
 Time-consuming activity

REFERENCES
Books and Journals
Kaplan, R. S. and Atkinson, A. A., 2015. Advanced management accounting. PHI Learning.
Simons, R., 2013. Performance Measurement and Control Systems for Implementing Strategy
Text and Cases: Pearson New International Edition. Pearson Higher Ed.
Online
Advantages and disadvantages of ABB. 2017. [Online]. Available through:
<https://accountlearning.com/advantages-and-disadvantages-of-activity-based-costing/>.
Job costing. 2017. [Online]. Available through:
<https://www.accountingformanagement.org/what-is-job-order-costing/>.
Under or over-applied overhead. 2017. [Online]. Available through: <
https://9to5managerialaccounting.wordpress.com/2012/08/17/under-applied-and-over-
applied-overhead/ >.