Accounting Report on Cost Analysis, Inventory, and EOQ Models

This accounting report delves into key concepts such as cost allocation, overhead analysis, and the Economic Order Quantity (EOQ) model. The report begins with an introduction to accounting and its role in presenting meaningful financial information for effective decision-making, emphasizing the importance of cost control. Question 1 provides an overhead analysis, detailing cost apportionment across production and service departments, including calculations for various overheads like supervisor salaries, factory rent, machine insurance, and canteen subsidies. Question 2 focuses on inventory management, including the calculation of reorder levels, the impact of stockouts, and the EOQ. The report highlights the importance of a robust inventory management system. Question 3 reflects on the learning experience, emphasizing the practical applications of the concepts discussed, particularly the use of Excel for financial analysis and reporting. References to relevant books and journals are included.

Accounting

Table of Contents
INTRODUCTION ..........................................................................................................................1
QUESTION 1...................................................................................................................................1
QUESTION 2...................................................................................................................................4
QUESTION 3...................................................................................................................................7
CONCLUSION................................................................................................................................7
REFERENCES ...............................................................................................................................8

INTRODUCTION
The detail and proper recording of various financial transaction with the features of
storing, sorting, reviewing, summarizing and presenting in different reports and accounts is
known as accounting (Accounting, 2019). The main concept of accounting is related with
presenting meaningful information to stakeholder by preparation of financial statements so that
effective decision are made. The measurements that is used in area of operation, supply
management and logistic that help to ascertain the volume of order which is actually required to
fulfil the demand of customer by reducing the cost per order in known a EOQ. Cost allocating is
the distribution of single cost among the various units, centre etc. within an organisation.
In this report, overhead analysis, cost allocation and absorption rates, determination of
reorder level, calculation of EOQ are discussed.
QUESTION 1
A) Overhead analysis:
It is related to predict the cost of every product, calculate the cost to the product that are
Work in progress and most crucial helps to control cost by properly comparing estimated with
actual cost included in production (Bracci and et.al., 2015).
1

Basis
of
Apportionment Production Department Service Department
Dispersion Mixing Finishing Canteen
Maintena
nce Total
Supervisor
Salary 42000 25200 35000 21000 16800 140000
Specific
overhead
Equally in
production
department 16800 21000 35000 15400 21000 109200
Factory Rent
& Rates Floor Space 13296.48
18615.0
8 28492.46 7597.99 7597.99 75600
Machine
Insurance
Value of
machinery 12084.21
30210.5
3 12084.21 7250.53 7250.53 68880
Machinery
depreciation
Value of
machinery 10315.79
25789.4
7 10315.79 6189.47 6189.47 58800
Canteen
Subsidy
Number of
Employees 16800 25200 28000 8400 5600 84000
Heating &
Lighting Floor Space 2954.77 4136.68 6331.66 1688.44 1688.44 16800
Total 114251.26
150151.
76
155224.1
2 67526.43 66126.43 553280
Production
Department Aggregate Costs
Direct Labour
Hours
Direct Labour
Rate per hour
Dispersion 114251.26 10700 10.68
Mixing 150151.76 10800 13.90
Finishing 155224.12 10250 15.14
Total 419627.14
2

Working Notes:
Production Department Service Department
Dispersion Mixing Finishing Canteen
Maintenan
ce Total
Floor Space 350 490 750 200 200 1990
Value of
machinery 1000 2500 1000 600 600 5700
Number of
Employees 60 90 100 30 20 300
Direct Labour
Hours 10700 10800 10250 31750
Factory Rent & Rates
 Dispersion = 75600 x (350/1990) = 13296.48
 Mixing = 75600 x (490/1990) = 18615.08
 Finishing = 75600 x (750/1990) = 28492.46
 Canteen= 75600 x (200/1990) = 7597.99
 Maintenance = 75600 x (200/1990) = 7597.99
Machine Insurance
 Dispersion = 68880 x (1000/5700) =12084.21
 Mixing = 68880 x (2500/5700) =30210.53
 Finishing = 68880 x (1000/5700) =12084.21
 Canteen= 68880 x (600/5700) = 7250.53
 Maintenance = 68880 x (600/5700) = 7250.53
Machinery depreciation
 Dispersion = 58800 x (1000/5700) =10315.79
 Mixing = 58800 x (2500/5700) = 25789.47
 Finishing = 58800 x (1000/5700) =10315.79
 Canteen= 58800 x (600/5700) = 6189.47
 Maintenance = 58800 x (600/5700) = 6189.47
Canteen Subsidy
3

 Dispersion = 84000 x (60/300) = 16800
 Mixing = 84000 x (90/300) = 25200
 Finishing = 84000 x (100/300) = 28000
 Canteen= 84000 x (30/300) = 8400
 Maintenance = 84000 x (20/300) = 5600
Maintenance
 Dispersion = 16800 x (350/1990) = 2954.77
 Mixing = 16800 x (490/1990) = 4136.68
 Finishing = 16800 x (750/1990) = 6331.66
 Canteen= 16800 x (200/1990) = 1688.44
 Maintenance = 16800 x (200/1990) = 1688.44
B) Necessity to record overheads
In business scenario, all cost that are related with direct material or labour that are
included in production process are known as overhead cost (Kaplan and Atkinson, 2015). These
overheads have a very important role to play in companies and there must be proper record of
every overheads so that cost of specific product can be determined. This also support in
increasing the profit of company as best suitable price are set by proper cost allocation. Thus it is
stated that it is essential to determine and allocate the suitable amount of total overheads to every
element of cost. Therefore, allocation of ordinary overheads that are used by different
department must be done by using predefined factory overheads application rate.
C) Apportion the service department.
In large or medium size organisation not each department is related with production of
specific good as some unit are basically provide support to production department. In business
mainly the service department cost are apportion to operating sections through a system
allocation method (van Helden and Uddin, 2016). This provide support in measuring of total cost
of product and make manager aware about the entire cost related with activities and help to
reduce waste from service department. The service department of companies provide various
support to production department thus it is crucial for manager to allocate and account these cost
properly. Some of the following reasons to allocate service department cost are:
 To deliver more authentic goods cost information which recognise that these are valuable
services that constitute an input in the manufacture process.
4

 It help to make improve decision about proper utilisation of resources.
QUESTION 2
A) Calculation of Reorder level:
In present business world, a situation when company need to reorder the stock to
complete the production process is consider as reorder level. It is a minimum amount of item that
is hold by an organisation within stock so that production of goods never gets affected. The
formula to calculate the reorder level is:
(Average Daily Unit Sales * Delivery lead time + Safety stock)
Annual Demand= 600000 crates
Ordering Cost = 85.00
Average Delivery Time = 2 – 4 Weeks
Selling Price = 4.95 per crate
Holding Stock = 2.75 per crate
Working Days = 48 Weeks or 48 x 7 = 336 Days
Total Sales = 600000 crates x 4.95 per crate = 2970000
Average Daily Unit Sales = 600000/ 48 = 12500
Re order level = (Average weekly Unit Sales x Delivery Lead Time) + Safety Stock*
= (12500 x 4) + Nil** = 50000
*Safety Stock = (Max daily sale per unit * max LT in days) – (Average daily sales per unit *
average LT).
**Information is insufficient for calculation of Safety Stock.
B) Impact of Stock out:
The situation when stock of company get exhausted is known as out of stock or stock out.
It is consider to be one of the most worst conditions faced by an organisation due to which
production of company reduced and there are no goods to satisfy the needs of customer
(Qvortrup, 2015). There is a huge effect of out of stock of respective company, as they lack the
availability of item that are essential for manufacture subsequent goods according to the demand
of customer. In order to meet the stock level many time company use to purchase the raw
material at higher cost due to which cost of production get higher and goods are supplied at
higher cost to customer. There are possible effects in case if particular stock is not available to
produce particular goods such as:
5

 Customer may agree to wait for the particular item.
 Clients may order back the same good.
 Irritated customer may cancel the order and move to other option
C) Calculation of EOQ:
The concept of economic order quantity is related with the production that is used to
ascertain the most efficient quantity of product that is needed to be purchased depending on
carrying and ordering cost (Watty, McKay and Ngo, 2016). In general word, it display the
optimum quantity of stock an organisation must order in every duration so that ordering and
reserving inventory cost can be reduced. There is a major importance of calculating EOQ level
has it support to minimise the holding and storage cost as this model deliver the most economical
number of unit that are required per order. It also support respective firm to hold the particular
number of goods within a period, provide exact time to re order and define the manner to order
the same item.
here,
D = Annual Demand
Co = Per Order Cost
Ch = Holding Cost per unit
EOQ = √(2 x 600000 Crates x 85.00)/ 2.75 = 6090.23
D) Importance of Robust inventory management system:
In every type of company there is a need of effective and accurate accounting system that
hold the detail information about inventory present at a specific time period. Inventory
management system most necessary system that is used by business enterprises to trace and
monitor stock list within the whole supply chain of company (Weetman, 2019). With the support
of this system manager are able to examine the real time motion of stock in company which
shows that production process is continuously producing valuable good. In DM PLC this system
is used to manage the different type of inventory such as raw material, finished goods, work in
progress and additional tools to check that demand and accessibility of specific inventories in
6

producing of valuable good for company. It also aid to decrease the total inventory and storage
cost which directly grow the profits.
E) Consultant has provided basic details by observing inventory process of DM Plc. With help
of demand per annum, order cost per crate and holding cost per crate i.e. 600000 Crates, 85.00
and 2.75 respectively, EOQ or economic order quantity can be easily calculated (Wildavsky,
Lockhart and Coughlin, 2018).
QUESTION 3
The whole model helps me to provide a detail and valuable knowledge and understanding
about terms of costing such as cost allocation, overheads allocation rate, reorder level, EOQ
model. Reorder level helps me to determine the exact point at which company are required to
make more order so that production of goods never gets affected and maximum number of
finished good can be deliver to customer. I think this is the best way to maintain a good brand
image in market and maximise profit by good margin in every year. I also get understand the
need of cost distribution to different service department as it provide support to production unit
that prepare most valuable good for company. Excel facilitates business entity to analyse the key
potential of numerous kind of data, by applying different formulas across cells. Through excel
data or information is infused into cells, can be sorted and filtered and then presented in charts,
graphs and in visual presentation. With help of graphs, pie charts, scatter diagrams etc.
usefulness and relevance of data can be enhanced and addition in very simple inn excel. Such
kind of visualisations of data can increase quality of different business reports. Tuff calculations
can be easily solved in excel by applying different formula, for instance EOQ, Re-order level etc.
for a large organisation having wide range of data can be easily calculated and interpreted.
CONCLUSION
From the above report it has been concluded that accounting is a wider concept that help
to maintain a detail record of different financial transaction and prepare most valuable financial
statements that provide clear information about overall picture of financial status of company.
Cost allocation is effective technique used to allocate cost to different product and service
department that support to increase profit by setting the best price of customer.
7

REFERENCES
Books and Journals:
Bracci, E., and et.al., 2015. Public sector accounting, accountability and austerity: more than
balancing the books?. Accounting, Auditing & Accountability Journal. 28(6) pp.878-
908.
Kaplan, R. S. and Atkinson, A. A., 2015. Advanced management accounting. PHI Learning.
Qvortrup, J., 2015. A voice for children in statistical and social accounting: A plea for children’s
right to be heard. In Constructing and reconstructing childhood (pp. 74-93). Routledge.
van Helden, J. and Uddin, S., 2016. Public sector management accounting in emerging
economies: A literature review. Critical Perspectives on Accounting. 41. pp.34-62.
Watty, K., McKay, J. and Ngo, L., 2016. Innovators or inhibitors? Accounting faculty resistance
to new educational technologies in higher education. Journal of Accounting Education.
36 pp.1-15.
Weetman, P., 2019. Financial and management accounting. Pearson UK.
Wildavsky, A., Lockhart, C. and Coughlin, R. M., 2018. Accounting for the Environment 1.
In Culture and Social Theory (pp. 85-112). Routledge.
Online
Accounting. 2019. [Online] Available Through: <https://www.accountingcoach.com/blog/what-
is-accounting>.
8