Analysis of Concetta Ltd.'s Costing System and Inventory Management

This homework assignment analyzes the costing system of Concetta Ltd., a company utilizing a job costing method. The analysis begins with an overview of job costing, followed by the calculation of the balance in Work-In-Process (WIP) inventory as of December 31st, considering raw materials, purchased parts, labor costs, and manufacturing overhead based on a predetermined overhead rate. The assignment then calculates the cost of chairs in finished goods inventory, applying the FIFO method. Further analysis involves determining overapplied or underapplied overhead, comparing applied overhead with actual overhead, and discussing accounting treatments for both marginal and significant differences. Finally, the assignment compares and contrasts the existing costing system with Activity-Based Costing (ABC), highlighting the limitations of the current approach and the advantages of ABC in allocating costs more accurately based on activity usage.

Assessment 3: Concetta Ltd.
Answer to Question 1: Job Costing System
Job costing method is one of the simplest methods of costing approaches which has been in
use since ages now and hence also called as the traditional or conventional costing method.
This method applies all the costs of the company to the products uniformly based on one
single allocation factor. This allocation factor can be machine hours used, labour hours used,
no. of unit produced, labour cost incurred or any other such single base. The total cost
includes cost towards Direct Material, Direct Labour and Manufacturing overheads (Bragg,
2019)
It is appropriate to use Job costing method when the company has a production line of
different products and all of them have separate significant cost. That is companies that have
different jobs with significant cost can appropriately use job costing. For e.g. Companies
making aircraft, specialised furniture, clothing merchants, construction companies all use job
costing method.
Answer to Question 2: Balance in WIP inventory as at 31 December
Concetta Ltd. has 3 jobs as opening Work In process Inventory as on 30 November. These
were CC723 for 20,000 units, CH291 for 15,000 units and PS812 for 25,000 units. The
company was able to complete and transfer 20,000 units of Job No CC723 and 15,000 units
of Job No CH291 in the month of December. This indicates that the company had 25,000
units of PS812 still in WIP account as at 31 December.
The cost of the balance WIP inventory account as at 31 December will be the opening WIP
cost plus the additions made to the job in the month of December in terms of raw material
and parts, labour cost and manufacturing overhead.
The allocation of manufacturing overhead in the company is done based on the pre-
determined overhead rate computed on the basis of total machine hours (900,000) used by the
company. The predetermined overhead rate is calculated as under:
Computation of pre-determined Overhead Rate
Total manufacturing overhead budget $4,500,000
Total Machine Hours 900,000
Therefore, pre-determined overhead rate
(Total Overhead / Total Machine Hours)
$5
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Assessment 3: Concetta Ltd.
Based on the above predetermined overhead rate, the balance in Work in process inventory
account as at 31 December can be computed as below:
Computation of Ending WIP - 31/12
Particulars Amount Amount
Opening Balance as on 11/30 $2,50,000
Add: Additions in December
Raw Material $1,24,000
Purchased Parts $87,000
Labour Cost $2,00,500
Manufacturing Overhead
(19,500 * $5/hr)
$97,500 $5,09,000
Balance in Work in process inventory account as at 31/12 $7,59,000
Thus, the balance in Work in process inventory account as at 31 December is $759,000.
Answer to Question 3: Cost of Chairs in Finished Goods inventory as at 31 December
Chairs or the Job No CH291 was at WIP stage as at 30 November, additions were made to it
and there were some units that were sold. We will first calculate the no. of units which are in
the inventory as Finished Goods as at 31 December
Units of Chair in Finished Goods as on 12/31
Particulars Amount
Finished goods inventory as on 11/30 19,400
Add: Units Completed during the month 15,000
Units available for sale 34,400
Less: No. of units sold during the month 21,000
Thus, Ending inventory 12/31 in units 13,400
This reveals that the company had a total of 13,400 units as Finished goods inventory on 31
December. The company is using FIFO or the First-In First-Out method to discharge units.
The FIFO method envisages that the sales of 21,000 units were first made from the beginning
inventory of 19,400 and balance from the units completed during the month.
This also means that the ending inventory has units that are from the units that have been
completed in December. So, to know the balance of the finished goods inventory, we will
compute the cost of goods manufactured in December.
Units of Chairs Completed in December
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Assessment 3: Concetta Ltd.
Particulars Amount Amount
WIP Inventory as on 11/30 $4,31,000
Add: Additions in December
Raw Material, $3,000
Purchased Parts $10,800
Labour Cost $43,200
Manufacturing Overhead
(4,400 * $5/hr)
$22,000 $79,000
Total Cost of the Chairs in the month $5,10,000
With a total cost $510,000 the company was able to produce 15,000 units. Per unit cost of
production thus works out to be $34 per unit ($510,000/15,000). Since, ending inventory has
units that are from the units that have been completed in December, the cost of the chairs in
the finished goods inventory is no. of units in inventory as finished goods multiplied by the
per unit cost. The cost of chairs in finished goods inventory = 13,400 units * $34 per unit =
$455,600.
Thus, the cost of the chairs in Concetta’s Finished Goods Inventory as at December 31 is
$455,600.
Answer to Question 4: Overapplied or Underapplied Overhead
Overapplied or Underapplied Overhead occurs when the overhead that has been applied by
the company over the products based on the pre-determined overhead rate is different from
the actual overhead. When the actual overhead is less that the overheads that has been
applied, the overhead is said to be underapplied and vice versa is true for overapplied
overheads.
The company has a policy of using machine hours as a base for allocation of overhead. The
predetermined overhead rate for the company is $5 per machine hour. The company worked
total machine hours of 830,000 from January to November and 49,900 hrs in December.
Thus, the total machine hours worked = 830,000 + 49,900 = 879,900 machine hours
Based on pre-determined overhead rate of $5/machine hr, the total overhead that was applied
during the year by the company is $5 per hour * 879,900 machine hours = $4,399,500.
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Assessment 3: Concetta Ltd.
Further, the actual overhead for the company from January to November is given as
$4,140,000 and the overhead incurred for the month of December is $252,000. Thus, the total
overhead incurred by the company during the year = $4,140,000 + $252,000 = $4,392,000.
Against the total overhead incurred of $4,392,000, the company on the basis of machine
hours have been able to apply total overheads of $4,399,500. Since, the actual overhead
incurred is less than the total overhead applied, the company has over applied overheads to
the tune of $4,399,500 - $4,392,000 = $7,500.
Concetta Ltd. over applied overhead to the tune of $7,500.
Answer to Question 5: Accounting Treatments of Over or Underapplied Overhead
The difference between the overheads incurred and applied must be written off at the end of
the year while closing the books of account for the company. The difference between the
overheads incurred and applied can be either significant or marginal. The accounting
treatments for both these are different and distinct.
1. Treatment of Marginal Over or Underapplied Overhead
Generally, the differences are not huge and the marginal under or over application is closed
or written off by simply adjusting the difference to the cost of goods sold in the current year.
Under or over application of overheads has happened in the current year and thus the
difference must have misappropriated the cost of goods. Adjusting the difference to the cost
of goods sold balances the cost and reflects accurate costs.
It is possible only when the difference is marginal as adding huge differences to the cost of
goods sold will increase the cost of goods sold and lead to high cost and thus lower
profitability.
2. Treatment of Significant Over or Underapplied Overhead
When the difference between the overheads incurred and applied are significant, the under or
over applied overhead is allocated to all the products that was worked upon inluding Work In
Progress units, Finished Goods units and units sold.
The above are two distinct methods of allocating the over or under applied overheads.
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Assessment 3: Concetta Ltd.
Answer to Question 6: ABC vs Existing Costing System
The company’s existing costing system allocates the overhead to the product using a single
plantwide rate computed on the basis of machine hours worked in the company. This single
plantwide rate is computed using the total overheads and total machine hours used by the
company. This is also known as job costing method
The inherent deficiency of the above system is that it allocates cost in one single basis which
leads to inaccurate costing of the products. The use of ABC eliminates this by allocating cost
based on each activity worked and usage of each such activity by the products manufactured
in the company.
Currently Concetta Ltd. is using a pre-determined overhead rate based on machine hour. This
is allocating the overheads based on machine hour used by the products. But the fact is that
not all products use the same resource of the company and thus allocating overheads
uniformly is not the right approach. The use of ABC eliminates this problem as this method
allocates overhead cost based on the resource usage by the products of the company.
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Assessment 3: Concetta Ltd.
References
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