Assessment Item 2: Role of Cost Control in Managing Production

This report, designed for a Management Accounting course, meticulously examines the critical role of cost control in production management. It begins by exploring job costing, providing detailed calculations and analysis, and then progresses to process costing, including comprehensive process cost summaries and unit cost calculations. The report then delves into joint costing, offering decision-making scenarios and calculations to determine optimal selling strategies. A significant portion is dedicated to variance analysis, with in-depth explanations and calculations of direct material and labor variances, alongside a business report summarizing the findings. The report concludes with a thorough examination of budgeting, presenting sales, purchase, and inventory budgets, as well as a budgeted income statement and statement of retained earnings, demonstrating the financial impact of effective cost control. The assignment provides a practical application of cost accounting principles.

Role of cost control in managing the production - Assessment item 2
Management accounting Cost & control
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Role of cost control in managing the production - Assessment item 2
Table of Contents
Solution 1 Job costing.................................................................................................................................3
Solution 2 Process costing...........................................................................................................................6
Solution 3 - Joint costing - decision making..............................................................................................10
Solution 4 Variance analysis.....................................................................................................................12
Solution 5 Budgeting.................................................................................................................................16
Bibliography..............................................................................................................................................19
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Role of cost control in managing the production - Assessment item 2
Solution 1 Job costing
Predetermined Overhead Rate = 12,000
3,000
4.00 per Direct Labour hour
Direct Material
Control
15055 3210
6155
7000
25000
28210 28210
Work In Process
6700 30110
3210
14800 1200
14800 7000
1200
39510 39510
Finished Goods
8790 30000
30110
8900
38900 38900
Accounts Payable
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Role of cost control in managing the production - Assessment item 2
6700 2345
1800 6155
(Purchase of Direct
Material)
8500 8500
Cost of Goods Sold
30000
The great Pyramid of Giza if would have constructed now it would have tough to reconstruct the
pyramid even after presence of modern technologies and machinery. It took around 20 years in
the past around 4500 years back to complete the structure. According to the experts and civil
engineers it would take around $5 billion in the present terms to complete the structure.
According to the accurate data of the structure the pyramid is around 756 feet in length and 481
feet in height. The pyramid was originally built with the help of around 4000 workers in a time
span of 20 years but now with the advanced technology and availability of cranes and helicopters
it would be completed in 5 years time and would take around 1500 to 2000 workers help.
However economist do not find economical to build such a structure in present time due to cost
benefit analysis. The same cost if would have incurred in constructing a building then it would
have resulted in better outcome and facilities for the public. While making comparison the One
World Trade Centre was constructed within the lesser cost if it would have incurred to develop
Giza Pyramid (Wolchover, 2012).
Cost benefit analysis
Cost incurred in building
Pyramid of Giza - $5 billion
One World Trade Centre - $4 billion
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Role of cost control in managing the production - Assessment item 2
Pyramid of Giza One World Trade Centre
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Role of cost control in managing the production - Assessment item 2
Solution 2 Process costing
Process 1.
Process Cost Summary
For Month Ended may. 31
Particulars Details $ Amount
$
Costs charged to production
Costs of beginning goods in
process
Direct materials 3,000
Conversion 2,000 5,000
Costs incurred this period
Direct materials 30,000
Conversion 60,000 90,000
Total costs to account for 95,000
Unit cost information
Units to account for Units accounted for
Beginning goods in process 2,000
Completed & transferred
out
7,
00
0
Units started this period 6,000 Ending goods in process
1,
00
0
Total units to account for 8,000
Total units accounted
for
8,
00
0
Direct Convers
ion
Equivalent units of production Materials
Units completed & transferred
out 7,000 7,000
Units of ending goods in process 500 500
Equivalent units of production 7,500 7,500
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Role of cost control in managing the production - Assessment item 2
Cost per EUP Direct Conversi
on
Materials
Cost of beginning goods in
process 3,000 2,000
Costs incurred this period 30,000 60,000
Total costs 33,000 62,000
÷ EUP 7,500 7,500
Cost per EUP
$
4.40
$
8.27
d.
Calculation
of costs
transferred
to finished
goods
Cost assignment and
reconciliation
Costs transferred out to finished
goods
Direct materials 30,800
Conversion 57,867 88,667
Costs of ending goods in
process
Direct materials 2,200
Conversion cost 4,133 6,333
Total costs accounted for 95,000
Process 2
Production Cost Report
Costs Charged to Production
Costs of beginning goods in
process
Transferred In 8,000
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Role of cost control in managing the production - Assessment item 2
Direct materials 3,000
Conversion 4,000
1
5,000
Costs incurred this period
Transferred In -
Direct materials $35,000
Conversion 45,000
8
0,000
Total costs to account for 95,000
Unit cost information
Units to account for
Beginning goods in process 1,000
Units started this period 7,000
Total units to account for 8,000
Units accounted for
Completed and transferred out 7,250
Ending goods in process 750
Total units accounted for 8,000
Transferr
ed In Direct Conversion
Equivalent units of production
Materia
ls
Units completed & transferred
out 7,250 7,250 7,250
Units of ending goods in process 750 750 225
Equivalent units of production 8,000 8,000 7,475
Cost per EUP
Transferr
ed In Direct Conversion
Materia
ls
Cost of beginning goods in
process 8,000 3,000 4,000
Costs incurred this period - 35,000 45,000
Total costs 8,000 38,000 49,000
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Role of cost control in managing the production - Assessment item 2
÷ EUP 8,000 8,000 7,475
Cost per EUP
$
1.00
$
4.75
$
6.56
d.
Calculation
of costs
transferred
to finished
goods
Cost assignment and
reconciliation
Costs transferred out to finished
goods
Transferred In
$
7,250.00
Direct materials 34,438
Conversion 47,525 89,213
Costs of ending goods in
process
Transferred In 750
Direct materials 3,563
Conversion cost 1,475 5,787
Total costs accounted for 95,000
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Role of cost control in managing the production - Assessment item 2
Solution 3 - Joint costing - decision making
Required: (a) If A was allocated $187 500 of the joint production costs under the net
realisable value method, what was the selling price of D?
Total Joint Cost 250000
Less Allocated to A -187500
Joint Cost of B 62500
Add Further Processing Cost 25000
Total Cost 87500
Quantity Produced 40000
Selling Price of D 2.19 Per Kg
(b) Suppose the firm receives an offer to buy all of product A for $2 per kg at the split-off
point. Would the firm be better off selling A or processing further to produce C? By how
much?
After Processing
Selling Price of A 4.5
Less Selling Price at Split - off Point 2
Additional Selling Price 2.5
Less Additional Processing Cost -0.75
Additional Benefit 1.75
At Split -off Point
Selling Price of A 2
Less Joint Cost -3.13
Net Loss -1.13
It would be beneficial for the firm to sell after processing further as
it results in
additional benefit of 1.75 Per Kg
Required: (a) If A was allocated $187 500 of the joint production costs under the net
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Role of cost control in managing the production - Assessment item 2
realizable value method, what was the selling price of D?
Total Joint Cost 250000
Less Allocated to A -187500
Joint Cost of B =C9+C10
Add Further Processing Cost 25000
Total Cost =C11+C12
Quantity Produced 40000
Selling Price of D =C13/C14 Per Kg
(b) Suppose the firm receives an offer to buy all of product A for $2 per kg at the split-off
point. Would the firm be better off selling A or processing further to produce C? By how
much?
After Processing
Selling Price of A 4.5
Less Selling Price at Split - off Point 2
Additional Selling Price =C21-C22
Less Additional Processing Cost =-45000/60000
Additional Benefit =C23+C24
At Split -off Point
Selling Price of A 2
Less Joint Cost =-187500/60000
Net Loss =C28+C29
It would be beneficial for the firm to sell after processing further as it results in
additional benefit of 1.75 Per Kg
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Role of cost control in managing the production - Assessment item 2
Solution 4 Variance analysis
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Direct Material Price Variance
=Actual quantity
(Actual price- Std. price) AP SP
6.2 6
=220000($6.20 -$6)
= $44000 (UF) UF
Direct Material Usage Variance
= Std. Price (Actual
Quantity -Std. Quantity) AQ SQ
197000 214500
= $6(197000 -
11*19500)
= $17,500 (F) F
(b) Total direct labour cost variance
Actual Direct labour cost -
Standard Direct Labour Cost
1950 = Actual Direct Labour Cost -
39000 *10
Actual Direct Labour Cost 781950
Per Hour 19.54875
Direct labour rate variance
= Ah * (AR-SR) AR SR
19.54875 20
= 40,000 hrs
($19.54875 - $ 20.00)
=$18050 (F) F

Role of cost control in managing the production - Assessment item 2
Direct labour efficiency variance
= SR *(AH-SH) AH SH
40000 39000
= $20 (40,000 -
19,500 *2)
=$20,000 (UF ) UF
B. Business Report
Executive Summary
The comparison of actual performance with standard performance results in variance. A variance
means the deviation of the actual result from the standard result. Variance analysis helps in
assisting a company in understanding their cost structures. Variance analysis helps the
management in pinpointing the areas where performance is above or below expectation. If the
variance is unfavorable then it helps the management to control the costs. Suppose if the direct
material price variance is unfavorable then it helps the management to control the price of the
material and if it is favorable then it helps the management in deciding that they can purchase
further material and production can be controlled.
BODY OF CONTENT:-
Variance Analysis is mostly used in Business management.
Material price arises due to change in standard price and actual price. Standard price is more than
actual price at which material is purchased therefore giving rise to positive price variance
(Edwards-Nutton, 2008).
Material quantity variances arise due to change in material quantity used in production as against
standard determined. When material quantity in actual is greater as compared to standards
determined it gives rise to material quantity unfavorable variance
To whom it is to be reported
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Role of cost control in managing the production - Assessment item 2
a) Direct material price variance should be reported to the purchasing manager who is responsible
for negotiating the good price for the company. Therefore Purchasing manager is usually
responsible for it.
b) Direct material quantity variance must be reported to the production manager and therefore the
production manager is usually responsible for this
Labor rate variance has been defined as the difference between the
(Actual Rate – Standard rate) * Actual hours Worked
Whereas Variable Overhead efficiency variance has been defined as the difference between the
(Standard Hours –Actual Hours) * Standard Rate
There may be an unfavorable rate variance and favorable variable overhead variance. The single
reason is that higher wages have been paid to the workers to increase the efficiency of the
workers .When actual wages are paid at higher rate it will result in unfavorable direct labor rate
variance and on the other hand when wages are paid at higher rate to improve the efficiency of
the workers it will result in favorable variable overhead variance because when more wages are
paid then the workers will take less hours to produce the product resulting in favorable variable
overhead variance (Putra, 2008).
To whom it is to be reported
a) Since rate variances generally arise as a result of how labor is used, production supervisors bear
responsibility for seeing that labor price variances are kept under control (SIDDIQUI, 2016).
b) The manager in charge of production is generally considered responsible for labor efficiency
variance. However, purchase manager could be held responsible if the acquisition of poor
materials resulted in excessive labor processing time (Putra, 2008).
CONCLUSION
Therefore, in this way variance analysis assist a company in understanding their cost structures
in their operations.
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Role of cost control in managing the production - Assessment item 2
It is very important to develop the dependable estimates because on the basis of these standards it
becomes easy for the management to compare their actual performance with the standard
performance and if any deviation occurs from the standards then it takes steps to control the
deviations. This results in improving the managerial effectiveness and efficiency.
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Role of cost control in managing the production - Assessment item 2
Solution 5 Budgeting
- Sales budget
Particulars 20X3 20X4 20X5 20X6 20X7
Budgeted Unit
Sales 32,400 34,992 37,791 40,000 40,000
Budgeted Unit price 6.630 6.968 7.384 8.127 8.775
Budgeted Total
Dollars 214,812 243,824 279,051 325,080 351,000
Purchase budget
Particulars 20X3 20X4 20X5 20X6 20X7
Budgeted Unit
Sales 32,400 34,992 37,791 40,000 40,000
Add Desired
Ending inventory 5,249 5,669 6,000 6,000 6,000
Total Estimated
Units Required 37,649 40,661 43,791 46,000 46,000
Less finished
Goods Beginning
Inventory (3,600) (5,249) (5,669) (6,000) (6,000)
Units to be
purchased 34,049 35,412 38,123 40,000 40,000
Per Unit 5.1 5.36 5.68 6.02 6.5
Total Purchases 173,649 189,808 216,537 240,800 260,000
Inventory Budget
Purchases Unit Price Sales Balance
Year Per Unit Amount
20X2 4.9 3600 17640
20X3 34,049 5.1 32,400 5,249 26,769
20X4 35,412 5.36 34,992 5,669 30,384
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20X5 38,123 5.68 37,791 6,000 34,080
20X6 40,000 6.02 40,000 6,000 36,120
20X7 40,000 6.5 40,000 6,000 39,000
Budgeted Income
Statement
Sales 214,812 243,824 279,051 325,080 351,000
Less Cost of Goods
Sold
Opening Inventory 17640 26,769 30,384 34,080 36,120
Purchases 173,649 189,808 216,537 240,800 260,000
Goods Available
For Sale 191,289 216,577 246,921 274,880 296,120
Less Closing
Inventory (26,769) (30,384) (34,080) (36,120) (39,000)
Cost of Goods
Sold 164,520 186,192 212,841 238,760 257,120
Gross Profit 50,292 57,632 66,210 86,320 93,880
General &
Administrative
Expenses 30,074 34,135 39,067 45,511 49,140
Net Income 20,218 23,496 27,143 40,809 44,740
Less Tax 8,087 9,399 10,857 16,324 17,896
Net Income after
Tax 12,131 14,098 16,286 24,485 26,844
Statement of
Retained Earnings
Opening Balance 3500 7,746 12,680 18,380 26,950
Add Net Income
after Tax 12,131 14,098 16,286 24,485 26,844
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