Management Accounting Report: Costing Analysis for Fantori Ltd

This report analyzes the costing methods used by Fantori Ltd, a sewing machine manufacturer, to determine why an overseas buyer is only interested in the advanced model. The report compares the traditional costing system, currently used by the company, with Activity Based Costing (ABC). It calculates the cost per unit for both models under both costing methods, revealing significant differences that could explain the buyer's preference. The report also examines the impact of each costing method on the operating income, and discusses the importance of accurate product costing for financial statements and decision-making. Furthermore, it explains the concept of overhead, including over/underapplied overhead and its accounting treatment, providing a comprehensive overview of the company's costing challenges and potential solutions. The report concludes by demonstrating the accounting entries for over and under applied overhead.

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student
Name of the University
Author’s Note
Table of Contents

1MANAGEMENT ACCOUNTING
Answer to Question 1..........................................................................................................2
Answer to Question 2..........................................................................................................2
Answer to Question 3..........................................................................................................3
Answer to Question 4..........................................................................................................5
Answer to Question 5..........................................................................................................7

2MANAGEMENT ACCOUNTING
Answer to Question 1
The calculation of the cost per unit of the two sewing models as per the traditional
costing system can be seen as $ 4.9 and $ 2.8.
1) Cost per unit of the two models of sewing machines
under the current traditional costing system
Basic
Model
Advance
Model Total
Units
produced and
sold 1700 1600 3300
Direct material
cost per unit 350 580
Direct Labour
cost per unit 175 280
Sales
Revenues 595000 928000 1523000
Direct Costs
Direct labour
costs 297500 448000 745500
Direct
materials cost 595000 928000 1523000
Total Direct
costs 892500 1376000 2268500
Cost Per unit 4.9 2.8
Answer to Question 2
The computation of cost per unit under Activity based Costing can be depicted as $ 14
and $2.
2) Calculation of cost per unit of the two models of sewing machines under
Activity based Costing
Particulars
Basic
Model
Advance
Model Total

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Units Produced and Sold $1,700 $1,600 $3,300
Selling price/unit $120 $648
Direct Labour cost per unit $175 $280
Direct material cost per unit $350 $580
Sales Revenues $204,222 $1,037,326 $1,241,548
Direct Costs
Direct Labour Costs 297500 448000 $745,500
Direct material costs 595000 928000 $1,523,000
Total Direct Cost 892500 1376000 $2,268,500
Cost Per unit 14 2
Activity Pool
Basic
Model
Advance
Model
Total
Indirect/Overhead
cost
Activity
Rate
Basic
Model
Activity
Rate
Advance
Model
Inspection 210 760 30000 143 39
Assembly 4700 3500 100000 21 29
Production scheduling 60 510 110000 1833 216
Machine Set-up 120 270 40000 333 148
Activity Rate 280000 120 648
Answer to Question 3
As per the computation of the operating income of both Basic Model, Advance Model
with traditional income statement and ABC analysis it can be seen that the Advance Model is
more preferable. It can be further discerned that the operating income for Advance model is more
even after an additional 30% of price on the selling price for the overseas buyers (Weygandt
Kimmel and Kieso 2015).
It needs to be seen that calculating the finances of the company is identified to be crucial
with financial statements and tax filings. The importance of the accurate product costing may be
inferred with budget impact, income statement, considerations, assets and inventory. In terms of
income statement, the accuracy is identified in terms of product cost and COGS. The cost on
each product sold is seen to be subtracted from the total revenues which is earned in the

4MANAGEMENT ACCOUNTING
accounting period for producing a net revenue figure. In case the calculations pertaining to the
product cost calculations are inaccurate then the actual net revenue figure may be lower or higher
than the reported figure. The accuracy in the computation is also seen to be important for
reporting of the direct costs of the product. In case an individual fails to calculate the product
cost then the inventory value may be inaccurate. As per the total percentage of error in the
calculation there may be error pertaining to asset reporting. Therefore, the assets of the company
are seen to be an important factor for the purpose of seeking finances and investment (Dale and
Plunkett 2017).
Calculation of Product Cost
(a) Traditional Income Statement of Fantori Ltd
Basic
Model
Advanc
e Model Total
Sales 595000 928000 1523000
Material Costs 455 754 1209
Direct Labour 227.5 364 591.5
Overhead 280000 280000 560000
Total Operating
Cost 383500 383500
Total Operating
income 314317.5 646882
961199.
5
(b) ABC Analysis of Fantori Ltd
Basic
Model
Advanc
e Model Total
Sales 204222
103732
6 1241548
Material Costs 455 754 1209
Direct Labour 227.5 364 591.5
Total Operating
Cost 383500 383500
Total Operating
income 203539
103620
8 1239747

5MANAGEMENT ACCOUNTING
Answer to Question 4
In the context of accounting overhead is referred to the indirect manufacturing costs.
These costs are seen with manufacturing costs other than direct labour and direct material. The
actual overhead is inferred as the indirect manufacturing costs which have practically occurred or
recorded. These are seen to be inclusive of the manufacturing costs such as maintenance, costs of
electricity, property tax and water. The applied overhead is inferred with the indirect
manufacturing costs which are assignable to the manufactured goods. Henceforth, it needs to be
seen that the manufacturing overhead is seen to be assigned usually with allocated using a
predetermined annual rate of overhead. As the future overhead costs and future number of the
machines are unknown, the actual machine hours will not be occurring in a uniform manner. In
this case there may be considerable difference between the amount of overhead applied to the
manufactured goods and actual overhead costs incurred (Gritsenko and Skorba 2015). The three
main ways to deal with the over/underapplied costs are stated as follows:
Determining the causes of over/underapplied manufacturing overhead
Unlike the different types of the components associated to job costing like manufacturing
overhead, labour and material cost the over/underapplied manufacturing overhead is based on
thee predetermined overhead rate. The underapplied overhead may be further occurring in case
the overhead rate computation is not accurate as per the initial estimate of a task.
Accounting Treatment of the over/underapplied manufacturing overhead
The common treatment in accounting is seen to be applicable with the COGS pertaining
to the manufacturing overhead. This shows that the actual cost of the producing the goods sold
was higher than it was anticipated initially. As the manufacturing overhead account is in a debit

6MANAGEMENT ACCOUNTING
position there may be another entry required pertaining to the balance the books. In such a case
the manufacturing overhead may be balanced to zero (Weygandt, Kimmel and Kieso 2015).
Reasons of over/underapplied manufacturing overhead
The applied overhead is considered with inclusion of the indirect manufacturing cost
which are assigned to the goods which are manufactured. The manufacturing overhead is usually
applied, located and assigned based on a predetermined overhead rate which is computed
annually. As the future overhead cost is often not known and since the rate of overhead cost will
not occur uniformly there is always a difference between the actual cost of overhead incurred
and actual amount of overhead applied for a manufactured good (Keller 2015). Some of the main
reason of increased manufacturing overhead cost may be depicted with labour cost, facilities
cost, resources and increased production in general. This is possible in case certain
manufacturing department is expected for increasing the production in a particular quarter or
month and decides to increase the costs on a proportionate basis. Due to the indirect relationship
among production cost per unit and individual cost of production it may not be possible for
estimating the departments funding needs in case there is changing volume of production
(Yorgure 2015).
As a certain task progresses the actual rate of overhead is usually recorded in the debit
side of the manufacturing overhead account. Additionally, the overhead costs are multiplied as
per the predetermined overhead rate and at the same time recorded in the credit side under the
work in progress inventory and this acts as a balancing entry. As the products are sold the COGS
increases to a considerable level (Heintz and Parry 2016). The underapplied manufacturing
overhead may take place when the actual overhead exceeds the overhead which is applied with
the job. As there is progress in job, the actual word amount is entered in the debit side of
manufacturing overhead account. Furthermore, the more it costs are depicted to be multiplied

7MANAGEMENT ACCOUNTING
with predetermined overhead rate on the credit side under the work in process inventory account.
This is done in order to balance the entry. As the products are sold, there is an increasing cost of
goods sold. The under applied manufacturing overhead takes place when the actual overhead
exceeds the overhead amount applied to a particular job. The most common treatment for under
applied overhead can be depicted with closing the cost of goods sold account (Triyuwono,
Chandra and Asri 2018).
This treatment in the accounting entry shows that the actual cost incurred to produce the
items where higher than it was initially anticipated. As the manufacturing over and the account is
seen in the debit position it is necessary to implement and other entry to balance the books in
order to credit the amount for cost of goods sold. The overall adjustment made in the
manufacturing overhead should balance to 0. The main impact of under applied manufacturing
overhead can be identified when there is an increase in the cost of goods sold. In such a situation,
there is a reduction in the value of net income as there is less profit obtained from the sale of the
products. Several critics of accounting who are involved in under application of manufacturing
overhead have stated that it should be recorded on the income statement as per the cost of unused
capacity for making the adjustment process less intricate in nature (Pleis 2016).
Answer to Question 5
When overhead is over-applied:
Account Name Debit Credit
Work in
Progress 60500
Finished
Goods 90000
Cost of Goods
Sold -1000

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Manufacturing
Overhead 149500
When overhead is under-applied:
Account Name Debit Credit
Work in
Progress 60500
Finished
Goods 90000
Cost of Goods
Sold 89000
Manufacturing
Overhead 239500

9MANAGEMENT ACCOUNTING
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p.365.
Heintz, J.A. and Parry, R.W., 2016. College Accounting, Chapters 1-27. Cengage Learning.
Hermason, R., Edwards, J. and Maher, M., 2016. Accounting Principles: Managerial
Accounting.
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Khan, M., 2015. Accounting: Financial. In Encyclopedia of Public Administration and Public
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Pleis, L.M., 2016. Cost Accounting: Linking Necessary Concepts. Business Education
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Wiley & Sons.

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