ACC-512: Management Accounting For Costs And Control - Manufacturing Statement And Income Statement -Assessment Answer

Management Accounting For Costs and Control Assignment

Case Scenario

The purpose of Assessment item 1 is to establish the skills needed in the workplace for costing products and services using the appropriate processes and tools and apply analytical processes to construct accounting systems and models using workplace tools. Each question uses realistic data and the professional practices similar to that found in workplaces.

Your assignment consists of different question styles including discussion questions, reports, exercises, problem questions and spreadsheet questions. It assesseslearning outcomesas listed in the assignment rationale below.

Assignment Task

1 Management accounting

Describe the three factors that drive management accounting work. Give examples

2 Control

What is meant by the control function of management accounting? Give examples

3 Cost concepts

Which of the following statement is false?

A. Cost accumulation to determine the cost of goods sold is an example of the control function of management accounting work.

B. Cost represents the value of resources consumed to achieve a specific objective.

C. A cost object is an activity for which a cost is required.

D. A cost driver is an activity that causes costs to change.

E. A variable cost varies proportionately with changes in the cost driver.

Explain your answer.

4 Manufacturing statement and income statement

Spreadsheet. See the Spreadsheet Advice PDF in Interact2 Resources and the examples in your textbook.

See the requirements within the spreadsheet template below.

Check the assignment requirements below paying particular attention to the spreadsheet requirements. Ensure you have separate data and report areas showing only formulas. Use IF functions to allow for the possibility of either a net income or a net loss. Show row and column headings and paste both a normal view and a formula view.

The following information has been obtained from the books of Ponting Manufacturing Co. Ltd at 30 September, 20X7:

Inventories, 30/9/X6:

Finished Goods $300 000

Raw Materials 500 000

Work in Process: Material 80 000 Labour 30 000 OH Expense 20 000

Inventories, 30/9/X7:

Finished Goods 120 000

Raw Materials 70 000

Work in Process: Material 30 000 Labour 20 000 OH Expense 10 000

Summary of transactions for year

Raw material purchases 2 000 000

Inward Charges on raw materials 80 000

Direct labour 660 000

Manufacturing expense 200 000

Sales of finished goods 6 000 000

Advertising 45 000

Audit Fee 3 000

Discounts to debtors 10 000

Discounts from creditors 8 000

Cartage Outwards 20 000

Insurance 15 000

Light and power (Office) 28 000

General Expenses 25 000

Rates 30 000

Salaries (Office) 450 000

Salaries (Factory) 550 000

Travellers' Commission 150 000

Adjustments are to be made in respect of the following:

(a) Accrued expenses: Salaries (Office) $2000, Salaries (Factory) $3000

(b) Insurance paid in advance, $500

(c) Estimated taxation liability for current year, $340 000

(d) Depreciation of factory plant, $25 000

(e) Insurance and rates are to be apportioned three-quarters to the factory and one-quarter to the office.

Required: Spreadsheet.

(a) manufacturing statement for the year.

(b) income statement for the year.

5 Cost concepts

"If a perpetual inventory system is used for recording movements of raw materials there is no need to conduct a physical stocktake."

Do you agree? Why?

6 Understanding the entries in the Materials Control account with GST

The Materials Control account balances were $20 000 on 1 August and $10 000 on 31 August. Raw materials issued to production during August cost $60 000. (All direct materials).

Required:

Show the Materials Control, Accounts Payable and GST Clearing accounts in the ledger for August and a general journal entry to record the cost of raw materials purchased (all on credit) during August, given that a 10% GST is paid on purchases.

6 Understanding the entries in the Accrued Payroll account

Salaries and wages payable to factory employees were $10 000 on 1 March and $4000 on 31 March. Gross salaries and wages paid during March totalled $40,000. March's direct labour totalled $18 000.

Required:

T-account for Accrued Payroll and general journal entries for recording salaries and wages earned by, and paid to, factory employees during March.

7 Payroll entries

The Ajax Company has a gross payroll of $20,000 per day. Withholdings for PAYG taxes are $6,000 per day. There are no other deductions from employees' earnings. The firm works five days per week, Monday to Friday inclusive. The payroll period covers Thursday to Wednesday inclusive and the payroll for the week is paid on the following Friday.

Gross payroll consists of $12 000 direct labour, $3000 indirect factory labour, $3000 selling expenses and $2000 general and administrative expenses each day. The following calendar should be used to answer the questions:

(a) What is the total amount to be credited to Accrued Payroll in respect of July earnings?

(b) If balance day adjustments are performed at the end of each month, what would be the balance in Accrued Payroll account at the close of business on July 31?

(c) Suppose that a single journal entry is made on the last day of each month to record the distribution of total labour costs for the month, but that entries are made each Friday to record payment of wages and withholdings. Also, PAYG taxes withheld are remitted to the Taxation Department at the end of each month.

(i) Show the weekly journal entry.

(ii) Construct the necessary ledger accounts to show all entries in respect of labour costs during the month of July.

8 Activity Based Costing

Your employer is contemplating changing the existing traditional costing systems used in the business to adopt activity based costing (ABC). See your text page 81.

Prepare a business report outlining the traditional costing system and evaluate arguments for and against ABC. Use the Internet as a resourceandacademic journal articles (about 400 words excluding references). The following CSU resource will help you prepare and format your

9 Service department cost allocation

Review the examples in your textbook.

Direct, step and reciprocal methods of overhead allocation: moderately difficult

A company has two production departments (Component Manufacture and Assembly) and two service departments (Staff Cafeteria and Materials Handling). The budgeted costs of these departments are:

The services of the Cafeteria are allocated according to the number of employees in the other departments: Materials Handling has 20 employees, Component Manufacture 50 employees and Assembly 40 employees.

The services of the Materials Handling department are allocated according to the number of budgeted requisitions per period. These are estimated as 30 for the Cafeteria, 40 for Component Manufacture and 30 for Assembly.

Required:

Allocate service department costs to the production departments using

(a) the direct method

(b) the step method

(c) the reciprocal services method.

You can choose if you wish to answer with a spreadsheet. Or not.

• Management accounting is affected by various factors. However, according to Avis (2008), following three man factors help in driving the management accounting.
• The primary purpose of management accounting is providing information to the management. Therefore, information requirement of management affects management accounting most. The information provided by management accounting is used by management for the purpose of decision making. Therefore, it is very essential that information provided by the management accountants is relevant to the management. For example, the management may require information about profitability of different products.
• The company operate with limited resources and it wants to utilize its resources optimally. This motivates management accountants to develop new tools and techniques to help cost control and cost reduction and increase profitability of the company. For example, management accounting can guide management which product it should manufacture with limited resources to achieve maximum profit.
• There have been continuous changes in technology and technological changes have changed information requirements of the management. The technology has prevented many difficulties and it has also created new vulnerabilities. The efforts of management accountants to meet changing requirement of management has resulted in new tools and techniques of management accounting. For example, many functions of management accountants are now performed by computer and software because of advancement in technology. This has motivated management accountants to find new avenues.

The control function of management consists of monitoring, measuring, evaluating and corrective steps undertaken by management accountants. In this process, the management accountants monitors and measures performance of employees. The performance is evaluated and corrective steps are taken for any adverse result. For example, standard costing is an example of controlling function of management accounting. In this system, standard costs are assigned to departmental managers on the basis of past results and expected level of activity. The actual cost is compared with past results to ascertain variances. If the actual cost is more than standard cost, variance is termed as adverse variance and if actual cost is less than standard cost, variance is termed as favourable. A detailed investigation is conducted for each type of variances and corrective steps are taken. This results in cost reduction. Thus, the primary purpose of control function of management accounting is to improve performance of employees (Mark, 2013).

1. True, cost accumulation is control function of management accounting.
2. True, cost represents value of resources consumed to achieve a specific objective.
3. False, a cost driver is an activity that for which a cost is required.
4. True, a cost driver is an activity that causes costs to change.
5. True, a variable cost varies proportionately with change in the cost driver.

According to Proctor (2006), in perpetual inventory system, inventory records are updated for each movement of inventory. Therefore, on a first note, it can appear that there is no need of physical verification of inventory in this system as inventory records are continuously updated. However, this is not correct. Physical verification of inventory is essential in perpetual inventory system also as physical inventory can differ from book inventory because of following reasons:

• Theft of Material
• Material received from supplier but not recorded in inventory records as invoice not received
• Material issued to production but left to be recorded in inventory records
• Wastage and Shortage of material

Thus, physical verification is necessary in perpetual inventory system also. Therefore, we do not agree with the statement that If a perpetual inventory system is used for recording movements of raw materials there is no need to conduct a physical stock take (Proctor, 2006).

In traditional costing system, overheads are allocated to products and services on the basis of machine hour or labour hour. The machine hours / labour hour does not represent correct way of allocating overheads. As overhead consists of major part of total cost of the company, incorrect overhead allocation can distort product costing of the company. The incorrect costing can lead to incorrect pricing decisions. The company may price few products too high (resulting in loss of sales) and it may also price few products too low (resulting in loss) because of incorrect costing data (Atkinson and Kaplan).

The activity based costing system has emerged because of this limitation of management accounting. In activity based costing system, costs are allocated to products and services on the basis of resource used by them. It gives recognition to the fact that different types of costs are affected because of different types of activities. Therefore, costs are allocated on the basis of activity used by the product / service. This results in accurate costing of products and services (Atkinson and Kaplan).

According to Garrison and Noreen (2014), the advantages of activity based costing system are as under:

• The primary advantage of activity based costing system is correct costing of products and services. The company can accurately allocate overheads to different products and services. This prevents cost distortions.
• The company can make correct pricing decisions by implementing activity based costing system. The price of products and services are generally determined by adding markup to cost. As activity based costing system provides correct costing, correct pricing decisions can be taken.
• The management can conducts detailed analysis of various types of costs as detailed cost data are available. This helps in cost controls and cost reduction.
• The management can conduct profitability analysis of different products as accurate costing is available. This analysis helps in focusing on profitable products.

According to Garrison and Noreen (2014), the activity based costing system also suffers from following drawbacks:

• Activity based costing system is not very useful for small companies as overheads are not major part of total cost for these companies.
• This costing system also does not have any use if the company is producing only one product / services.
• ABC system can increase costs of the company as detailed records are required for each cost and activity.
• The identification of cost drivers is subjective and it may be difficult to identify correct cost drivers in some cases.

Thus, it can be seen from the above discussion that there are various advantages and limitations of activity based costing. However, the management should implement this system as it will benefit the company in long run and its limitation is not very major considering its benefits.