Brief Description of Product Costing System and its Purpose

Discuss about the Case Study for Seafarer Kayaks.
 

A company named Seafarer Kayaks is in need of an accountant as their incumbent accountant has met with an accident and cannot perform his tasks until full recovery. All the data of the company will not be available to the accounting firm due to high security. The company is looking for someone who can get the accounting for the company back on track and running until their accountant returns. Also this report seeks to explain the importance of standard costing and why the company need to implement it. The company doesn’t recognise the need to implement such system and the importance of product costing for deciding the price. This report is prepared keeping in mind such issues prevailing at Seafarer Kayaks.

Product costing is the process of allocating costs to the activities of production and inventory. Product costing is an important process for manufacturers. There are several methods of costing used by manufacturers as per their need for simplicity, accuracy, project tracking, decision making, and project development.Accuracy- It refers to the accuracy with which the company can trace its overheads with the cost of the project and the expense related to inventory(Lacoma , n.d). With the help of product costing analysis the company can get accuracy especially when it comes to variable expenses. It helps in matching the costs with the activities that create value in the business. Project tracking- It refers to the process of allocating budget to the different stages of a project and keeping a vigil over it in order to trace whether the expenses are creating enough value to match the expectations or not. It becomes important to have costing process in any project, without which it will be difficult to analyse cash flows and the success of the project. For greater accuracy, costing can segregate costs among different teams and departments. Decision Making- Every decision made by a project manager revolves around the return on investment and the profit that can be derived out of it. Such decisions cannot be made without ascertaining costs. For example, when using Absorption costing, a project might not look beneficial if it does not add to profits. The same project, when analysed through variable costing, will be accepted as profitable as it might be adding only variable costs and no increase in the fixed costs in the business. Project Development- It means the introduction of several products in the product line of the project. Product costing is extremely useful in adding new products to the existing line or recreating the current products. With the help of costing the manager will be able to assign costs related to specific material, design, features etc.

Schedule of Cost of Goods Manufactured

AASB102 pertains to inventories and its valuation. It explains that the value of inventory should be recorded at cost or Net Realisable Value (NRV), whichever is lower. The company must have bifurcation of all the products in order to value the cost of inventory. It means the AASN 102 wants the company to follow the product costing system where they can assign costs related to specific products from the line of products. (Chartered Accountant, 2015)

Items excluded from the schedule:

The above expenses are excluded from the schedules as these are incurred during sales of the products which occur after the manufacturing process is over. The above prepared schedules pertain only to the manufacturing activity.

Overhead applied during the year

Overheads applied during the year = Direct labour hours * Overhead Rate per DLH

                                                        = 850                           * $63

                                                        =$53,550

Total of Actual Indirect/Overhead Costs for the year;

Actual Indirect/Overhead costs for the year

Over- or under-applied overhead based on the actual versus the applied overhead during the year.

Under applied overheads: ii. – i.

                                    =$57,100 – $53,550

                                    =$3,550 

Journal entry to dispose of any imbalance/differences.

Journal Entry to dispose the imbalances of under applied overheads:

Indirect costs are referred to as overheads. In Traditional Costing Method, overheads are determined using several drivers which are also used in deciding the price of the product. Any actual overhead is more than the expected/predetermined overhead; it is identified as under absorbed cost. Similarly if any actual overhead is less than the estimated overhead, it is identified as over absorbed cost.

Journal entry to eliminate the Over Applied Overhead

Journal entry to eliminate the under Applied Overhead

Standard costing system is an important concept in cost accounting. These are costs associated with the manufacturing concern’s direct, indirect and manufacturing overheads.

Instead of allocating the real cost of the direct material, managers use standard or estimated costs. It means that the costs of goods sold will reflect estimated and not actual costs of the product. Although the payment is done at actual costs. (Averkamp, n.d) Due to this, there exists a difference in the standard and actual cost. This difference is known as variance.

This tool of variance and standard costing is valuable for manufacturing units. The manager will know that the project is not going as per the anticipated route if he finds variance in costing. There are two types of variances:

1. Favourable variances: These occur when the actual costs are lower than standard costs. It means that, if the project continues to perform this way, the profits at the end will be higher than estimated.
2. Unfavourable Variances: These occur when the actual costs are higher than the standard costs. It tells the managements that corrective measures need to be taken to control the costs in order to achieve the desired profit.

It is known that Seafarer Kayaks are into manufacturing business. They have a product line to cater needs of kayakers. In order to keep control on the cost of these products, they need to set certain bar/ceiling of expenses. They can set standards to compare actual performance. By doing this, the management will know exactly where the costs are acting beyond anticipation. Such costs, if controlled can lead to decrease in overall cost of the product.

Owners of Seafarer Kayaks can make use of the variance tool to measure whether the manufacturing process has favourable or unfavourable variances. Against Normal costing, standard costing offers many features which can be very useful in their business to exercise greater control over cost of product. (Kumar ,2009) 

References 

H Averkamp, n.d., Introduction to Standard Costing, [Online], Available at: https://www.accountingcoach.com/standard-costing/explanation, Accessed Date: 16/09/2016

V Kumar V, Oct 2009, Introduction to Standard Costing, [Online], Available at: https://www.svtuition.org/2009/10/importance-of-standard-costing.html, Accessed Date: 16/09/2016

Lacoma T, n.d., The Advantages Product Costing offers in Financial Accounting, [Online], Available at: https://smallbusiness.chron.com/advantages-product-costing-offers-financial-accounting-24883.html, Accessed Date: 16/09/2016

Chartered Accountant, Feb 2015, AASB 102 INVENTORIES, [Online], Available at: https://www.charteredaccountants.com.au/Industry-Topics/Reporting/Australian-accounting-standards/Analysis-of-AASB-standards/AASB-102–Inventories?standard=, Accessed Date: 16/09/2016

Cliffnotes, n.d., The Cost of Goods Manufactured Schedule, [Online], Available at: https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-ii/managerial-and-cost-accounting-concepts/the-cost-of-goods-manufactured-schedule, Accessed date: 16/09/2016

Bragg S, May 2013, What is a cost of Goods Sold Statement? [Online], Available at: https://www.accountingtools.com/questions-and-answers/what-is-a-cost-of-goods-sold-statement.html, Accessed Date: 16/09/2016