Nt1310 Unit 1 Assignment
Cost Accounting Level -1 Sep - Jan 2014 Semester.
Module Name
Cost Accounting Level -1
Module Code
AC 02-1
Assessment No.
I Weighting 40 %
Assessment Type:
INDIVIDUAL
STUDENT MCUC NUMBER:
Please note that a grade will only be given to those whose student number is noted on this form. Please ensure that the student numbers from all group members are recorded accurately.
2012868
Submission Date:
3rd Dec 2013.
MODULE TUTOR:
Umar Farooq Awan
DECLARATION
The work contained in this assignment is my own and that all materials and sources used have been acknowledged.
I/We have not copied or colluded in part or in whole, or otherwise plagiarised …show more content…
the work of other students.
This assignment has not been submitted for previous assessment in any other subject or to a substantial extent has been accepted for the award of any other unit, module, degree or diploma of a university or any other institute, except where due acknowledgement is made in the text.
I/We confirm that I/we have read, understood and followed the guidelines for assignment submission and presentation provided by the lecturer.
I/We understand that this assignment may be retained on the database and used to make comparisons with other assignments in future.
I/We have made a copy of my assignment
This work may be photocopied and/or communicated for the purpose of identifying plagiarism.
I/We give permission for a copy of this marked assignment to be retained by the faculty of Business Management for the purpose of course reviews by external examiners and to be used as a resource by Majan College.
I/We understand that unauthorized late submission without a valid written extension will be marked as per the college policy mentioned in the students handbook page 18 section 18.5. WORDS-1577/2227
CONTENTS
SERIAL NUMBERS
TOPICS
PAGE NO.
1
Index
2
2
Introduction, Difference Between Allocation, Apportionment & Re-Apportionment
3
3
Significance Of Factory Overhead Allocation And Apportionment
4
4
Methods For Re- Apportionment
5
5
Current & Suggested Method
6
6
Working, Observation
7
7
Importance Of IT, Limitation Of Apportionment, Conclusion
8
8
References
9
INTRODUCTION
In recent years, Factories have become more automatic; which has led to an increase in manufacturing cost significantly and has a huge impact on as factory overhead as it comprises a percentage of total manufacturing cost. Factory overheads expenses include costs that may be classified as semi-variable, fixed and variable.
According to Vanderbeck (2002), all costs incurred by the factory are charged indirectly to the manufactured goods are known as FACTORY OVERHEAD. In addition Vanderbeck (2013), also states that factory overhead takes account of all costs which have direct impact on the production of manufactured goods excluding its direct material and direct labor.
This report will examine Shamu LLC a major Omani furniture manufacturer producing various items for both homes and offices. The company has no accounting section and the allocation of costs of the 2 service departments amongst the 3 production departments is carried out by the company 's finance section on the basis of total number of hours worked in each production department.
The objective of the report to define a proper system for fixed overhead allocation and apportionment for Shamu LLC and design a new allocation system which is effective and can yield the cost and selling price of products at different stages of completion.
DIFFERENCE BETWEEN ALLOCATION, APPORTIONMENT& RE-APPORTIONMENT
ALLOCATION: It is the allocation of whole items of cost centers, whether they may be production cost centers or service cost centers. For instance, Hospitals make use of difficult method for allocating costs of service departments such as Housekeeping, Patient Admissions. http://www.slideshare.net/Shibani123/cost-allocation-powerpoint-presentation-15312020 APPORTIONMENT: Rajasekaran and Lalitha (2010)defines apportionment that it is the distributions of items of cost to other cost centers on suitable basis after they are collected under separate standing order numbers. Example:-Factory rent may be allocated to the factory and has to be apportioned among the producing and service departments on an equitable basis.
RE-APPORTIONMENT: Khan and Jain (2000) states that reapportionment is the re-distribution of expenses from several service divisions to manufacturing divisions. This is necessary because of the ultimate objective of absorbing all overheads over goods produced in the production departments. Examples of such departments are container house, cafeteria, warehouse, clinic etc.
SIGNIFICANCE OF FACTORY OVERHEAD ALLOCATION AND APPORTIONMENT
Collin (2012), states that at the present time businesses are very dynamic. Scientific advancement and improvement, economic situations and social considerations are the essential factors for transformation of industries at huge manufacturing to meet up its more demand. It is important to realize that what constitutes factory overhead in one situation may or may not also be classed as a true factory burden in a different setting. http://www.wisegeek.com/what-is-factory-overhead.htm The importance of cost allocation is to assist a business find out the total of a piece item produced will charge.
A few features concerning to the importance of cost allocation comprise staying on budget, estimating goods to meet profit goals, and tracking unproductive operations. Various methods are available depending on a company’s working. It is required by Third Party reimbursements -Rate regulated industries -Governmental subsidies -Cost plus contracts, External Reporting/Taxes -FASB and IRS requires allocation, Costing products accurately is important. -Decision Making -Control.
The importance of cost apportionment is that items of indirect costs residual to the process of cost allocation are covered by cost apportionment. It is accurate as it assigns expenses with policy according to factors like real use.It helps in controlling overhead cost, calculating of cost of production, analysis of under or over absorption, calculating of work in progress goods.
WORKING-
INDIRECT WAGES=CUTTING DEPARTMENT=3500*2500/10000 =875
CURRENT METHOD
Particulars
Cutting
Assembly
Finishing
Total
DISTRIBUTION OF COST …show more content…
7,735
9,945
4,420
22,100
WORKING-
DISTRIBUTION OF COST=CUTTING DEPARTMENT=3500*22100/10000 =7735
OBSERVATION
CURRENT
7,735
9,945
4,420
SUGGESTED
12,089.6
4,824
5,184.6
DIFFERENCE
4354.6
5121
764.6
Shamu LLC can use Reciprocal Method in the current situation. Repeated Distribution method is under Reciprocal Method is an appropriate method for Shamu LLC. The company deals with both finished goods and semi finished goods. Repeated distribution method recognizes that if a department receives services from other department, the department receiving it should be charged. If two service departments provide services to each other, each department should be charged for the cost of service rendered to each other.
In Cutting Department there is a loss (4354.6), the company even sells semi finished goods. The company has sold goods before at lower price now selling price should be increased, which leads managers to under consume or to source externally. Profits are understated. In Assembly Department, there is an over-profit (5121) which is good to a certain point but it can lead to problems in future. The company has sold goods before at higher price now selling price should be decreased. It leads to lower selling price, which leads managers to over consume the service. Profits are overstated. In Finishing Department, there is a profit (764.6), which is quite well as the major income received is from this department.
A change in the apportioning base leads to change in the selling price and which further leads to change in profits. Company 's goodwill decreases if the goods are sold at higher prices or lower prices. Shamu LLC should use appropriate method for fixing selling prices.
IMPORTANCE OF INFORMATION TECHNOLOGY
In many industries, survival and even existence without extensive use of it is inconceivable, and Information Technology plays a critical role in increasing productivity. Information systems are important tools available to managers for achieving higher levels of efficiency and productivity in business operations. It is a major tool for firms to create new products and services, and also an entirely new business models. It helps in having a better communication with the suppliers and customers. Information system made it possible for the managers to use real time data from the marketplace when making decision.
LIMITATIONS OF APPORTIONMENT AND WAYS TO REDUCE IT Hansen, Mowen and Guan (2009), points out that fact that most companies are faced with task of allocating costs among very large number of cost centers.
It often leads to tension and disagreement among managers as no one can conclude and get the "RIGHT ANSWER".
Additional challenges arise when multiple service centers use each other’s services choice of apportion base – determination of costs to be allocated). Even assuming all allocated costs are relevant and the apportion base is well specified, this presents a difficult goal to achieve.
In a “real world” setting, most firms are faced with apportioning the costs of a very large number of service centers (i.e., the manufacturing department alone might apportion costs for maintenance, engineering). However, for simplicity, this example also uses only two service centers (Electricity and Water) and two profit centers (Cars and Trucks).
Service center estimates overhead by apportioning in which bases are kilowatt hours and gallons and service center usage. It is essential to note that the service centers are consuming their own services as well as the services of the other service
center.
CONCLUSION
Company incurs expense directly or indirectly. No company can survive without incurring costs. Allocation and Apportionment are also other 2 ways for distributing costs. It would be suggested that SHAMU LLC should use REPEATED RECRIPROCAL METHOD as it is an effective and can yield the cost and selling price of products at different stages of completion. The company has gained profit and loss also. The CEO of the company should focus on the Cutting and Assembly Department especially as there has been abnormal loss and over profit. IT plays an integral role in every industry, helping companies improve business processes, achieve cost efficiencies, drive revenue growth and maintain a competitive advantage in the marketplace.
REFERENCES
BOOKS
Drury, C., 2011, Cost and Management Accounting, 7th Ed. USA: South-Western CENGAGE Learning.
Gupta, S., Sharma, A., Ahuja, S., 2007, Cost Accounting. India: J.N Printers.
Hansen, D., Mowen, M., Guan, L., 2009, Cost Management. USA: South-Western CENGAGE Learning.
Horngren, C., Datar, S., Foster, G., 2006, Managerial Emphasis. USA: Prentice Hall.
Khan, Y., Jain, P., 2000, Cost Accounting. USA: Tata McGraw Hill Limited.
Murthy, A., Gurusamy, S., 2009, Cost Accounting, 2nd Ed. USA: Tata McGraw Hill Limited.
Rajasekaran, V., Lalitha, R., 2010, Cost Accounting. USA: Dorling Kindersley.
Vanderbeck, E., 2013, Cost Accounting, 16th Ed.USA: South-Western CENGAGE Learning.
Vanderbeck, E., 2002, Principles of Cost Accounting, 12th Ed. USA: South-Western CENGAGE Learning.
WEBSITE
"Cost-Allocation-PowerPoint-Presentation"Http://Www.Slideshare.Net(ACCESED ON 07/11/2013)
"Cost-Allocation/Simultaneous-Equation-Method"Http://Accountingexplained.Com(ACCESED ON 13/11/2013)
"Importance-Information-Technology-Business"http://www.ehow.com(ACCESED ON 25/11/2013)
"Method_of_repeated_redistribution "Http://Www.Tutorsonnet.Com(ACCESED ON 20/11/2013)
"Overheads Analysis "Http://My.Safaribooksonline.Com(ACCESED ON 13/11/2013)
"Overhead-Cost-Allocation "Http://Www.Managementaccountancy.Com (ACCESED ON 07/11/2013)
"What-Is-Factory-Overhead " http://www.wisegeek.com (ACCESED ON 11/12/2013)
"six-important-business-objectives-information-technology"http://smallbusiness.chron.com (ACCESED ON 12/12/2013)
Module Name
Cost Accounting Level -1
Module Code
AC 02-1
Assessment No.
I Weighting 40 %
Assessment Type:
INDIVIDUAL
STUDENT MCUC NUMBER:
Please note that a grade will only be given to those whose student number is noted on this form. Please ensure that the student numbers from all group members are recorded accurately.
2012868
Submission Date:
3rd Dec 2013.
MODULE TUTOR:
Umar Farooq Awan
DECLARATION
The work contained in this assignment is my own and that all materials and sources used have been acknowledged.
I/We have not copied or colluded in part or in whole, or otherwise plagiarised …show more content…
the work of other students.
This assignment has not been submitted for previous assessment in any other subject or to a substantial extent has been accepted for the award of any other unit, module, degree or diploma of a university or any other institute, except where due acknowledgement is made in the text.
I/We confirm that I/we have read, understood and followed the guidelines for assignment submission and presentation provided by the lecturer.
I/We understand that this assignment may be retained on the database and used to make comparisons with other assignments in future.
I/We have made a copy of my assignment
This work may be photocopied and/or communicated for the purpose of identifying plagiarism.
I/We give permission for a copy of this marked assignment to be retained by the faculty of Business Management for the purpose of course reviews by external examiners and to be used as a resource by Majan College.
I/We understand that unauthorized late submission without a valid written extension will be marked as per the college policy mentioned in the students handbook page 18 section 18.5. WORDS-1577/2227
CONTENTS
SERIAL NUMBERS
TOPICS
PAGE NO.
1
Index
2
2
Introduction, Difference Between Allocation, Apportionment & Re-Apportionment
3
3
Significance Of Factory Overhead Allocation And Apportionment
4
4
Methods For Re- Apportionment
5
5
Current & Suggested Method
6
6
Working, Observation
7
7
Importance Of IT, Limitation Of Apportionment, Conclusion
8
8
References
9
INTRODUCTION
In recent years, Factories have become more automatic; which has led to an increase in manufacturing cost significantly and has a huge impact on as factory overhead as it comprises a percentage of total manufacturing cost. Factory overheads expenses include costs that may be classified as semi-variable, fixed and variable.
According to Vanderbeck (2002), all costs incurred by the factory are charged indirectly to the manufactured goods are known as FACTORY OVERHEAD. In addition Vanderbeck (2013), also states that factory overhead takes account of all costs which have direct impact on the production of manufactured goods excluding its direct material and direct labor.
This report will examine Shamu LLC a major Omani furniture manufacturer producing various items for both homes and offices. The company has no accounting section and the allocation of costs of the 2 service departments amongst the 3 production departments is carried out by the company 's finance section on the basis of total number of hours worked in each production department.
The objective of the report to define a proper system for fixed overhead allocation and apportionment for Shamu LLC and design a new allocation system which is effective and can yield the cost and selling price of products at different stages of completion.
DIFFERENCE BETWEEN ALLOCATION, APPORTIONMENT& RE-APPORTIONMENT
ALLOCATION: It is the allocation of whole items of cost centers, whether they may be production cost centers or service cost centers. For instance, Hospitals make use of difficult method for allocating costs of service departments such as Housekeeping, Patient Admissions. http://www.slideshare.net/Shibani123/cost-allocation-powerpoint-presentation-15312020 APPORTIONMENT: Rajasekaran and Lalitha (2010)defines apportionment that it is the distributions of items of cost to other cost centers on suitable basis after they are collected under separate standing order numbers. Example:-Factory rent may be allocated to the factory and has to be apportioned among the producing and service departments on an equitable basis.
RE-APPORTIONMENT: Khan and Jain (2000) states that reapportionment is the re-distribution of expenses from several service divisions to manufacturing divisions. This is necessary because of the ultimate objective of absorbing all overheads over goods produced in the production departments. Examples of such departments are container house, cafeteria, warehouse, clinic etc.
SIGNIFICANCE OF FACTORY OVERHEAD ALLOCATION AND APPORTIONMENT
Collin (2012), states that at the present time businesses are very dynamic. Scientific advancement and improvement, economic situations and social considerations are the essential factors for transformation of industries at huge manufacturing to meet up its more demand. It is important to realize that what constitutes factory overhead in one situation may or may not also be classed as a true factory burden in a different setting. http://www.wisegeek.com/what-is-factory-overhead.htm The importance of cost allocation is to assist a business find out the total of a piece item produced will charge.
A few features concerning to the importance of cost allocation comprise staying on budget, estimating goods to meet profit goals, and tracking unproductive operations. Various methods are available depending on a company’s working. It is required by Third Party reimbursements -Rate regulated industries -Governmental subsidies -Cost plus contracts, External Reporting/Taxes -FASB and IRS requires allocation, Costing products accurately is important. -Decision Making -Control.
The importance of cost apportionment is that items of indirect costs residual to the process of cost allocation are covered by cost apportionment. It is accurate as it assigns expenses with policy according to factors like real use.It helps in controlling overhead cost, calculating of cost of production, analysis of under or over absorption, calculating of work in progress goods.
WORKING-
INDIRECT WAGES=CUTTING DEPARTMENT=3500*2500/10000 =875
CURRENT METHOD
Particulars
Cutting
Assembly
Finishing
Total
DISTRIBUTION OF COST …show more content…
7,735
9,945
4,420
22,100
WORKING-
DISTRIBUTION OF COST=CUTTING DEPARTMENT=3500*22100/10000 =7735
OBSERVATION
CURRENT
7,735
9,945
4,420
SUGGESTED
12,089.6
4,824
5,184.6
DIFFERENCE
4354.6
5121
764.6
Shamu LLC can use Reciprocal Method in the current situation. Repeated Distribution method is under Reciprocal Method is an appropriate method for Shamu LLC. The company deals with both finished goods and semi finished goods. Repeated distribution method recognizes that if a department receives services from other department, the department receiving it should be charged. If two service departments provide services to each other, each department should be charged for the cost of service rendered to each other.
In Cutting Department there is a loss (4354.6), the company even sells semi finished goods. The company has sold goods before at lower price now selling price should be increased, which leads managers to under consume or to source externally. Profits are understated. In Assembly Department, there is an over-profit (5121) which is good to a certain point but it can lead to problems in future. The company has sold goods before at higher price now selling price should be decreased. It leads to lower selling price, which leads managers to over consume the service. Profits are overstated. In Finishing Department, there is a profit (764.6), which is quite well as the major income received is from this department.
A change in the apportioning base leads to change in the selling price and which further leads to change in profits. Company 's goodwill decreases if the goods are sold at higher prices or lower prices. Shamu LLC should use appropriate method for fixing selling prices.
IMPORTANCE OF INFORMATION TECHNOLOGY
In many industries, survival and even existence without extensive use of it is inconceivable, and Information Technology plays a critical role in increasing productivity. Information systems are important tools available to managers for achieving higher levels of efficiency and productivity in business operations. It is a major tool for firms to create new products and services, and also an entirely new business models. It helps in having a better communication with the suppliers and customers. Information system made it possible for the managers to use real time data from the marketplace when making decision.
LIMITATIONS OF APPORTIONMENT AND WAYS TO REDUCE IT Hansen, Mowen and Guan (2009), points out that fact that most companies are faced with task of allocating costs among very large number of cost centers.
It often leads to tension and disagreement among managers as no one can conclude and get the "RIGHT ANSWER".
Additional challenges arise when multiple service centers use each other’s services choice of apportion base – determination of costs to be allocated). Even assuming all allocated costs are relevant and the apportion base is well specified, this presents a difficult goal to achieve.
In a “real world” setting, most firms are faced with apportioning the costs of a very large number of service centers (i.e., the manufacturing department alone might apportion costs for maintenance, engineering). However, for simplicity, this example also uses only two service centers (Electricity and Water) and two profit centers (Cars and Trucks).
Service center estimates overhead by apportioning in which bases are kilowatt hours and gallons and service center usage. It is essential to note that the service centers are consuming their own services as well as the services of the other service
center.
CONCLUSION
Company incurs expense directly or indirectly. No company can survive without incurring costs. Allocation and Apportionment are also other 2 ways for distributing costs. It would be suggested that SHAMU LLC should use REPEATED RECRIPROCAL METHOD as it is an effective and can yield the cost and selling price of products at different stages of completion. The company has gained profit and loss also. The CEO of the company should focus on the Cutting and Assembly Department especially as there has been abnormal loss and over profit. IT plays an integral role in every industry, helping companies improve business processes, achieve cost efficiencies, drive revenue growth and maintain a competitive advantage in the marketplace.
REFERENCES
BOOKS
Drury, C., 2011, Cost and Management Accounting, 7th Ed. USA: South-Western CENGAGE Learning.
Gupta, S., Sharma, A., Ahuja, S., 2007, Cost Accounting. India: J.N Printers.
Hansen, D., Mowen, M., Guan, L., 2009, Cost Management. USA: South-Western CENGAGE Learning.
Horngren, C., Datar, S., Foster, G., 2006, Managerial Emphasis. USA: Prentice Hall.
Khan, Y., Jain, P., 2000, Cost Accounting. USA: Tata McGraw Hill Limited.
Murthy, A., Gurusamy, S., 2009, Cost Accounting, 2nd Ed. USA: Tata McGraw Hill Limited.
Rajasekaran, V., Lalitha, R., 2010, Cost Accounting. USA: Dorling Kindersley.
Vanderbeck, E., 2013, Cost Accounting, 16th Ed.USA: South-Western CENGAGE Learning.
Vanderbeck, E., 2002, Principles of Cost Accounting, 12th Ed. USA: South-Western CENGAGE Learning.
WEBSITE
"Cost-Allocation-PowerPoint-Presentation"Http://Www.Slideshare.Net(ACCESED ON 07/11/2013)
"Cost-Allocation/Simultaneous-Equation-Method"Http://Accountingexplained.Com(ACCESED ON 13/11/2013)
"Importance-Information-Technology-Business"http://www.ehow.com(ACCESED ON 25/11/2013)
"Method_of_repeated_redistribution "Http://Www.Tutorsonnet.Com(ACCESED ON 20/11/2013)
"Overheads Analysis "Http://My.Safaribooksonline.Com(ACCESED ON 13/11/2013)
"Overhead-Cost-Allocation "Http://Www.Managementaccountancy.Com (ACCESED ON 07/11/2013)
"What-Is-Factory-Overhead " http://www.wisegeek.com (ACCESED ON 11/12/2013)
"six-important-business-objectives-information-technology"http://smallbusiness.chron.com (ACCESED ON 12/12/2013)