Assessment Type Case Study 2000 10-Word Report

Assessmentassessment Type Case Study 2000 10 Word Report And Ana

Assessment assessment type: case study – 2000 + 10% word report and analysis - individual assignment. The task involves analyzing given financial information related to a management accounting problem, similar to real-world scenarios, and presenting findings with analysis as it applies to accounting concepts. Connectta Ltd, which manufactures furniture for computer workstations and uses a job costing system, has specific inventory and manufacturing data to analyze for December. The assignment includes describing when to use a job costing system, calculating work in process inventory and finished goods costs, evaluating manufacturing overhead variances, and discussing alternative accounting treatments and costing methods.

Paper For Above instruction

Introduction

In the realm of management accounting, the choice of costing systems plays a pivotal role in accurately capturing the costs associated with specific products or jobs. Connectta Ltd exemplifies a manufacturing environment where job costing is applicable, particularly when the company produces distinct items such as computer caddies, chairs, desks, and printer stands. This paper critically analyzes the use of a job costing system within Connectta Ltd, performs necessary financial calculations based on the provided data, examines overhead variances, explores alternative accounting treatments, and discusses potential improvements through activity-based costing (ABC). The objectives are to demonstrate a comprehensive understanding of management costing techniques and their implications in real-world settings.

Use of Job Costing System

A job costing system is appropriate when a company manufactures customized or unique products, or when costs can be accumulated on a per-job basis. This system is ideal for organizations producing distinct items that require separate cost tracking to determine profitability accurately. In the case of Connectta Ltd, manufacturing bespoke furniture for computer workstations with different jobs and variants necessitates job costing. This approach allows for detailed cost control, pricing decisions, and performance evaluation for individual jobs, as standard costing methods may be insufficient for such diverse products.

Calculation of Work in Process Inventory at 31 December

To determine the work in process (WIP) inventory as at 31 December, we need to assess the costs incurred on jobs that are partially completed and have not yet been shipped or sold. This involves calculating direct materials requisitions, direct labor costs, and applied manufacturing overhead for unfinished units.

Step 1: Determine Manufacturing Overhead Rate

The budgeted manufacturing overhead (MOH) is based on machine hours:

- Estimated MOH (budgeted): $400,000

- Estimated machine hours: 12,000 hours

Thus, the predetermined overhead rate = $400,000 / 12,000 hours = $33.33 per machine hour.

Step 2: Calculate Applied Manufacturing Overhead

Using actual machine and labor hours for December:

- For Job CC: 600 machine hours x $33.33 = $20,000 (approximate)

- For Job CH: 1,200 machine hours x $33.33 = $40,000

- For Job PS: 1,500 machine hours x $33.33 = $50,000

- For Job DS: 2,300 machine hours x $33.33 = $76,623

Total applied MOH = sum of above costs.

Step 3: Total Costs Incurred

Add direct materials, direct labor, and applied MOH for each job, then calculate the costs of jobs in progress, including units not completed.

Based on the data, the total costs for jobs not completed in December sum to the WIP inventory, which can be broken down proportionally according to units produced and costs incurred per job.

Step 4: Final Calculation

The total work in process inventory value at 31 December comprises the costs of unfinished units of each job, calculated using the cost per unit derived from total costs and units produced.

Given the data limitations, an estimated WIP inventory value can be derived using the costs per unit of jobs in progress, the units incomplete, and the proportion of costs assigned to those units.

Cost of Chairs in Finished Goods Inventory at 31 December

To compute the cost of chairs in finished goods:

- Quantity in inventory: 400 units

- Unit cost: $35 (as given)

Therefore, total value = 400 units x $35 = $14,000.

This figure represents the recorded cost in the finished goods inventory for chairs at year-end.

Overapplied or Underapplied Manufacturing Overhead

Actual MOH incurred in December: $120,000

Predetermined MOH rate: $33.33 per machine hour

Total machine hours utilized during the year: 11,000 hours

Applied MOH = 11,000 hours x $33.33 = $366,630

Difference between applied and actual MOH:

- Overapplied MOH = Applied MOH - Actual MOH = $366,630 - $120,000 = $246,630 overapplied.

This significant overapplication indicates that overhead costs were overestimated relative to actual costs incurred.

Alternative Accounting Treatments for Overapplied or Underapplied Overhead

Two common approaches to handling overapplied or underapplied overhead are:

1. Close to Cost of Goods Sold (COGS): Adjust the amount directly against COGS at the end of the period, either proportionally or entirely, which simplifies accounting but may distort gross profit margins temporarily.

2. Prorate Across Work in Process, Finished Goods, and COGS: Distribute the over- or underapplied overhead based on the relative balances of these accounts, providing a more accurate reflection of costs and inventory valuation.

Each approach has implications for financial statement presentation and managerial decision-making, with the choice depending on the materiality and management policies.

Activity-Based Costing as an Improvement

Activity-Based Costing (ABC) offers a refined method of allocating overhead by identifying multiple cost drivers related to specific activities. ABC addresses deficiencies in traditional costing, such as the overgeneralization of overhead based on machine hours, which can distort product costs, especially in complex manufacturing environments like Connectta Ltd.

By analyzing activities such as machine setup, inspection, and material handling, ABC assigns costs to products more precisely according to the resources consumed. This improved accuracy helps management identify high-cost activities, improve process efficiencies, and set more competitive prices. For Connectta Ltd, adopting ABC would better reflect the true costs of manufacturing each furniture component, enabling more strategic decisions regarding product pricing, product mix, and process improvements.

Conclusion

The use of a job costing system in Connectta Ltd is appropriate given the company's production of varied, customized furniture items for computer workstations. Proper calculation of inventory values, overhead variances, and effective handling of overapplied costs are essential for accurate financial reporting and managerial control. Furthermore, transitioning to activity-based costing could significantly enhance cost accuracy, leading to better strategic and operational decisions. Overall, integrating these management accounting techniques ensures more precise cost control and improved profitability analysis in a competitive manufacturing environment.

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