Explain Cost Accounting, Classify Product Costs, And Compute
Explain cost accounting, classify product costs, and compute cost for GFI products
You have been hired by Gracie Faye International (GFI) as a cost accountant. Your task is to prepare a comprehensive management report divided into four sections:
Part 1: Explain what cost accounting is, including an overview of cost management and its applications. Highlight the skills you bring to the company and how cost management relates to corporate strategy.
Part 2: Classify the product costs for manufacturing toka balls as fixed or variable, direct or indirect. Provide justification for each classification, completing the table accordingly.
Part 3: Compute key manufacturing costs and financial figures for July based on provided data for GFI's electronic scoreboard division. Calculate the cost of direct materials used, direct labor used, cost of goods manufactured, cost of goods sold, gross profit, and overhead over/under-applied overhead. Do not consider underapplied or overapplied overhead in cost calculations.
Part 4: Analyze the profits expected from two models of pitching machines (softball and hardball) by allocating overhead costs, including inspection costs, using both traditional and activity-based costing methods. Recalculate and compare the overhead allocations for each product using the number of inspections as a driver. Include Excel calculations in your report.
Your report should be professional, clearly structured with an introduction and conclusion, and adhere to APA standards. It will be shared with senior management and the board of directors.
Paper For Above instruction
Introduction
Cost accounting plays a vital role in modern corporate management by providing detailed insights into the costs associated with manufacturing and delivering products. As a cost accountant at Gracie Faye International (GFI), my role is to utilize cost management techniques to help the company make informed decisions that align with its strategic goals. This report aims to elucidate the concept of cost accounting, classify product costs for toka balls, perform cost computations for the company’s electronic scoreboard division, and analyze profitability of two product models using different costing approaches.
Part 1: Understanding Cost Accounting and Its Role in Corporate Strategy
Cost accounting is a branch of managerial accounting that involves the recording, classification, analysis, and allocation of costs associated with the production of goods or services. Its purpose is to facilitate internal decision-making, improve efficiency, and enhance profitability. Cost management encompasses the strategies and techniques employed to control costs, optimize resource utilization, and align operational activities with the company’s strategic objectives. It involves budgeting, cost control, cost analysis, and performance evaluation.
Effective cost management provides opportunities for competitive advantage through pricing strategies, cost reduction initiatives, and product mix decisions. For GFI, implementing robust cost accounting systems will enable better understanding of product costs, identification of cost-saving opportunities, and support for strategic initiatives such as product differentiation or market expansion.
The skills I bring include proficiency in cost analysis, budgeting, variance analysis, and knowledge of both traditional and activity-based costing systems. This expertise will help GFI allocate costs accurately, identify cost drivers, and support strategic decisions like product pricing, cost control, and process improvement.
Connecting cost management to corporate strategy allows GFI to maintain competitiveness, improve financial performance, and sustain growth in a dynamic market environment. Cost accounting thus becomes an essential tool in managing profits, reducing waste, and positioning the company for long-term success.
Part 2: Classification of Product Costs for Toka Balls
| Cost Item | Variable or Fixed | Direct or Indirect | Justification |
|---|---|---|---|
| Electricity | Variable | Indirect | Electricity consumption varies with production volume; it is not directly traceable to each toku ball but supports multiple processes. |
| Real Estate Taxes | Fixed | Indirect | Real estate taxes are constant regardless of production volume; they are attributable to property ownership, not specific units. |
| Wood for Toka Sticks | Variable | Direct | Wood costs fluctuate with the number of toka sticks produced; directly traceable to the product. |
| Leather to Tie Wood Together | Variable | Direct | The cost depends on the number of units produced; directly part of manufacturing. |
| Manufacturing Labor | Variable | Direct | Labor hours increase proportionally with production; directly traceable to each toka ball. |
| Water | Variable | Indirect | Water consumption varies with production activities; it supports manufacturing but isn’t directly traceable per unit. |
| Lubricants for Machinery | Variable | Indirect | Usage depends on machine operation; costs vary with production volume but are not directly traceable to each product. |
| Equipment Depreciation | Fixed | Indirect | Depreciation is amortized over time; it remains constant regardless of production levels. |
This classification aids in calculating accurate product costs and understanding how costs behave with changes in production volume, facilitating better pricing and cost control decisions.
Part 3: Cost Computations for July
Using the provided data, calculations are performed as follows:
1. Cost of Direct Materials Used
Beginning Raw Materials Inventory: $62,000
Purchases during July: $510,000
Ending Raw Materials Inventory: $75,000
Direct Materials Used = Beginning Inventory + Purchases – Ending Inventory = $62,000 + $510,000 – $75,000 = $497,000
2. Cost of Direct Labor Used
Factory Payroll: $745,000
Assuming all factory payroll is direct labor (unless specified otherwise), direct labor cost = $745,000
3. Cost of Goods Manufactured (COGM)
Beginning Goods in Process: $85,000
Ending Goods in Process: $95,000
Manufacturing costs (Direct Materials + Direct Labor + Manufacturing Overhead):
Overhead is estimated based on the predetermined rate; overhead = 52% of direct labor cost = 0.52 × $745,000 = $387,400
Total Manufacturing Costs = $497,000 + $745,000 + $387,400 = $1,629,400
Cost of Goods Manufactured = Beginning GIP + Total Manufacturing Costs – Ending GIP
= $85,000 + $1,629,400 – $95,000 = $1,619,400
4. Cost of Goods Sold (COGS)
Beginning Finished Goods Inventory: $103,000
Ending Finished Goods Inventory: $58,000
COGS = Beginning Finished Goods + COGM – Ending Finished Goods = $103,000 + $1,619,400 – $58,000 = $1,664,400
5. Gross Profit
Sales Revenue: $3,500,000
Gross Profit = Sales – COGS = $3,500,000 – $1,664,400 = $1,835,600
6. Over/applied Overhead
Actual Overhead: Indirect materials ($24,000), Indirect labor ($132,000), Other overhead costs ($220,000). Total overhead incurred = $376,000
Applied Overhead = Predetermined rate × Direct labor cost = 0.52 × $745,000 = $387,400
Overapplied Overhead = $387,400 – $376,000 = $11,400
Part 4: Profitability Analysis of Pitching Machines
For the two models, overheads are allocated using both traditional and activity-based costing (ABC) methods. The total inspection costs are $40,000. Each unit's direct labor hours are 200 hours, with the total units being 20 for each product. The number of inspections per unit are 5 for the softball machine and 15 for the hardball machine.
Overhead Allocation Using Direct Labor Hours
Total inspection costs allocated based on direct labor hours:
Softball Machine: 5 inspections × 20 units = 100 inspections
Hardball Machine: 15 inspections × 20 units = 300 inspections
Total inspections: 400
Cost per inspection = $40,000 / 400 = $100
Cost allocated to Softball = 100 × $100 = $10,000
Cost allocated to Hardball = 300 × $100 = $30,000
Overhead Allocation Using ABC (Number of Inspections as Driver)
The same logic applies: total inspections are 400, with the total costs equally distributed based on inspections.
Softball machine: 100 inspections, allocated overhead = $10,000
Hardball machine: 300 inspections, allocated overhead = $30,000
Conclusion
The analysis indicates that overhead costs, particularly inspection costs, are significant and varying with inspection activity. Applying activity-based costing provides a more accurate reflection of the cost incurred per product, supporting better pricing and profitability analysis.
Conclusion
This comprehensive report underscores the importance of cost accounting in strategic decision-making at GFI. Effective classification of costs, accurate computation of manufacturing costs, and appropriate allocation methods are essential for understanding product profitability and improving financial performance. As GFI continues its expansion into various sports equipment markets, leveraging robust cost management techniques will be instrumental in maintaining competitiveness and supporting sustainable growth.
References
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