Question

1.

The division controller of West Coast Supplies needs to determine the cost of products left in inventory.

INITIAL POST:

For your initial post, select one of the above situations and discuss what managerial accounting information the managerial accountant should provide and how this information would be useful.

Answer 1

Product costing is one of the important managerial accounting techniques. Product costing helps in Profitability analysis, valuation of inventory and decision making.

The Division Controller needs the following information from Management Accountant in determining cost of products left in the Inventory:

• Product Costing methods adopted by West Coast Supplies
• Opening values of Finished Products, WIP and Raw materials
• Purchases and consumption of Raw Materials and Cost of direct Labor and other expenses during the year
• Manufacturing Overheads - Fixed and Variable
• Predetermined overhead rates
• Cost of products sold during the year
• Standard or Budgeted Costs and their variances with actual cost
• Wastage
• Scrap
• Cost of Goods Sold
• Closing Value of work in progress
• Inventory valuation methods (useful when different values or prices exist for the items in inventory)

Let us discuss how the above information will helpful in determining the product costs.

There are primarily two product costing methods for a manufacturing company. They are Job and Process Costing.

Under Job Costing Method, Costs such as material, direct labor and direct expenses are assigned to identifiable jobs or identifiable units under jobs. Overhead is apportioned based on predetermined overhead rate or allocation base.

Any normal wastage or spoilage is considered part of the cost and will be assigned to the Job. Any abnormal wastage or spoilage is not considered as normal cost and will be carried to costing profit & loss account instead of assigning to the Job.

Any value realised from scrap is reduced from manufacturing overhead which ultimately reduces the overhead costs of the job.

Under process costing method, products pass through several processes or operations before completion. The costs both direct and indirect are assgned to their respective processes. Cost of previous process will become input cost for the next process. Final costs are divided by no. of units produced to arrive product costs.

Same principles apply regarding wastage, spoilage and scrap values as in Job costing.

There are two methods in treating manufacturing overhead.

Under absorption costing, both fixed and variable overheads are assigned to products. It means products in inventory carries fixed element of overhead also. But in marginal costing of allocation, only variable element overhead costs are assigned to the product costs. It means all fixed overheads are considered as period costs and no element of this cost is in inventory.

Some companies follow predetermined rate in allocating overhead to the products. In this case, finished goods in inventory has overhead cost assigned to it at predetermined rate. Any over or under absorption of overheads is adjusted to cost of goods sold.

Closing Value of product costs left in the inventory = Opening Inventory + Opening WIP + Raw Materials Consumed + other Direct Costs + Manufacturing Overheads - Closing WIP - Cost of goods sold

Or

Product Cost = (Total Costs + Opening WIP - Closing WIP) / No. of units produced

Cost of products left in the Inventory = Product Cost * No. of Units left in the inventory

(Assuming no under or over absorption of costs)

The Management Accountant should provide all the relevant information.