Assessment
Solution
Question 1
The amount of the Manufacturing Overhead (MOH) that the company of Voltus will have applied for the jobs which occurred during the period of 1 July 2018 to 1 May 2019 is computed below.
| Budgeted Manufacturing Overhead | $ 3,600,000 |
| Allocation Base (Machine Hours) |
80000 |
| Manufacturing Overhead Application Rate | $ 45.00 |
The MOH that is applied to the jobs that occurred during the period of July 2018 to 31 May 2019 is computed as follows
| Application of Manufacturing Overhead (1 Jul 2018 to 31 May 2019) | |
| Total Machine Hours Used | 73000 |
| Manufacturing Overhead Application Rate | x Machine Hours |
| =45*73000 | $ 3,285,000 |
Question 2
For the period of June 2019, the amount of the MOH that is applied by the company of Voltus is as shown below.
| Applied Manufacturing Overhead (June 2019) | $ 6,000 |
| Total Machine Hours Used | x Machine Hours |
| Manufacturing Overhead Application Rate | $ 270,000 |
| =45 x 6000 |
The resultant computations show that manufacturing overhead is 270,000.
Question 3
The computations for the Over or the under applied Manufacturing overhead are shown in the following table.
| 1 Jul 2018 to 31 May 2019 | $ 3,300,000 |
| Over/ Under Applied Manufacturing Overhead | – Actual Overhead of (1 Jul 2018 to 31 May 2019) |
| Actual Overhead of (1 Jul 2018 to 31 May 2019) | $ (15,000.00) |
| Application of Manufacturing Overhead (1 Jul 2018 to 31 May 2019) | |
| =3285000 – 3300000 | |
| = 15000 Under applied |
This shows that MOH for the period of 1 July 2018 to 31 May 2019 is under applied by 15000.
Similarly, the month of June computations for the over or under applied MOH shows.
| For the Month of June 2019 | $ 288,000.00 | |
| Over/ Under Applied Manufacturing Overhead | – Actual Overhead for June 2019 | |
| Actual Overhead of June 2019 | $ (18,000.00) | |
| Applied Manufacturing Overhead (June 2019) | ||
| =270000 – 288000 | ||
| = 18000 Under applied | 15000+18000 = | -33000 |
| Total Manufacturing Overhead Under applied for the year = | ||
| 33,000 Under applied | ||
The results show that the company has under applied the MOH by 18000 in June 2019. The total MOH for the year shows that the MOH is under applied by 33,000.
Question 4
For the Disposition of the under applied MOH, there can be different ways that the Voltus can employ and make use of. For example, one such method can be that of the simpler method of charging the entire amount of the under applied MOH to the Cost of the Goods Sold amount. The following is shown in the table below through the entry of.
| Entry | Debit | Credit |
| Cost of Goods Sold | 33,000 | |
| Manufacturing Overhead | 33,000 |
This is the way through which the under applied M OH is going to increase. Furthermore, the Cost of the Goods Sold is going to become more correct in terms of the representation of the factory overhead.
Another different method which can also be used for the purpose of the disposition of the under applied MOH is to charge this amount that has been under applied to the finished goods, work in process, and the Cost of Goods Sold Accounts depending on the individual accounts amount proportions (Blokdyk, 2018). The following is the representation of the disposition of the amount in this specific manner.
| Entry | Debit | Credit |
| Work in Process | 11,948.28 | |
| Finished Goods | 6,827.59 | |
| Cost of Goods Sold | 14,224.14 | |
| Manufacturing Overhead | 33000 |
The amounts calculated are from the use of the following calculations.
($315000/$870000) *$33000 = $11,948
($180000/$870000) *$33000 = $6,828
($375000/$870000)*$33000 = $14,224
This is a complex option to dispose of the under applied amount of the M OH; however, it is also the more accurate way as well. The option to choose which of the methods for the disposition of the under applied M OH depends on several significant factors.
For example, it is important to note that the amount itself is also important to factor. The amount is if very negligible then the simpler method can be used as it will not have any potential impact on the financials. However, on the other hand, if the amount of the under application or over-application is very big then it is important that the more accurate method for the application is utilized. The accounting system of the company is also another important factor which the companies can consider before applying for the Manufacturing Overhead. The more the accounting system of the organization is capable of handling complex transactions, the more it is easier for the companies to use the second method (Warren et al., 2016).
It means that it is based on the capabilities and effectiveness of the accounting system of a company if it can handle difficult and complex tasks and techniques then the company is also able to use complex methods in better, reliable, and accurate manner. But in the case where company has the ability to manage complex systems then it must do in a rational manner which means that it should not use these systems for smaller amounts. The company used in this case is a manufacturing organization, and it has the ability to handle complex tasks. Thus, there are two factors, but more important factor is related to amount and its significance. The amount and its significance are under applied overhead which can be expressed as percentage of total applied overhead (Boyd, 2013).
Question 5
Activity-based costing or ABC is a technique in cost accounting which involves overhead and circuitous expenditures by assigning risk to relevant components and their management. ABC is also said a bookkeeping strategy in which costing makes the connection with different types of costs and overheads, and the products which are developed and manufactured. It is different from conventional methods or forms of costing in such a way that it allocates circuitous expenses to values of items which are available at low discretion. However, there are some forms of circuitous costs which are not easily broken into smaller parts. Examples of such costs or expenses are compensation packages for board and staff. ABC has been researched as a suitable costing method for assembling operations. It increases the level of cost information where it manages and orders different expenses in the manufacturing process in an organization (Shank et al., 2013).
ABC breaks down expenses at the beginning for activities which are overhead exercises. This type of costing enables the expenses of exercises which are requested. It helps costing towards management, administration of costing, and evaluation choices in an exact manner. Overheads and their cost drivers are built where exercises get noticed and prominent very much. Thus, accountants can be able to decrease focus for them. ABC enables working out expenses so that overheads can be better distributed and disposed of. Moreover, it enables by empowering items and providing benefits to clients. Broad matters and strategies are also assisted through ABC where consistent and regular improvements can be possible. This costing strategy dispenses known exercises of a business and then these exercises are linked with administration. Costing items and administration help to perform administration (Hansen et al., 2007). For the assembling purpose of an item A, there is no use of movement X and the action’s expense is also not linked with item A.
It is a very useful and effective method of costing because it is aligned with the appropriate conditions of an industry. There is an application of ABC for the case of Voltus Company, and this application follows some steps.
Step 1:
Having knowledge of all procedures and processes to develop a product
Procuring raw materials
For the communication equipment, assembling operations would be undertaken
For the communication equipment, components would be processed
For the communication equipment, machines are employed
For the communication equipment, components are polished
For the communication equipment output, final improvements are considered.
Step 2:
Dividing the activities into the relevant cost pools and showing the calculations for the overhead:
| Cost Pool | Overhead cost | Computations |
| Touching cost pool | $ 345,000 | the indirect labor cost/3 |
| Polishing cost pool | $ 345,000 | the indirect labor cost/3 |
| Machining cost pool | $ 1,155,000 | the depreciation cost |
| Processing cost pool | $ 345,000 | the indirect labor cost/3 |
| Assembly cost pool | $ 735,000 | the utility cost |
| Purchase cost pool | $ 375,000 | the indirect material cost |
Step 3:
Assigning the cost drivers to cost pools individually
| Cost Driver | Remarks | |
| Cost (Incurred on purchase function ) | Number of units | The cost incurred on purchasing units is directly proportional to the raw material purchased. |
| Cost (Incurred on assembly function) | Number of machine hours | Capital is required heavily for this cost pool |
| Cost (Incurred on processing function) | Number of labor hours | Heavy labor and workforce is required for this cost function |
| Cost (Incurred on machining function) | Number of machine hours | Heavy capital investment is required for this cost pool |
| Cost (Incurred on polishing function) | Number of labor hours | Heavy labor and workforce is required for this cost pool |
| Cost (Incurred on touching function) | Number of labor hours | Heavy labor and workforce is required for this cost function |
Step 4:
Computation of the Cost driver Rate:
| Cost driver | Overhead cost | Units | Cost driver rate | |
| Purchase cost pool | Units purchased | $375,000 | 8977 | $41.77 |
| Assembly cost pool | Machine hours | $735,000 | 17595 | $41.77 |
| Processing cost pool | Labor hours | $345,000 | 8259 | $41.77 |
| Machining cost pool | Machine hours | $1,155,000 | 27650 | $41.77 |
| Polishing cost pool | Labor hours | $345,000 | 8259 | $41.77 |
| Touching cost pool | Labor hours | $345,000 | 8259 | $41.77 |
| $3,300,000 | 78999 | $41.77 |
Step 5:
There are three different modes of improvement in costing methods by using Activity Based Costing. First, it has the ability to increase the quantity and units of cost functions which can be used to generate overhead costs in large volume. Activity Based Costing has the ability to pool costs one by one by realizing the need for suitable and appropriate action where there is no need to collect and take all expenses to include into one and only pool.
Second, there are examples of machines which may also be referred to direct work costs. It designs new foundations and reasons to transfer overhead expenses to items with an objective to get expenses dispensed. Expenses are dispensed while having a dependence on exercises which incur costs. However, there is less quantity produced in volume measures (Hansen & Mowen, 2017).
Finally, Activity Based Costing does not support the concept that there are backhanded costs in few quantities. In the result, costs become indirect, and examples of indirect costs are devaluation, utilities, and rates of pay. These are recognized and known as specific exercises. While, Activity Based Costing has the ability and effectiveness in its ability to transfer overheads costs from high volume to low volume values which increases the cost per unit of values or components having lower quantities.
Thus, the discussion recommends that Activity Based Costing technique or method is worth to be adopted by companies. It is the contemporary and new method to allocate overhead (Gupta, 2009). The company has the ability to come up to the expectations and requirements of ABC as it has been highlighted in the following:
There are two broad types or groups of movement measures i.e. exchange drivers and span drivers. Exchange drivers determine the frequency of actions while span drivers note the duration of action until it is finished ultimately. There is no similarity with customary cost assessment criteria which is based on the volume check. Machines hours represent an example of volume check. Moreover, there are direct working hours needed to put overhead expenses to components and values. There are five different types of actions under Activity Based Costing, but they are linked with delivery of a number of units. Implications of these steps and decisions lead to mass level activity, action at the unit stage, association of continuing action, and level at item stage.
The arrangements under ABC for the bookkeeping activity have the reliance on exercises. These exercises may be in the form of any occasion, work task, and a specific objective. Examples of exercises include setting up machines for manufacturing, making arrangements to items, disintegrating any product which is completed, or getting machines workable. Exercises are cost objects because they incur costs, and they take overhead assets. The chosen company, i.e. Voltas Company has the fulfillment for this requirement which is to take activities so that communication equipment can be manufactured (Shank et al., 2013).
While using the ABC framework, a movement may be taken as cost driver in the result of any occasion or exchange activity. Thus, a cost driver is also considered as movement driver which is used to direct towards distribution activities. There are different examples of costing purposes which are in the form of machine arrangements, supporting demand, having control, purchasing orders, checking for quality, and manufacturing orders (Blokdyk, 2018). Voltas Company has the responsibility to fulfil this aspect of responsibilities as well which is mainly based on allocation through machine hours.
Question 6
The balance of the 30 June 2019 Finished Goods is shown below.
| Finished Goods | WIP | DM Processing | DL Spending | Machine Hours x Overhead Rate | Bal Transferred to FG Acc | Sold/FG Account | |
| Bal 1 Jul 2018 | 375000 | ||||||
| June | |||||||
| Job | B12-008 | 263000 | 2500 | 13500 | 14400 | $ 293,400 | Sold |
| Job | K12-009 | 163000 | 1400 | 36000 | 48000 | $ 248,400 | Finished Goods End Bal |
| Job | K12-011 | 0 | 71800 | 85100 | 67200 | $ 224,100 | Sold |
| Bal 730 June 2019 | $ 248,400 | ||||||
It shows that all jobs which have completed are sold with the exception of K12-009. Thus, the ending balance of K12-009 represents total balance of finished goods inventory as on June 30, 2019. The finished goods inventory is worth $248,400.
References
Blokdyk, G., 2018. Job Costing a Complete Guide. 1st ed. Emereo Pty Limited.
Boyd, K.W., 2013. Cost Accounting For Dummies. 2nd ed. John Wiley & Sons.
Gupta, K.P., 2009. Cost Management: Measuring, Monitoring & Motivating Performance. 1st ed. Global India Publications.
Hansen, D.R. & Mowen, M.M., 2017. Cornerstones of Cost Management. 4th ed. Cengage Learning.
Hansen, D., Mowen, M. & Guan, L., 2007. Cost Management: Accounting and Control. 6th ed. Cengage Learning.
Shank, J.H., Govindarajan, V., Govindarajan, S. & Shank, J.K., 2013. Strategic Cost Management: The New Tool for Competitive Advantage. 2nd ed. Simon and Schuster.
Warren, C., Reeve, J.M. & Duchac, J., 2016. Financial & Managerial Accounting. 14th ed. Cengage Learning.
