ACC200 Job Costing System Of Voltus Communications Assignment 3 Answer

Answer :

Voltus communications is a manufacturer of communications equipments. It uses the job costing system for pricing its products and calculating profits. Job costing system is used by manufacturers of unique and customized products as the system allows the identification and application of cost of materials, labor and overhead related to a particular job in its cost. It helps in identifying the cost of individual job and bills it to the specific customer. Also the system helps in examining the cost of the job and finding ways to reduce them in later jobs (Bragg, S., 2019).

The report analyses the details of the company for the period from 1 July 18 to 31 May 2019 and June 2019. The results of the analyses are as follows:

1. Manufacturing overhead applied to jobs for the period 1 July 2018 to 31 May 2019:

The total Budgeted Overheads of the Company are $3,600,000 for the financial year of 1 July 2018 to 30 June 2019. The total Machine hours estimated are 80,000. The manufacturing overheads are applied using the predetermined over heads rates based on the machine hours.

Manufacturing over heads Rate = Estimated Manufacturing overheads/ Total estimated machine hours

= $3,600,000/80,000 = $45 per Machine Hour

Machine hours used by all jobs in the period of 1 July 2018 to 31 May 2019 = 73,000 hours

The amount of manufacturing overhead Voltus would have applied to jobs for the period 1 July 2018 to 31 May 2019 = Machine hours used * predetermined overhead rate

                                  = 73,000*$45 = $3,285,000

2. Manufacturing overhead applied to jobs during June 2019:

Manufacturing over heads Rate =$45 per Machine Hour

Machine hours used by all jobs during June 2019 = 6,000 hours

The amount of manufacturing overhead Voltus would have applied to jobs during June 2019 = Machine hours used * predetermined overhead rate

                                  = 6,000*$45 = $270,000

3. Manufacturing Overhead Over-applied or under applied at 30 June 2019:

The difference between the manufacturing overheads applied to the jobs using the predetermined overhead rate and the actual manufacturing overheads cost incurred for the jobs during the period is termed as over or under applied manufacturing overhead. 

If the manufacturing overheads applied are more than the actual manufacturing overheads incurred on the jobs the difference is known as over applied overhead. While if the manufacturing overheads applied are less than the actual manufacturing overheads incurred on the jobs the difference is known as under-applied manufacturing overhead (Accountingformanagement.org, 2019)

4. Methods to dispose of the over- applied and under-applied overhead:

In case where the actual manufacturing overheads and the applied manufacturing overheads are different the manufacturing overheads account shows a balance equal to the amount of over applied or under-applied manufacturing overheads. The difference/balance is to be disposed off in order to close the accounts. 

While accounting for overheads the actual manufacturing overheads incurred are debited to the manufacturing overhead account as they are the incurred cost by the company. The applied manufacturing overhead are credited to overhead account as this the cost that is applied to the jobs. The account has the debit balance if the overheads are under applied and credit balance if the overheads are over applied. In the case of Voltus Communications the overheads are under-applied and hence the manufacturing overheads have debit balance (BCcampus, 2019).

The disposal of over/under-applied manufacturing overheads can be done in two ways:

a. Transfer to the Cost of Goods Sold account: 

The one of the simple method to dispose of the over/under applied manufacturing overheads by transferring the total amount of balance in the overhead accounts to the cost of goods sold account. 

The under applied manufacturing overhead is transferred to the cost of goods sold account using the following entry:

Account Name                                                                                   DR.                 CR.

Cost of goods Sold                                                                             XX

            Manufacturing Overhead                                                                                XX

The over applied manufacturing overhead is transferred to the cost of goods sold account using the following entry:

Account Name                                                                                   DR.                 CR.

Manufacturing Overhead                                                                    XX

            Cost of Goods Sold                                                                                        XX

This method is simple to use and does not consume time. All the over/under applied manufacturing overhead is written off against the revenues of the financial years through the cost of gods sold account (Principlesofaccounting.com).

b. Transfer to the work in process, finished Goods and Cost of Goods Sold account: 

The other method of disposing of the over/under applied manufacturing overheads is to transfer the amount to the three accounts being the work in process account, finished goods account and the cost of goods sold account The method is more accurate and identifies the over/under applied manufacturing overheads to the specific jobs to which they belong. The over/under applied overheads related to the jobs which are still in progress are transferred to the work in process account. The over/under applied related to the jobs which are completed but in stock are transferred to the finished goods account.  The over/under applied manufacturing overheads amount related to the jobs which are completed and sold during the period are transferred to the cost of goods sold account (Accountingformanagement.org, 2019). 

The  following entries are required in this method for under applied manufacturing overheads:

Account Name                                                                                   DR.                 CR.

Work In Process                                                                                  XX

Finished Goods                                                                                   XX

Cost of goods Sold                                                                             XX

            Manufacturing Overhead                                                                                XX

The over applied manufacturing overhead is transferred to the respective accounts using the following entry:

Account Name                                                                                   DR.                 CR.

Manufacturing Overhead                                                                    XX

Work In Process                                                                                              XX

Finished Goods                                                                                               XX

            Cost of Goods Sold                                                                                        XX

This method is more accurate but is time consuming as the allocation of under/over applied manufacturing overheads to the work in process account, finished goods account and cost of goods sold account is to be determined separately. This method needs the accurate information of cost incurred for each job. 

In the case of Voltus Communications, the first method of allocating the over/under applied overheads to the cost of goods sold is more suitable and preferred. The data of the company does not provide information on the actual manufacturing overheads incurred for each job. The data provided is of total manufacturing overhead incurred by the company from 1 July 2018 to 31 May 2019 and the expenses incurred in the month of June. However in order to allocate the under/over applied manufacturing overheads accurately to the work in process, finished goods and cost of goods sold account, the information on overheads actually incurred for each job is required.

Thus the first method of transferring the total over /under applied overheads to cost of goods sold account is preferred for Voltus Communications. The required accounting entry for this is:

Account Name                                                                                   DR.                 CR.

Cost of goods Sold                                                                             33,000

            Manufacturing Overhead                                                                                33,000

(under-applied manufacturing overheads transferred to cost of goods sold account)

5. Activity Based costing:

Activity Based Costing is the system of costing the products/jobs considering the activities that are required to carry out the job or manufacture the products. The system identifies the activities that are required to produce the product and identify the cost incurred in performing these activities. There are various activities performed in the organization and each activity has a different cost.  Thus the cost of activities is allocated to the products/jobs on the basis of the activities used by the product. Hence the jobs will share the cost of just those activities which are performed to complete it (Taylor, E., 2017).   While in costing using the labor hours or machine hours all the manufacturing overhead cost is allocated only on the basis of one activity being the labor hours or machine hours. Thus the job using more labor hours or machine hours will be allocated more overhead cost even if it using very less of other activities. Also some activities are more expensive than others and the jobs using those activities must be charged with higher cost than others (Pondent, C., 2017). 

The use of Activity Based Costing will ensure the indirect cost allocated to the jobs is the cost of the activities carried out in its production. In case of Voltus Communications each job will be charged on the basis of activities used by the job. From the given information on jobs by Voltus it is observed that Job L15-006 uses very less number of machine hours  in June 2019 but it has high number of labor hours. Using the machine hours as overhead allocation method will result in charging the job with less than the actual overhead cost incurred for the job. Using Activity Based costing the Depreciation cost will be charged to the job on the basis of machine hours used but the indirect labor and indirect materials might be charged on the basis of labor hours or direct material used by the job or any other identified activity which result in the overhead cost. Thus Activity Based Costing will result in more specific and accurate manufacturing overhead cost allocation to the jobs and will be useful to Voltus Communications in pricing the jobs more accurately. However Activity based costing system is very time consuming and extensive costing system.

Factors affecting the use of Activity based Costing

Activity Based costing system will help the or in the organization to   find out the accurate cost of the products. However before the ABC system is implemented, it is necessary the following factors are considered by Voltus  Communications:

1. Identification of cost pools: The Company needs to identify the various activities which result in high costs and form different cost pools. Like the machine hours used can be related to the depreciation cost of the machine, electricity used, or  utilizes used in running the machine. While the indirect labor cost can be related to direct labor hours or inspection hours used for the job. If the cost incurring activities cannot be identified, it will be difficult to implement the system. 
2. Time  and cost consuming: The process of setting the activity based costing system in practice is a time consuming process and needs resources to set it up. It also involves cost to implement the system.
3. Job costing (machine hours) is simple: The Job costing system currently used by Voltus communications is very simple as compared to ABC. ABC needs high technical and professional expertise in product costing to identify the activities, their cost and relate activities to the products.

ABC is indeed a more technical and accurate method of costing the products. However if not implemented properly it can lead to misinterpretation of data and wrong decision making. It will be useful to the current situation only if the company is able to ensure right implementation of the method.

6. Balance in the Finished Goods Account at 30 June 2019:

The finished goods account of Voltus Communications have the balance of Job K12-009. This is the only job that is completed during the year but not yet sold.

The Balance of the Finished Goods Account is:

Job K12-009

Balance at 31 May 2019                                                         $163,000

Cost incurred in June:                                     

Direct material                                                              $14,000

Direct labor                                                                               $36,000

Manufacturing Over heads applied                                         $45,000

(Macgine Hours- 1000*$45)

Total Amount                                                                         $258,000

The balance in  the Finished Goods account at 30 June 2019 is $258,000.

Since the total under/applied overheads are transferred to the cost of goods sold account they do not reflect in the finished goods account.