ACC200 Manufacturing Overhead of Company Voltus Communication Assessment 3 Answer
The case study here deals with the manufacturing overhead of the company Voltus communication. The first three parts presents the overhead and machine hour calculations. The fourth part deals with disposal of underapplied or overapplied manufacturing overhead. The fifth part deals with the use of ABC costing in this scenario. And the final part deals with the calculation of under applied overhead
Overhead produced for applying to jobs – From 01/07/18 to 31/05/19-
To measure the Budgeted Overhead Rate,
Budgeted Overhead Rate= Overhead Rate/ Machine Hours=> $3,600,000/ 80000=> $45/ machine hrs
To identify the amount of manufacturing overhead that Voltus would have applied for the period of 1st July 2018 to 31st May 2019, the applied manufacturing overhead needs to be calculated
To measure the Manufacturing overhead applied from July 2018 to 31st May 2019,
Manufacturing overhead applied from July 2018 to 31st May 2019=> Machine Hours for July 2018 to 31st May 2019* Budgeted Overhead rate=> 73,000 machine hrs* 45 mhrs=> $3,285,000
Therefore, our calculation reveals a manufacturing overhead applied of $3,285,000.
Manufacturing overhead used to work during June’19 -
To identify the amount of manufacturing overhead that Voltus would have applied for the period of June 2019, the following calculations need to be done
To measure the Manufacturing overhead applied for the period of June 2019,
Manufacturing overhead applied for the period of June 2019= Machine Hours for June 2019 * Budgeted Overhead rate => 6000*$45=> $270,000.
Manufacturing overhead over applied or under applied at 30/06/19 –
|Particulars ||1st July 2018 to 31st May 2019||Jun’ 2019||Total|
|Manufacturing Overhead Applied||32,85,000||270,000||35,55,000|
|Actual Manufacturing Overhead Incurred ||33,00,000||288,000||35,88,000|
|Manufacturing Overhead Under-applied||15,000||18,000||33,000|
Manufacturing Overhead Applied during the time 1st July 2018 to 31st May 2019 is $ 32, 85,000. The Manufacturing Overhead Applied during the time is June 2019 is 270,000. $ 35, 55,000. The Total Manufacturing Overhead Applied is $ 35,55,000. The Actual Manufacturing Overhead Incurred during 1st July 2018 to 31st May 2019 is $ 33,00,000. The Actual Manufacturing Overhead applied during the time is June 2019 is 288,000. The total manufacturing overhead applied is $ 35, 88,000.In all three cases, the Manufacturing Overhead is Under-applied. Manufacturing Overhead during 1st July 2018 to 31st May 2019 is $ 15,000. The under applied Manufacturing Overhead applied during the time for June 2019 is $ 18,000. The Total Manufacturing Overhead applied during the time is 33,000.
Ways to set out of the over applied and under applied overhead –
This Answer to question deals with the suitable disposal of the under applied or over applied cost overhead in the case of Colorado Communication. There are different types of overhead. Applied manufacturing overhead refers to the indirect costs that are intended to make a product. Therefore, the goal is to determine, the possible cost of production for the product that we are manufacturing as accurately as possible, after taking the operational cost of using the types of equipment into account. Overhead is the difference between the general manufacturing cost applied as the work progresses and the general actual manufacturing cost during a designated period (Plies, 2016). If indirect cost applicable during work in progress is greater than the cost over a period of time, the difference is called over-applied manufacturing overhead. If the applied overhead is lesser than the actual overhead, it will be deemed as under-applied manufacturing overhead (Walter & Skousen, 2016). These two scenarios are normal in manufacturing because the cost is calculated with the use of rough estimation which is general. These costs are estimated in advance, at the beginning of a period, and are applied to the general costs expected throughout that period. If the overapplied overhead occurs it will result in credit balance and if it is underapplied overhead, it will result in debit balance. Applied overhead is a fixed cost for a specific job or production department within a company. Therefore, the applied overhead will be assigned to all the departments within an organisation. As a result, a certain level overhead costs will be applied to the departments like the marketing department. The overhead levels vary from department to department (Farkas et al., 2016).
There is a total of 3 different ways to eliminate the under-applied overhead. It can be easily written off as COGS account. If the result indicates that the costs allocated are under or over applied, the products are higher than the costs incurred, and the COGS account will be reduced and the income will increase as a result of it.
The second option is to prorate the variations within the work-in-process, finished good and COGS account. Under the Prorate method, it provides better accuracy with calculations. The closing balance of the COGS account will reflect on that. This method will assign the overhead if there aren’t any errors with the calculations (Garrison, et al., 2008).
The cost will be recomputed by utilizing the overhead and the rate. This following option is considered as a beneficial one because the company uses cost-plus contracts. The activities get recost if the overhead value is correct. But, the disadvantages includes it is a time-consuming options because of the level of activities involved such as bookkeeping to data processing.
After the consideration of multiple methods used by the companies to disposal of under applied or the over applied manufacturing overhead, the author here decided to go with the supplementary rate of disposal. It is one of the widely used methods in the field of cost accounting. The supplementary rates provide some key advantages to the companies involved. Generally, at the end of the accounting period, the indirect costs applied differ from the actual indirect costs incurred. The simplest way to eliminate the under or over-application of indirect costs is to recognize the difference as a result of the period. The analysis here made use of the supplementary rates after the consideration of three different models discussed in the part above. The supplementary levy on the overhead will be considered if the manufacturing overhead is under or over-application. Therefore, the cost of job will be adjusted if there is under or over absorption.
Relocate to the COGS (Cost of goods sold) Account account
This Answer to question deals with the applicability of the Activity based costing on the case of Voltus communication company. Activity-based costing as a set of cost management methods provides timely and accurate product cost information in product pricing, entry and exit points, improving company business strategy, business process reengineering and cost control to name a few. The activity-based costing method is proposed to solve the shortcomings of traditional cost accounting and management accounting. It is based on resource consumption for cost calculation, cost allocation according to various “cost drivers” causing indirect costs, and the cost returnable. With the use of Activity Based Costing costing, the attributes are greatly improved, thus providing more accurate information for enterprise to control there and make good management decisions. The capability analysis first divides the enterprise's operation centre, finds the corresponding cost drivers, and determines the production capacity measurement of each operation. The unit-level operation should be divided, and the cost driver rate should be calculated according to the actual production capacity; the rest of the operations belong to the batch level. At the product level, the cost driver rate should be calculated according to the available production capacity. Activity-based costing also applies to the later stages of the product life cycle. In the past, people divided the cost into variable cost and fixed cost according to the relationship between cost and output (business volume), and only regarded the cost that changed with the change of output in the short term as variable cost. While many important cost categories do not change with production in the short term, they change over time with product design, product mix, company product range, and customer range. Therefore, the founders of the activity based costing method, Kaplan and Cooper, strongly putforth an argument that the variable cost need to be further differentiated into both short-term variable costs as well as the long-term variable costs (Demeere et al., 2009).
Analysis of product profitability under traditional costing methods and activity-based costing can help managers find the strongest profitability products and focus on developing these products to maintain their competitive edge. The results of product profitability analysis often help with the product portfolio or variety structure of the company is determined. Product profitability can be measured by the product’s profit margin indicator, but not the same cost calculation method often leads to different cost calculation results, which affects the evaluation of product profitability (Childress et al., 2015). The calculation process of the activity based costing has been accustomed to a large scale of subjective randomness as its allocation process involves indirect manufacturing costs, which will be resulting in distortion of product cost information, and therefore it cannot be treated as a objective aspect. It will reveal the profitability of the product based on traditional costing method, which calculates the indirect costs into the product according to the uniform distribution rate of the whole plant or the departmental allocation rate. In this example, the uniform distribution rate of the whole plant is calculated based on the machine time distribution.
Activity-Based Costing (ABC)-
However, despite all these advantages, Activity Based costing does have some shortcomings. In the stage of cost aggregation, the problem of measuring costs is still a matter that must be solved. A single cost driver is that there is no way to solve the problem of all incremental costs unless the cost drivers are quantifiable; they are useful in the Activity Based (Shields, 1995). If even the cost drivers are difficult to measure, then continuing to operate will only waste more time. Some companies introduce Activity Based only because it is more popular, and then for some companies, it may be more appropriate to fully cost. Because the workload of the activity-based costing method is large, in practical applications, the cost of using and maintaining the activity-based costing method may be greater than the benefits it brings (Kaplan et al., 2014). Activity-based costing is also often accompanied by uncertainty, as there may be more than one cost driver associated with an Activity Based costing technique. We must understand that the Activity-based costing follows a job-based management information system. activity based costing mostly centred on the jon, and as a result, the operation is divided from product design to material supply, from the production process. Later it will be applied to other activities such as the quality inspection, final assembly, and till the process of shipping and completion of sales. Through the confirmation and recognition of the operation and operation costs, the relative real product cost can finally be calculated (Kaplan & Anderson, 2003).
The traditional costing method always charges the indirect costs by machine hours or labour hours. The quantity factor is distributed to each product, which masks the variability of overhead costs, resulting in high production costs and low complexity. A cost-interactive compensation phenomenon in which the production cost is high and the product cost is low and the complexity is low. However, in general, under the traditional cost method, differences in batch size, process variation, and variety specifications will cause cost inconsistency. After considering all the disadvantages associated with the Activity Based costing technique under the case we are dealing with we can come to a conclusion that, Activity Based costing cannot be considered as suitable for the current situation.
Completed Products Account Balance at 30/06/19 -
|Particulars ||Job K-12-009||Abnormal |
|Cost Incurred Up to 31.5.19||$ 163,000||$163,000|
|Direct Material||$ 14,000||$14,000|
|Direct Labour||$ 36,000||$ 36,000|
|Manufacturing OH (1000*48)||$ 48,000||$ 98,000||45,000 (1000*45)|
|Total FG value as on 30.6.19||$ 261,000||$258,000|
|Difference ||$ 3,000|
|Moved to cost PL||$ 3,000|
For the Job K-12-009, the value of the finished goods at normal costing should be $261,000. If it is abnormal costing, the value of finished goods will be $258,000. Therefore, it will result in Increase in cost due to abnormal situation. The difference on this case will be $ 3000. Therefore, it will be shown in costing P&L account.
The analysis Identified a under applied overhead for Voltus communication. The ABC costing on the other hand cannot be regarded as a suitable alternative in this case.