Critical thinking about cost flow, Cost Accounting

Assignment Help:

Critical Thinking about Cost Flow

It is simple to overlook an important aspect of cost flow within a manufacturing operation. If you see that have taken note of an important concept! Try to give solution to this seemingly easy question: Is downgrading an expense? You are almost certainly inclined to say yes. Other than, the fact of matter is that the solution depends! Let's think this with an instance. Assume that Altec Corporation calculated deprecation of $500,000 for 20X1. 60% of this depreciation pertained to the manufacturing/constructing plant, and 40% related to corporate offices. More, Altec sold 75% of the goods place into production during the year. One third of the remaining goods placed in the production house were in finished goods awaiting resale, and the other portion was still being processed in the factory/industry. So, what do you understand by accounting implication? How does this all shake out? Let's re-examine the above drawn diagram -- this time with flow of the $500,000 of depreciation superimposed (for this illustration, we ignore all other costs and looking only at depreciation piece/part):

217_cost flow1.png

At first, notice that the $500,000 of depreciation cost enters the cost pool on left; $300,000 attributable to manufacturing ($500,000 X 60%) and $200,000 to nonmanufacturing ($500,000 X 40%). The nonmanufacturing depreciation is a time cost and completely makes its way to expense on the right side of graphic. Other than, the manufacturing depreciation follows a much protracted journey. It is assigned to work in the process, and 75% of the goods put in process end up being completed and sold by end of the year. Hence, $225,000 of the $300,000 ($300,000 X 75%) is charged against the income as price of goods sold. The other $75,000 ($300,000 - $225,000 cost of goods sold) remains somewhere in the inventory/factory. In our fact situation, 1/3 of the $75,000 ($25,000) is attributable to the completed goods and becomes part of the finished goods inventory/factory. The other $50,000 ($75,000 x 2/3) stays in work in process inventory because it is attributable to units still in production.

Is it puzzling enough? The base line here is that only $425,000 of depreciation was charged against the income. The other $75,000 was given to work in the process and finished goods inventory. In short, $500,000 ($300,000 + $200,000) entered on the left, and $500,000 can be obtained on the right ($50,000 + $25,000 + $225,000 + $200,000). Coming back to the seemingly simple query, we see that the cost is not always an expense in the same time period. In a manufacturing business, much of the direct labour,  direct material, and factory overhead can end up in inventory -- at least until that particular inventory is disposed.

How much importance does these cost flow concepts contain? Well, they are significant enough that the FASB has specified external reporting rules desiring the allocation of the production overhead to inventory. And, for tax purposes, the IRS have specific "uniform capitalization" rules. Under these rules, inventory must soak up direct labour, direct materials, and indirect costs of including indirect labour, pensions, employee benefits, indirect materials, handling, storage, purchasing, depreciation, rent, insurance, utilities, taxes, repairs, design cost, tools, and there is a long list of other factory overhead items. A company's results of operations are sensitive to the proper cost assignment, and management accountants are focused on the processes for correctly calculating and capturing this information. Subsequent topics will better acquaint you with this kind of aspect of accounting.


Related Discussions:- Critical thinking about cost flow

Production needs in inventory for component a, Kenner company produces two ...

Kenner company produces two products: SR200 and TX500. Budged sales for four months are as follows; SR200 TX500 May 8,000 20,000 June 13,000 32,000 July 11,000 39,000 August 18,000

Compute the days'' sale, Year Ending April 2009, 2009 April 30, 2008 Net Sa...

Year Ending April 2009, 2009 April 30, 2008 Net Sales $10,148,082 $10,070,778 Accs Receivable 1,171,797 1,161,481 Assume that the accounts receivable (in thousands) were $996,852 a

Optimise manufacturing cost, Optimise Manufacturing Cost Of late it is...

Optimise Manufacturing Cost Of late it is perceived that in order to optimise manufacturing cost, a product might be designed and financed in one country; its material /compon

Storing and issuing materials, what is the equivalent unit for materials? i...

what is the equivalent unit for materials? if the cost of normal lots units are absorbed by the units transferred out to the next department the work in process- beginning (60% com

Relevance of interdependence , Describe the meaning and relevance of interd...

Describe the meaning and relevance of interdependence of variances when reporting to managers.

Example of economic order quantity, Example of Economic Order Quantity ...

Example of Economic Order Quantity The EOQ model supposes : - Annual demand is recognized - Hold costs are constant and recognized - Ordering costs are recognized a

Classification of cost, what is the meaning of classification of cost in re...

what is the meaning of classification of cost in relation to variability?

Plot janitorial labor cost produced on a scattergraph, The number of workd...

The number of workdays varies from month to month due to the number of weekdays, holidays, days of vacation, and sick leave taken in the month. The number of units produced in a

Marginal costing, MARGINAL COSTING As per the Chartered Institute of Ma...

MARGINAL COSTING As per the Chartered Institute of Management Accountants, London, the phrase 'Marginal cost' means - 'the amount at every given volume of output through which

What is the amount of overhead applied, Morrow Company applies overhead bas...

Morrow Company applies overhead based on direct labor hours. At the beginning of the year, Morrow estimates overhead to be $620,000, machine hours to be 180,000, and direct labor h

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd