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

Apportionment of overheads, Apportionment of Overheads Apportionment...

Apportionment of Overheads Apportionment of overheads occurs whereas the net value of an overhead item is shared among more or two cost centers that employ the overheads. Th

Economic order quantity, Economic Order Quantity This constitutes the...

Economic Order Quantity This constitutes the quantity purchased of either raw materials or stocks which is considered most optimum. It is the quantity such minimizes both ord

Calculate the cost of job - manufacturing overhead, Cube Manufacturing bega...

Cube Manufacturing began two jobs during May 200X. The company had no beginning inventory. The following information is available:

Last in first out or lifo, Last in first out or LIFO LIFO is based upo...

Last in first out or LIFO LIFO is based upon the assumption such the stock purchased last is issued first. Stock valuation should here be based upon the prices ruling on acqui

Cost accountign, Hi, i need the solution manual for cost accounting manager...

Hi, i need the solution manual for cost accounting managerial emphasis 12 edition

Stock control and its level, Stock control and its Level Management m...

Stock control and its Level Management must formulate decisions regarding to the control of stock levels along with a view to minimizing the cost of the company whereas achie

Ppe, is ppe taxable

is ppe taxable

Student, i asking for start up

i asking for start up

Group bonus plan, Group Bonus Plan There are specific operations or j...

Group Bonus Plan There are specific operations or jobs that require to be done collectively via a group of workers, as an example of, continuous production work flows in asse

Estimate the debt and assets ratio, 1. Wrangle Corporation stock sells at a...

1. Wrangle Corporation stock sells at a price of $80 a share and the riskless rate is 7%. Calculate the price of a 9-month call option on Wrangle stock with an exercise price of $7

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