Production costs- these are the costs used in producing the products the company offers. In this regard, the production costs include the cost of materials purchased and factory wages, electricity, and equipment depreciation (Boyd, 2007). Administration costs which include production supervisors salary and manager’ s salary Selling and distribution costs including advertising and salaries to sales staff and truck lease. After costs have been thus classified, the company then uses cost-plus costing in determining the selling price for its products. In this regard, the company’ s revenue is determined by marking up the estimates of direct material costs and direct labor costs by 35%.
It should however be noted that this kind of cost classification may not be appropriate due to the fact that some costs are ignored when determining the price at which to sell the product. For instance, administrative costs and cost of electricity have not been factored in determining the cost at which the company’ s products will be sold (James, 2002). Thus, this kind of cost classification and hence costing may result in the company either over costing or under costing its products. Estimating the cost of goods manufactured and sold From the additional information, the following can be noted; Only 90% of direct materials have been used 80% of rent relates to the production 95% of equipment is used in production All electricity is used in production 50% of managers salary is used in production It should also be noted that 20% of manufacturing costs relate to work in the process.
This implies that; Only 70% of direct materials have been used on finished goods 80% of the rent used in production relate to finished goods 80% of the equipment depreciation relating to production is for finished goods 80% of electricity relate to finished goods 80% of the manager’ s salary relating to production should be charged to finished goods (Cliffsnotes. com, 2014). 80% of the supervisor’ s salary relates to finished goods. 80% of the production of staff salary relates to finished goods. From the above information, the cost of goods sold could be estimated as follows; Direct materials = 70/100× $300,000 = $210,000 Rent =80/100× 80/100× $80,000= $ 51,200 Depreciation = 80/100*95/100* $25,000 = $ 19,000 Electricity = 80/100* $12,000= = $ 9,600 Manager’ s salary =80/100*50/100*$80,000 = $ 32,000 Supervisor’ s salary = 80/100* $35,000 = $ 28, 000 Staff salary = 80/100*$250,000 = $ 200,000 Total production cost = $ 549,800 CTC Income Statement For the month ended 31st October 2014 Sales $980,000 Less expenses: Materials purchased $210,000 Factory wages $200,000 Production supervisor’ s salary $28,000 Rent $67,200 Council rates $ 5,000 Sales staff $110,000 Advertising $ 18,000 Equipment depreciation $20,250 Electricity $9,600 Managers salary $72,000 Truck lease $10,000 Total expenses (750,050) Net profit $229,950 Comparison: Looking at the financial statement prepared by the company and the one I have prepared above, one will note that the income prepared by the company has far less net profit compared with the one I have prepared (Lister, 2011).
While the company’ s financial statement showed a net profit of $55,000, the income statement that I have prepared above reports a net profit of $229,950. In addition, the company reported direct materials worth $300,000 while I reported direct materials worth $210,000. The same case applies to other expenses that report fewer amounts than those reported by the company including production staff salary, managers’ salary, rent equipment depreciation, electricity, and production supervisor’ s salary.
Boyd, K2007, Cost accounting for Dummies, London, Rutledge.
James, D2002, Accounting for Manufacturing Business, Oxford, Oxford university press
Cliffsnotes.com, 2014, Accounting by manufacturing companies, Retrieved on 19th November 2014, from;
Lister, J2011, Accounting process for manufacturing companies, London, Rutledge.
Jerrold, S2013, Lean accounting, Oxford, Oxford University Press.
Josphine, N2010, Introduction to managerial accounting, New York, Taylor and Francis.
Johansen, B2005, Managerial accounting, New York, John Wiley & Sons.