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Submission by:-
Aditya Sanket(B19003)
Arpit(B19009)
Jayant Jain(B19022)
Saransh Kejriwal(B19043)
Objective:
To compare the standard costing system with the process costing system and determine
which is better for the firm.
Introduction
Process-costing systems are used by firms that produce masses of identical or similar units of
output. In such companies, it is fairly easy to set standards for quantities of inputs needed.
Standard cost per input unit calculated can then be multiplied by input quantity standards to
obtain the standard cost per output unit.
Actual process-costing incorporates the disadvantage of costing all products at a single
average amount. This can be tackled by implementing standard-costing method.
Under the standard-costing method, teams of engineers, operations personnel, and
management accountants work together to determine separate standard costs per equivalent
unit on the basis of different technical processing specifications for each product.
Standard costs are usually associated with a company's following costs:
Rather than assigning the actual costs of direct material, direct labour, and manufacturing
overhead to a product, we can assign the expected or standard cost. This means that the
inventory and cost of goods sold will begin with amounts reflecting the standard costs, and
not the actual costs of a product. However, manufacturers would still have to pay the actual
costs. As a result, there are differences between the actual costs and the standard costs, and
those differences are known as variances.
Q.1 Prepare two income statements for the month and two balance sheets as of the end of the
month. One set of financial statements should be based on the company’s actual process
costing system using absolute figures. The second set should be prepared using the proposed
standard costing system, where both raw-material and finished-goods inventory reflect
standard costs.
Sol. Calculations
Monthly figures
Budgeted Manufacturing
Overheads 311500 Factory Rent
Equipment
Depreciation
Supervision
Utilities
Other Costs
Manufacturing Cost Per plate
4.45
Number of plates
produced 80000 22.176 1774080
Accounts Receivable
Collected 1400000
Accounts Receivable Left 217000 Actual
Accounts Receivable Left 490000 Budgeted
Costs incurred
Budgeted 1495200
Actual 1521280
Cash Received
Budgeted 288500
Actual 264000
Income Statement(Budgeted)
Sales 1890000
Cost of Goods Sold 1515500
Gross Profit 374500
Net Profit 374500
Income Statement(Actual)
Sales 1617000
Cost of Goods Sold 1330560
Gross Profit 286440
Net Profit 286440
Assets Liabilities
Assets Liabilities
From the variance analysis, it could be observed that the company is incurring heavier costs
than forecasted and is not able to convert the same into a commensurate revenue stream.
Thus, the company needs to focus on reducing the raw material and manufacturing overheads
cost.
There may also be a case of lack of incentives in sales and marketing, thus not selling the
forecasted number of units. In this case, the relevant problems with the sales and marketing
decisions should be identified and dealt with appropriately.
Q.2 Explain the differences between the two sets of financial statements. Which costing
method should Dang use? Why?
Sol. The first set of financial statements have been prepared by the Process-costing method,
which is used by firms that produce masses of identical or similar units of output. In such
companies, it is fairly easy to set standards for quantities of inputs needed. Standard cost per
input unit calculated can then be multiplied by input quantity standards to obtain the standard
cost per output unit.
The financial statements produced compute the costing of all products at a single average
amount. Furthermore, they do not provide any opportunity for a variance analysis and all the
errors get reflected in the financial statements in the form of incorrect information. This can
be tackled by implementing standard-costing method.
The second set of financial statements have been computed by the standard-costing method.
Under the standard-costing method, teams of engineers, operations personnel, and
management accountants work together to determine separate standard costs per equivalent
unit on the basis of different technical processing specifications for each product.
The financial statements associate the costs with the following costs:
Rather than assigning the actual costs of direct material, direct labour, and manufacturing
overhead to a product, we can assign the expected or standard cost. This means that the
inventory and cost of goods sold will begin with amounts reflecting the standard costs, and
not the actual costs of a product. However, manufacturers would still have to pay the actual
costs. As a result, there are differences between the actual costs and the standard costs, and
those differences are known as variances.
Dang should use the Standard Costing method to prepare the financial statements. The
advantages of the Standard Costing method have been discussed above. Furthermore, the
following benefits are obtained:
• Calculation of Variance: The variance could be calculated based on the forecasted
values and the actual values
• Efficiency Measurement: The efficiency could be measured by taking into account
the actual values as a fraction of the forecasted values
• Management by Exception: Standard-Costing gives the opportunity to specifically
identify the inherent problem in the process, thus making it possible to tackle it
effectively
• Cost Control: Costs can be controlled by taking into account the factors responsible
for the occurrence of the variance
• Better Decision-Making: All of the following analysis provide the opportunity for
making better decisions, and eliminate inefficiencies.