Quiz 9: Absorption Cost System


Absorption Costing: It is a method used in the cost accounting system, under which all the expenses which are related to the production or manufacturing of a product are entered or taken into consideration. Under this method, all the expenses relating to the manufacturing are absorbed by the units that are being produced by the company at that point in time.Profit Center: Profit center is the departments of an organization that generates revenue. For example, the selling department. They also incur some cost but are responsible for generating the revenue for the whole firm including cost center. a.In the present, the company is engaged in the business mobile phone manufacturing. The information regarding the structure, the costs incurred and the other relevant data is provided.This will depend upon the accounting system i.e. how the accounting system of the company will manage such things. If the system agrees to charge or put their idle time at the beginning of the day itself than the same will happen with the boards. The managers will urge the board department to provide the detail at the beginning of the month or the day only. But on the other hand, if the idle time of the accounting system is scheduled at the end then the managers will tell the department to provide for the details at the end of the month or the day accordingly. Moreover, if the inventory is scheduled according to the last day of the month then the risk of idle time wastage is minimized due to the monthly targets and the orders are completed on time by each and every employee.b.There are much dysfunctional behaviors which is being carried on in the plant of the company and the same are as follows: 1. The load problem on the workers during the peak time for completing the order. 2. The board department is not working appropriately as it is working or only utilizing its 70 percent capacity. The main issue in such utilization is that the fixed costs of the departments are 80 percent. So if the department increases its capacity level then also the costs will not increas4e and there will be more manufacturing of the mobile phones in the plant. 3. The incentives which are provided to the managers are based on the basis of months and not on an hourly basis, so the managers tend to get a lower pay as incentives in the month of February than the month of March. 4. If the expenses that are operated in the company tends to vary on monthly basis then the managers of the company will plan the production accordingly i.e. there will be less revenue in the month which has a maximum number of working days. c.The company shall implement numerous changes in its working scenario and some of them are listed below: 1. The company shall start paying the incentives of the managers on the basis of hours and not on the basis of the month. This will increase the production in that month also which has less working days. 2. The charging of costs to the products of the assembly department shall be charged according to the number of units assembled. The costs of the idle time shall not be charged so it will reduce the unnecessary costs from the structure. 3. The fixed costs which are incurred in the board department by the company shall be written off in the books of the company in single time only because the fixed costs of the company are greater than the area of the capacity utilized in the production.

Conversion Costs: It is the sum of all the direct costs incurred during the process of manufacturing and all the overhead costs which are incurred during such a process. FIFO: It stands for first in first out and it is a method of recording the inventory by the company that the oldest inventory is to sell first by the company. In the present case, the data regarding the working of the firm in the first quarter of the year are provided. Before calculating the requirement of the given case, one should understand the relation between ending the beginning work in process and the same is presented with the help of equations which are as follows: img Now, compute the conversion with the help of MS-Excel which is as follows: img The result of the above calculations is as follows: img Therefore the conversion costs come out to be img

Budgeted volume: Budgeted volume means the quantity planned either to produce or sell for a given particular period. Volume expected for the coming year or the long run average volumes are the two ways to estimate the budgeted volume. Calculate the budgeted volume amount (in screen square inches) as shown below: img The over applied refers to excess absorption of overheads. Therefore the actual overheads are less than the applied overheads. Therefore, to get the budgeted overheads the over applied should be added to the actual overheads. Thus, the budgeted volume amount (in sq. in) is img .