b. Should overtime payments be treated as direct labour, or as overhead?
1.Purpose of management accounting reports:
Means of communication: Management reports are used for upward communication. It is made for use by internal users. Examples are management, government agencies, creditors and many more uses the report to know about inside condition of organization (Garrison, et al., 2010).
Record for future: The reports provide valuable and significant information that can be used as reference in future. Due to this data is collected with maximum care to become source of information in future.
Prepare budget: Managers analyse department’s performance in order to control cost. The managers prepare budget in order to estimate expenses and income over a future period of time. A manager also uses these reports to provide incentive and increment to its employees. From budget reports analysis for future goals and budgets is prepared.
Inventory process efficiency: Companies having physical inventory system uses managerial accounting reports to keep their manufacturing process effective. The reports prepared shows the labour hour wasted, overhead cost and many more which helps company to analyse profitable department and areas needing improvement.
2.Control function of management:
Controlling as function of management is of significant value in business organization. It assures of the actual state of business condition is parallel to expectation. It also gives the exact data needed for effective decision making process and maintaining healthy state of business (Granlund, 2011). Controlling function is used to offer timely encourage and key to manage people in business. Control is not restricted to decide if the plans are being inclined to, yet it also prompts recognizing the reasons of deviations and to take remedial practices accordingly. It is the process by which actions are directed to produce better results and ways are improved to promote outcomes. Controlling also eliminates the obstacles resent and upcoming in path of business. It has great uses on areas which require immediate action. Controlling is also targeted at effectiveness, efficiency and better outcomes. Controlling can lead an organization to survive in difficult time, attain sustainable development and many more.
3.Purpose of product costing:
Reporting to organization: It refers to business effectiveness in monitoring expenses through product cost and inventory control. The accuracy in product costing helps increasing correctness in variable costing (Fisher & Krumwiede, 2012). This also helps in administering the matching principle, combining cost to value, and creating value of business.
Financial accounting: Product costing helps in decision making in financial statement. It mainly involves return on investment and profit earning capacity for an organization. For example variable costing is used to know the expenses that vary with changing level of output and profitability of contract can be determined. Hence product costing acts as a decision making tool for these decisions.
Cost management: It refers to development of new products. When an organization is planning to enter into new product line or innovate some of existing products then product costing act as a valuable resource. This allows business to add some specific cost not only in product but also to material, labour and many more to enable accurate calculation of product cost.
Managerial accounting: Product costs are those which are necessary to produce a product. Product cost composes of direct material, production overhead and direct labour cost (Wyatt & Frick 2010). It also helps in determining actual expenses incurred during a period for manufacturing a product. After knowing a product cost, sale prices and future profit can easily be estimated.
4.aTwo aspects of labour costing:
Recording liability and distributing labour costs: In this labour cost will recorded as business liability. It allows flexibility to manage the allocation of payroll expenses among different departments. It also can be assigned to special project and determine profit. It gives the idea where the department is lacking due to labour control measures and decide which department is giving result.
Payment of labour: During payment of labour direct labour A/c is debited and cash A/c is credited.
4.bOvertime premium treatment:
Overtime premiums is considered as direct labor costs, if it is at the specific request of a client because they want a job to be finished in lesser time the process usually takes (Hart & Ma, 2010). Because where overtime is worked on some specific requirement to meet urgent target for which customer paid extra money as well. Then complete labor cost is charged as direct labor cost.
Overtime premium as overhead cost: Overtime is calculated at overtime rate for employees working extra hours. For example if a worker is working 49 hours a week @7 per hour and for some particular week he works for 56 hours then company pays @ 14 per hour for extra hour worked. The allocation of cost will be:
Direct labor: (56x7) 396
Manufacturing O/H: (7x7) 49
Total cost: 445
Issued to production
indirect material cons.
The “Activity Based Costing Analysis” is an analytical method of inventory control which target at centralising efforts on items which require attention. The purpose of using ABC analysis is to generate policy framework for selective control (Hadi-Vencheh, 2010). The following framework is established to distribute items under different categories:
Stricter control over items which require attention by store and purchase management. Items under category A are of huge consumption value, requires control, frequently ordered and for which weekly statements are prepared.
The B classs is for medium use items. It shows 35% of total stock, which account for yearly 15-20% of overall material consumption. It requires moderate control, lesser safety stock, control on obsolete items and surplus items.
Items uses easier system designed to cause lesser problem to purchase and stores department (Teunter, Babai & Syntetos, 2010). It requires lowest consumption value and accounts for approximately 50% of inventory.
Arguments for ABC analysis:It guarantees authority over the expensive things in which a lot of capital is contributed.
Arguments against ABC analysis:It is not powerful if the material is not arranged into the groups appropriately.
Under this framework, the materials supplied might be ordered into various classes as indicated by their significance. It is built on the concept that a tiny number of things in stores critically take the huge money value of the total materials used in production process. While generally substantial huge number of things may show a less amount of the cash estimation of inventory stores utilized. It is vital system of inventory control. It helps organization to takes inventory issues seriously and invest time to manage inventory with effective measures.
ABC analysis requires more resources than traditional inventory management and it does not meet the requirement as per GAAP. So companies with large capital and stock are unable to use. Thus it’s available for use by small companies.
Fisher, J. G., & Krumwiede, K. (2012). Product costing systems: Finding the right approach. Journal of Corporate Accounting & Finance, 23(3), 43-51.
Garrison, R. H., Noreen, E. W., Brewer, P. C., & McGowan, A. (2010). Managerial accounting. Issues in Accounting Education, 25(4), 792-793.
Granlund, M. (2011). Extending AIS research to management accounting and control issues: A research note. International Journal of Accounting Information Systems, 12(1), 3-19.
Hadi-Vencheh, A. (2010). An improvement to multiple criteria ABC inventory classification. European Journal of Operational Research, 201(3), 962-965.
Hart, R. A., & Ma, Y. (2010). Wage–hours contracts, overtime working and premium pay. Labour Economics, 17(1), 170-179.
Teunter, R. H., Babai, M. Z., & Syntetos, A. A. (2010). ABC classification: service levels and inventory costs. Production and Operations Management, 19(3), 343-352.
Wyatt, A., & Frick, H. (2010). Accounting for issnvestments in human capital: A review. Australian Accounting Review, 20(3), 199-220.
Yu, M. C. (2011). Multi-criteria ABC analysis using artificial-intelligence-based classification techniques. Expert Systems with Applications, 38(4), 3416-3421.