Systems Life Cycle Costing: Cost Management Essay

Question:

Describe about the Systems Life Cycle Costing for Cost Management?

Answer:

Using the FIFO method in process costing the costs incurred in the mixing department. Costs which enter the marketing department first are recorded first, which shows the FIFO method.

The units are calculated:

Direct Materials

Conversion Costs

Transferred In

Units in Opening WIP

5000 liters

% of completion in opening WIP in previous year

% of opening WIP being completed this year

Transferred units in opening WIP

3000 liters

3000 liters

Units produced in January

90000 liters

1000 liters

89000 liters

Units transferred in January

89000 liters

89000 liters

89000 liters

Units in Closing WIP

6000 liters

6000 liters

% of completion in closing WIP in this year

Transferred units in closing WIP

3600 liters

3600 liters

Total Units

95600 liters

95600 liters

91400 liters

(Eldenburg and Wolcott, 2011)

Opening WIP includes 40% of 5000 liters was completed in the prior period, which is 2000 liters. Thus, in this year the opening WIP will be 5000-2000= 3000 liters.

The closing WIP includes 60% of the total closing inventory, which is 6000 liters* 60%= 3600 liters.

Cost per Unit

Total Costs

Direct Materials

Conversion Costs

Opening Inventory

Period Costs

Total Costs

Total Units

95600 liters

95600 liters

Cost per unit

$5 (approx)

$2 (approx)

(Farr, 2011)

Cost Allocation

Total Costs

Direct Materials

Conversion Costs

Opening Inventory

Units Produced

Closing Inventory

Total Allocated Cost

$669,200

$478,000

$191,200


The direct material cost is calculated by multiplying the total unit with $5 and the conversion costs are calculated by multiplying the total unit with $2.

The total cost allocated is $669200.

This question involves the basic concept of process costing. The processing cost can be utilized to calculate the manufacturing costs of the product. In this question the manufacturing costs of the unit is calculated in context to the mixing departments. However, when the manufacturing costs of the cooking department will be done there will be some difference. It is given that no extra direct materials included in the cooking department so, the direct material will remain unchanged. The overhead costs, operations and direct labor is carried out throughout the cooking process. Thus, there will be some changes in the manufacturing costs of the cooking department (Grewal, 2011). The factors which will increase the manufacturing costs are-

Direct Labor- In the cooking process, the company will require more labor to carry out the process, which will need extra labor costs. The labor costs are likely to increase the conversion costs along with the manufacturing overheads.

Operations overhead- The overhead that are related to the activities, which are not directly related to the production process, is operations costs. The operations cost of the process will increase indirect cost related to the cooking department.

Overhead costs- O expenses are likely to increase the indirect expenses, which may increase the conversion costs (Geiger, 2011).

References

Eldenburg, L. and Wolcott, S. (2011). Cost management. Hoboken, NJ: John Wiley.

Farr, J. (2011). Systems Life Cycle Costing. Hoboken: CRC Press.

Geiger, D. (2011). Cost management and control in government. [New York, N.Y.] (222 East 46th Street, New York, NY 10017): Business Expert Press.

Grewal, S. (2011). Manufacturing process design and costing. London: Springer.

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