Product Costing Analysis For Sewing Easy Ltd

Statement of Cost- Traditional Approach
Particulars	Basic Model	Advance Model Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
Units produced and sold	1,600	1,500
Direct Material cost per unit	325	560
Direct Labour cost per unit	150	260

Total Material Cost	5,20,000	8,40,000
Total Labour cost	2,40,000	3,90,000
Total Allocated Overhead cost	1,43,750	1,06,250
Total Cost	9,03,750	13,36,250
Cost Price Per unit	565	891

Allocation of Overhead-Traditional approach
Particulars	Amount
Inspection	20,000
Assembly	90,000
Production Scheduling	1,05,000
Machine set-up	35,000
Total Overhead to be allocated	2,50,000
Total Machine Hours consumed	8,000
Overhead per Machine Hour	31
– Overhead Allocted to Basic Model	1,43,750
– Overhead Allocted to Advance Model	1,06,250

Statement of Cost- ABC approach
Particulars	Basic Model	Advance Model
Units produced and sold	1,600	1,500
Direct Material cost per unit	325	560
Direct Labour cost per unit	150	260

Total Material Cost	5,20,000	8,40,000
Total Labour cost	2,40,000	3,90,000
Total Allocated Overhead cost	75,506	1,74,494
Total Cost	8,35,506	14,04,494
Cost Price Per unit	522	936

Allocation of Overhead-ABC Approach
Particulars	Inspection	Assembly	Production Scheduling	Machine set-up	Total Cost
Cost	20,000	90,000	1,05,000	35,000	2,50,000
Units	950	8,000	550	350
Cost per unit	21	11	191	100

Units for Basic Model	200	4,600	50	100
Units for Advance Model	750	3,400	500	250
Total Overhead for Basic Model	4,211	51,750	9,545	10,000	75,506
Total Overhead for Advance Model	15,789	38,250	95,455	25,000	1,74,494

Statement of Profit and Loss- Tradition Approach
Particulars	Basic Model	Advance Model
Sales	10,84,500	16,03,500
Less:
Total Material Cost	5,20,000	8,40,000
Total Labour cost	2,40,000	3,90,000
Total Allocated Overhead cost	1,43,750	1,06,250
Other Operating Expenses for Advance model
– Selling and Administration expenses	–	1,40,600
– Interest Expense	–	25,200
– Office Rent	–	35,900
Profit	1,80,750	65,550

Calculation of Sales Price Per unit- Tradition Approach
Particulars	Basic Model	Advance Model
Cost per unit	565	891
Add: profit margin 20%	113	178
Sale Price Per unit	678	1,069

Statement of Profit and Loss- ABC Approach
Particulars	Basic Model	Advance Model
Sales	10,02,607	16,85,393
Less:
Total Material Cost	5,20,000	8,40,000
Total Labour cost	2,40,000	3,90,000
Total Allocated Overhead cost	75,506	1,74,494
Other Operating Expenses for Advance model
– Selling and Administration expenses	–	1,40,600
– Interest Expense	–	25,200
– Office Rent	–	35,900
Profit	1,67,101	79,199

Calculation of Sales Price Per unit- ABC Approach
Particulars	Basic Model	Advance Model
Cost per unit	522	936
Add: profit margin 20%	104	187
Sale Price Per unit	627	1,124

The interest of the buyer is towards the advance model and not towards the basic model of the sewing machine (Atkinson, 2012). The costing method adopted by the company is the traditional costing method. Since, the company follows the traditional approach- the overhead has been allocated based on the consumption of the machine hours (Berry, 2009). However, this is not considered to be a practical way of costing because there is no usage of actual consumption while doing the apportionment (Mattessich, 2016). If the company would have adopted ABC model then the price of the sewing machine would have been $1124. The buyer knows the fact that the cost that actually belongs to the advance model has been charged to the basic model wrongly (Boyd, 2013). As the buyer is aware of this fault in the costing system he has preferred advance model to basic model.

Particulars	Budgeted	Expenses per unit
No of units produced	2,000
Direct Material	5,000	2.50
Direct Labour	2,500	1.25
Direct Expenses	2,500	1.25
Overhead Expenses	3,000	1.50

Particulars	Actual	Expenses per unit
No of units produced	1,900
Direct Material	5,200	2.74
Direct Labour	2,600	1.37
Direct Expenses	2,500	1.32
Overhead Expenses	3,200	1.68

Overhead is the indirect cost associated with the production of goods. However, these costs are not directly measurable (Datar M. S., 2015). The company does not know about the actual overhead till the production is complete. Therefore, the management of the company estimates the overhead expenditure and recovers that amount from the customers accordingly. There is a high chance that the amount recovered from the customers is not equal to the actual overhead, this is because that the overhead that is applied is an estimate and not an actual value (Datar S. , 2016).

If the overhead applied is more than the actual overhead then it is known as over recovery whereas if the actual overhead exceeds applied overhead then it is a case of under recovery. The treatment of under/ over recovery of overheads are done as follows

The most widely used methods of treating overhead is by charging the under/over recovery to the profit and loss account.
The under/over absorption can be carried forward to the subsequent year.
The last and the most difficult method is to adjust the under/ over absorption is by the way of distributing it among the existing units

5. The benefits of the ABC system are as follows:

The reliable data that has been obtained from this approach helps the management in the process of decision making.(Girard, 2014)
A proper track of the activities that are carried out can be kept which helps the management in controlling cost.
The company has a proper knowledge of the costs that are involved which encourages the company to make maximum and optimum utilisation of its capacity.
It helps in the pricing of the product correctly as the management is able to trace the costs involved.(Holtzman, 2013)

The limitations of this approach are as follows:

This approach involves lot of time and effort because all the data relating to the cost has to be collected in order to make proper allocations.(Horngren, 2012)
This approach needs the information about the usage of resources. It is not easy to measure or quantify the usage of resources every time.(McLaney & Adril, 2016)
The adoption of this approach is usually avoided by the service industry because they do not involve production of units. Therefore, it is usually adopted by the manufacturing companies only.(Hubig, 2013)

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