You have just been hired as an accountant by LifeStyle Furniture, a manufacturer of specialty, hand-made furniture based in Tasmania. The furniture produced by Lifestyle is in two ranges, Modern and Classical. The two ranges are different in design, but both are high quality, hand-made furniture and are priced accordingly. The owner of the company, Brendan Pierce, has always believed in pricing a quality product based on how much their larger competitors are pricing theirs. His argument has been that "our product is as good, if not better, than the mass producers of furniture, so we should be charging at least as much, if not more, than what they charge".
When you arrived at work for the first time, you learnt that the though the company has been in existence for the last twelve years, they have never had an accountant. The accounts were typically prepared by the Jodie Watts, secretary of Brendan Pierce and Tom Nicholson, a part-time accountant who came in once or twice a month. Tom has informed Brendan that he could no longer spare the time to come in and has suggested the need for an accountant on a full time basis, which is why you have been hired. Brendan, though, is still not convinced of the need for a full time accountant. "Look, why do I need a full-time accountant? At the end of the day, all I need to do is total up my revenues, total up my expenses and the difference is my profit. Do I really need to understand my product costs? What is the purpose of that? It's not like I can lower my prices if my product costs are lower. I just follow the big guys like Harvey Norman and A-mart and price my product according to their prices. Why do I need to know what my product costs are?" asked Brendan.
Jodie, who has been the secretary cum bookkeeper (of sorts) since the day the company started has prepared some information for you. Trying to be helpful, she has alphabetised the accounts. "I do not know much about accounting," said Jodie. "But Tom has said that we need a Schedule of Cost of Goods Manufactured and a Schedule of Cost of Goods Sold, whatever that means. I have last year's accounts for you, so could you please prepare those schedules or whatever and get it to Brendan?" The alphabetised list of accounts can be found in Appendix A.
Four days into your work, there was a fire over the weekend in the main office that stored the accounts. The manufacturing facility was not affected and work could go on, however, most of the information that was for the current year's accounts was damaged and only partial fragments were readable. These are shown in Appendix B. Luckily your work on last year's accounts were not affected as you had brought them home to complete and was still in process of completing them.
"You need to get me back all the information that's now lost! My creditors want to see that information and I need you to work on it asap! If you can't do it, I'll get someone else who can!" cried Brendan when he saw you.
Sifting through ashes and interviewing selected employees, you have worked up some additional information:
a) Jodie remembers clearly that the predetermined overhead rate was based on 60,000 direct-labour hours to be worked for the year and $180,000 in overhead costs. ("Tom mentioned this before he left," Jodie said. "No idea why it is important, but if it can help you, good luck".)
b) The production supervisor's cost sheets showed only one job in process on 30th April.
Materials of $2,600 had been added to the job, and 300 direct labour hours had been expended at $6 per hour.
c) The accounts payable are for raw material purchases only, according to Jodie. She clearly remembers that the balance in the account on 1st April was $6,000. Checking with Brendan for his cheque stubs, payments of $40,000 were made to suppliers during April. (All materials used were direct materials.)
d) A charred piece of the payroll ledger shows that 5,200 direct labour hours were recorded for the month. Jodie has confirmed that there were no variations in pay rate (i.e. all employees were paid $6 per hour.)
e) Records in the warehouse indicate that the finished goods inventory totalled $11,000 on 1st April.
f) From another charred piece of paper, you discerned that the cost of goods manufactured for April was $89,000.
You are now ready to reconstruct the T-accounts and give Brendan the information he needs before you lose your job! When you went in to tell him that you can now start working on the information, Brendan tells you that he has spoken to Tom (their previous part-time accountant) and that the following information are required: "Tom says we need the following information: Work in process at the end of April, raw materials purchased in April, Overhead applied, Cost of goods sold in April, and Raw materials used in April. He also suggested that we should be looking at whether the overhead was over- or under-applied, whatever that means. "
As you were about to leave, Brendan stopped you. "Listen, I have heard talk of this new costing system that some of our competitors are using and I want to know more about it. I need you to tell me what it's all about and whether it would suit us. They are calling it ABC or something like that. It is said to be a better costing system but I am not sure. Tell me more about it. I need to know how it works, its benefits and its limitations. If it works for us, I would like to implement it as well. I do not want to be left behind!"
REQUIRED:
Prepare a report (no more than 10-pages) for Brendan Pierce that addresses the following:
a) The purpose of a product costing system.
b) Preparation of a Schedule of Cost of Goods Manufactured and Cost of Goods Sold. (The schedules may be in the appendix). Explain why some items have been excluded from the schedules.
c) Complete the T-accounts and determine the following:
i. Work in Process at the end of April;
ii. Raw materials purchased in April;
iii. Overhead applied in April;
iv. Cost of Goods sold in April;
v. Raw materials used in April; and,
vi. Over- or under-applied overhead in April.
d) Discuss how overheads can be over- or under-applied and how the company should deal with the over- or under-application.
e) Evaluate whether ABC should be introduced. (Hint: remember to consider both the costs and benefits of any action recommended.)
Attachment:- Appendix.png