Braxton Inc. aims at producing 5000 headphones. It is essential to understand the variable costs to be incurred for the units. The direct materials are incurred at the cost of $60, direct labour at $110, and variable manufacturing overhead costs at $40. Also, the fixed overhead cost is $100,000. Foremost, the initial costing activity involves the calculation of product costing by utilizing absorption costing technique. This starts by computing per-unit costs and the addition of direct labor, resources, and overhead expenditures. The next step entails the calculation of costs per unit on the basis of the fixed overhead costs to incorporate per unit overhead to the estimate. The evaluation is done by obtaining the overhead costs and dividing by the total number of units. Absorption costing accounting also permits a firm to decide the suitable retailing value of each unit.
Direct Materials $60
Direct labor $110
Variable Manufacturing Overhead $40
Total Variable Production Cost $210
Fix manufacturing overhead $20
Unit Production Cost $230
Costs per unit based on the overhead costs = $100,000/5000
Absorption Cost per unit = $210 + $20
Suppose Braxton Inc. anticipates to make $150,000 every month. In order to achieve these sales, the company would require the manufacture of 5,000 units, with the production cost of each item being $230. In calculating the selling price, the first step involves taking the profit margin and divide using the number of the total product. The following phase entails the addition of the product cost to obtain the accurate price of the product. The selling price for each product would be $260. On the basis of the computation below, approximately 5000 units should be manufactured to obtain the required selling price.
Number of Products 5000 units
Product Cost $30.
Selling price = $30+ $230
Absorption costing is the appropriate approach since it puts into consideration every full costing aspect (Aurora, 2013). It incorporates the direct materials and cost of labor in addition to both fixed and variable production overhead charges on the ultimate merchandise. The charge remains with the merchandize pending the point of sale and recorded in the income report as the price of products retailed. Variable valuation is also known as a direct estimation. Variable valuation incorporates every direct cost and variable production overhead price at the culmination of product manufacturing (Hasan. 2015). As soon as the manufactured goods are retailed, they are recorded on the revenue invoice as the cost of products retailed and the production overhead expenses are recorded during the duration they are incurred.
Why not Chosen
Process evaluation is another method but not chosen due to some factors. Process accounting is suitable for production firms that have various regulations. Braxton Inc. produces headphones that are not thought to be standardized as they can be produced in different shapes, colors, and sizes. Therefore, the product may require to be indistinguishable if the process evaluation method is to be used. The other option entailed the use of the ABC method or traditional evaluation since both methodologies approximate the overhead costs linked to the products, and rates are allocated to the cost driver. Each of the bookkeeping techniques has a complicated and precise variance. However, the traditional methodology is unsophisticated, but the rate of precision is an aspect that requires deliberation. The ABC method is more intricate but more precise as compared to traditional valuation; however, it dispenses indirect costs to undertakings and then allocates expenses based on product use.
According to Duska Duska and Kury (2018), several ethical deliberations are based on aspects such as overproduction, allocation of costs, incompatible securities, and asset replacements. It is important to consider ethical accounting procedures in any business entity. Overproduction transpires when bookkeepers select approaches that advance profits based on operations but decreases period expenditures and upturns complete and decent record. Another area that seems to be unethical is the Cost allocation area. Inappropriate allocation of a firm’s financial accounts can result in distortion and possibly ruin a firm’s relationship with the client since clienteles may be exorbitantly in their contractual agreements. Another unethical practice comprises of conflicting interests. This happens when an accountant manipulates figures to advance his or her ambitions as compared to ensuring the company’s reputation is maintained. Finally, asset replacement, which ensues once a new resource has a greater price which inevitably reduces the Return on Investment toward the asset. Therefore, when contracting a bookkeeper and other members of staff, the firm ought to be certain that they are contracting individuals with high ethical standards. After recommendations are presented to advance the firm, one section assists in reducing the conflict of interests. There is a need for accountants to make recommendations that have a positive impact on the Return of Investment and will benefit the firm.
The form Capital planning is utilized by many corporations to deliberate on decisions on utilizing restricted revenue streams. It is likewise utilized in making certain that the investments are of importance in taking a longstanding risk. During the implementation of capital budgeting, it is essential to ascertain and assess prospects, verify the flow of cash that is available as well as determine the amount of cash to be used in the implementation proceses. This can be achieved after assessing the proposed project and decide which project will match the firm’s business plan. After every aspect is complete, a final decision has to be agreed upon on the mode of implementation. The process of implementation has to ascertain that every segment is administered. Moreover, every process must be appropriately implemented. The ultimate implementation section continuously tracks the capital by making sure that every figure is appropriate and in line with the financial plans.
Various forms of capital accounting systems can be used, which makes it significant for a firm to evaluate the appropriate technique for the firm. One of the systems involving the payback duration is a technique employed to assess a project where the preliminary investments will be repaid with the shortest duration. This is computed considering the costs of every prospective project and divide it by the annual cash inflow. The main reason for selecting this technique is that it is less complicated, rapid, and stress-free to compute. For instance, a project with an initial budget of $600,000 could be anticipated to recoup $100,000 each year. This implies that it will take six years to recoup. However, the sole demerit of this methodology is that it fails to consider the likelihood of going past the repayment period.
The selection of the appropriate mode of accounting for the company may prove to a daunting task. It is, therefore, important to consider the factors involved, if it is appropriate for the firm and how advantageous it will turn out to be for the company.
Aurora, B. B. C. (2013). The Cost of Production Under Direct Costing And Absorption Costing–A Comparative Approach. Annals-Economy Series, 2, 123-129.
Duska, R. F., Duska, B. S., & Kury, K. W. (2018). Accounting ethics. John Wiley & Sons.
Hasan, M. (2015). Variable Costing and its Applications in Manufacturing Company. International Scholar Journal of Accounting and Finance, 5(1).