It is the objective of the concept of profit maximization for a company to realize its profits in a legal and ethical manner. However, managers may tend to manipulate the reported profits to indicate an increase in profits to allocate themselves greater bonuses since their performance evaluation and rewards are directly linked to profits. Therefore, the process of evaluating and rewarding of managers should be designed in a way that prohibits unethical behavior. Further, optimal profits achievable by ethical standards, are lower in the short term in comparison to when the managers have not acted ethically but would increase in the long term.
For a company to ensure that its employees act in an ethical manner, it should establish an atmosphere and a culture of ethical business practices through rewards to employees who act with integrity, fairness, and honesty. Further, the company can establish its own professional conduct and that should be communicated to employees to affirm its visibility for enforcement. Moreover, certified accounting professionals should be hired while at the same time applying ethical values when selecting employees to other departments.
Wages paid to production workers.
Depreciation on machinery in plant.
Rent on factory building.
Maintenance workers’ wages.
Utilities in the plant.
Utilities in the office.
Rent on office equipment.
Maintenance on office equipment.
Actual Costing v. Normal Costing
Actual costing systems do not provide accurate and timely unit cost information, therefore, they are rarely used in practice. Further, the actual overhead costs per unit may vary significantly from one period to the next due to; variation in the number of units produced as well as costs in the periods. Therefore, using actual costing may lead to units produced during low-volume periods being assigned higher costs than those produced during high-volume periods. Accounts can thus wait until the end of the accounting period to use the total actual overhead costs for the period to ascertain the cost per unit to avoid per-unit cost fluctuations (Kinney and Raiborn 2012, p. 63). However, it would be too late to provide decision-making, control, and planning. Therefore, it is appropriate to use normal costing system as well as the predetermined overhead rate to mitigate the problems accruing from using actual costing system.
Normal costing solves the problem by using a predetermined annual overhead rate to assign products a manufacturing overhead thus it is based on the expected overhead costs for the whole accounting period as well as the expected production volume for the year. Normal costing, therefore, results in overhead rates that are more realistic and uniform for all the manufactured units during the accounting period.
Statement of Cost of Goods Manufactured for the Month of May:
Statement of Cost of Goods Manufactured
For the Month of May 2016
Beginning inventory $ 24,000
Add Purchases 54,000
Materials available $ 78,000
Less Ending inventory 26,000
Direct materials used in production $ 51,900
Direct labor 31,200
Indirect labor $ 15,000
Depreciation on machinery 9,000
Rent on factory 21,000 45,000
Total manufacturing costs added $ 128,100
Add beginning work-in-process inventory 6,300
Total costs in progress $ 134,400
Less ending work-in-process inventory 9,600
Cost of goods manufactured $ 124,800
- Income Statement
For the Month of May 2016
Sales $ 165,900
Less: Cos of goods sold:
Add Cost of goods manufactured $ 124,800
Beginning inventory finished goods 15,000
Cost of goods available for sale $ 139,800
Less: ending inventory finished goods 17,100 122,700
Gross margin $ 43,200
Les selling and administrative expenses 18,900
Operating income $ 24,300
- Prime and Conversion costs
Prime costs = $51,900 + $31,200 = $83,100
Conversion costs = $31,200 + $45,000 = $76,200
Sales = $600/ unit; Purchase = $250/unit; Variable cost = $50/unit; Fixed costs = $2,000
Monthly break-even point in sales dollars
= Fixed expenses/contribution margin ratio
Contribution margin = sales – variable cost = $600 – $50 = $550
Contribution margin ratio = 550/600 = 91.67%
2,000/91.67% = $2,181
Monthly break-even point in units
Contribution margin of each unit = $600 – $50 = $550
Fixed cost/ contribution margin = $2,000/$550 = 4 units.
Monthly income for April
15(600-250-50) – $2000 = $2,500
Monthly income for May
20(600-250-50) – $2000 = $4,000
Margin of safety for April
(Actual Sales- Break-even sales)/ Actual sales
($9,000-$2,181)/$9,000 = 75.77%
Predetermined overhead rate = total estimated manufacturing overhead cost/estimated number of machine hours
$96,000/4,000 = $24 per direct labor hour.
Materials, direct labor and factory overhead.
Costs assigned to Job XX: materials $10,600;
Direct labor 100 * $30 = 3,000
Factory overhead applied 100 * $24 = 2,400
The work in process, April 30, 2016 = $16,000 *$120,000/4000 = $30 per hour
Amount of materials placed into production during April 2016.
$X + $120,000 +$96,000 + $20,000 – $16,000 = $400,000
X = $180,000