Accounting Business Reporting for Decision Making

480 Accounting: Business Reporting for Decision Making

Illustrative examples 11.3 and 11.4 demonstrate the use of both costing systems by a manufacturing entity.

ILLUSTRATIVE EXAMPLE 11.3

Determination of inventoriable product cost — single product

(process costing)

Joanne (Jo) Geter established a private company, Coconut Plantations Pty Ltd, located on the Sunshine

Coast in Queensland, to manufacture and sell a range of sustainable coconut-based products such as soaps,

candles and detergents. The company commenced operations in September 2016. Assume that Jo made

a cautious, risk-averse decision to manufacture only soaps initially to reduce production complexity, and

planned to increase the range of products gradually as feedback was obtained on production processes.

In the first four months of operation, Coconut Plantations Pty Ltd produced 15 000 soaps, of which

12 500 were sold. The following costs were recorded:

Direct material

Direct labour

Manufacturing overhead

$ 180 000

100 000

50 000

Total manufacturing costs

Warehouse and distribution expenses

Selling and marketing expenses

Administrative and finance expenses

$

$

330 000

42 000

3 000

35 000

Total non-manufacturing $ 80 000

Determining the inventoriable product cost for Coconut Plantations Pty Ltd is relatively simple as the

company produced only one product, soap. A process costing system is therefore suitable as all manu-

facturing costs will be consumed in the same way by all units of output. The total manufacturing costs

incurred in the production process for the first four months were $330 000, being direct material, direct

labour, and manufacturing overhead. This amount excludes the selling and administrative expenses, in

line with the IFRS, as they are not ‘costs’ of the inventory.

The determination of the unit cost enables Coconut Plantations to value cost of sales and inventory

on hand at the end of the period as follows: $275 000 (12 500 units × $22) will be expensed to cost of

sales; and $55 000 (2500 units × $22) will be recorded as a current asset (inventory). (Further discussion

of the effect of opening and closing inventories on the determination of inventoriable product costs in a

process costing system can be found in management accounting texts.)

Assume that Coconut Plantations extended its range of products in 2017 to include candles as well as

soaps. The choice of costing system now depends on how resources are consumed by each product. If the

indirect costs are consumed differently, an averaging approach to product costing will no longer be appro-

priate. In order to recognise the difference in resource consumption, Coconut Plantations would have

to adopt a job costing system to determine the inventoriable product cost for each product. Illustrative

example 11.4 illustrates how the costing system would change for Coconut Plantations with the introduction

of the new product line, candles, which consumes resources differently to the existing product, soaps.

ILLUSTRATIVE EXAMPLE 11.4

Determination of inventoriable product cost — multi-product

(job costing)

Coconut Plantations Pty Ltd has extended its product range, and now manufactures both soaps

(30 000 units) and candles (20 000 units).

Soaps Candles

Units

Direct costs

Labour hours per unit

Machine hours per unit

30 000

$613 125

.25

1

20 000

$276 875

.125

1.5