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  • Subject Name : General Accounting and Finance

Management Accounting - Question 1

Solution

If we are keeping old machine

  1. Depreciation Per Year $4000
  2. Annual operating cost $10000
  3. Salvage value $0

Therefore, Total expense for one year will be operating cost + Depreciation i.e. $4000+$10000

=$14000

For three years it will be $42000

If we buy new machine

  1. Cost of Acquisition $14000
  2. Salvage value of current machine $3000
  3. Annual Operating cost $8000
  4. Salvage Value $0

Therefore, the depreciation of the machine per year will be 14000/3 = $4666

Total Operating Cost for first year = depreciation + Operating cost for each year - Salvage value of old machine = 4666+8000-3000 = $9666

Operating cost for second year = Depreciation + Operating cost = (4666+8000) =12666 Operating cost for the third year = Depreciation + Operating Cost = 4666+8000 =12666 Total Operating cost for three years of the new machine = 9666 +12666 +12666 = $34998

Total cost of the new machine is much lesser than the old machine.

Therefore, we should replace the old machine and buy the new one, as it will be beneficial for the organization.

As per comparisons made the cost of new machine is much lesser than the old machine. Moreover, the new machine will be better to use as there are chances that it will be of latest technology and it will make things work easier as it is decreasing the operating cost. There are chances that in starting it will be difficult for the labor to use new machine but after some time they will get used to it and it will ultimately result in decreasing the operating cost, leading to the more profits and better products, which is good for the customer and for business too.

Management Accounting - Question 2

Yes, I agree with the statement that all product costs are inventoriable costs. It is because as per the corporate finance and the concepts product cost are that cost that is

involved in the production process for the purpose of generating the revenue. These are the direct cost involved in the production or manufacturing of a product (Ponisciakova, Gogolova, and Ivankova, 2015). For example, a manufacturer has the product cost that will include raw material, direct labor, manufacturing supplies, and production facility and overheads such as electricity. These are all the product cost or direct cost that is involved in the manufacturing process. For any retailer, the retailer must include the product cost while supplying the material. Supplier purchase material from various supplies and the material already involve the product cost which is costing the supplier. One of the major reason that all product costs are called inventoriable costs is because all the costs which are incurred by the firm are transformed in expenses and to become a inventoriable cost, if the cost is not paid by the firm on immediate basis and eventually add up in the inventory account, until and unless the goods are sell; is referred as inventoriable costs product (Ponisciakova, Gogolova, and Ivankova, 2015). It can also be inferred that inventoriable costs or product costs are either sold or unsold in nature and are usually considered as an asset for the firm in the balance sheet.

Any other cost in walled in the product or bringing product or goods to the market is another cost and is not in walled in the product cost. Product cost is incurred and generated in the process of manufacturing or in the process of acquiring a product that is considered to be product cost. It is therefore said that all the Product costs are inventoriable because product cost is often treated as inventory. Inventoriable costs are those that add some value to the inventory and the direct cost in the manufacturing process is all about creating value in the inventory. Therefore, the product cost is often treated as inventory. Whenever any product is sold or whenever any product costs something then the part of the cost of goods sold becomes a part of product cost and which is shown in the income statement (Weygandt, et al., 2020).

It is also necessary to understand that from one industry to another, these inventoriable costs vary significantly; they also differ in the supply chain in terms of one supplier to another. Hence, it can be understood that inventoriable costs for manufacturer and retailer may be different.

Inventoriable cost is also known as to be the product cost. It is not that all the product cost is the only known to be inventoriable cost but also inventoriable is known by the name which is product cost and it refers to the direct costing of manufacturing of product and a cost related to it. It is calculated for revenue generation and the manufacturing process. Whenever any product is sold to a consumer or a customer or disposed of in any way then the cost of curd is charged to the expense account specific to that product. Before the inventory gets sold in any form it is recorded on the asset side of the balance sheet. The cost of production or inventoriable cost differs from supplier to supplier or from industry to industry. It depends on various manufacturer considerations. For a retailer, all the cost in the acquisition of product from manufacturer is the inventoriable or product cost and for a manufacturer, the cost associated with carrying out direct material, direct labor, raw material is said to then go to inventoriable or product cost (Birt, et al., 2020)

This statement can be further elaborated with the help of following example-

Let’s say there is an Automobile Company operating in Canada which assembles different parts of car for resale purpose to other countries. The company imports different part of car from different parts of the world. For example: engine from one country, some parts from china and rest of the components made in house. Now to identify the inventoriable cost the manufacturer must include all the cost right from the acquisition to the point we have them in the warehouse. It will include costs such as direct labour, freight-in,and any other manufacturing overheads.

Hence, this statement is completely agreed that all product costs are inventoriable costs and are also referred as direct costs because they are responsible for revenue generation by manufacturing if

unit cost will be$500 ($2500/50 units). To break even and make profits, a single car must be sold for a price which is higher than $500.Once it is sold to retailer company will record the same as COGS in income statement.

References for Business Reporting for Decision Making

Birt, J., Chalmers, K., Maloney, S., Brooks, A., Oliver, J. and Bond, D., 2020. Accounting: Business reporting for decision making. John Wiley & Sons.

Ponisciakova, O., Gogolova, M. and Ivankova, K., 2015. The use of accounting information system for the management of business costs. Procedia Economics and Finance, 26, pp.418-422.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2020. Managerial accounting: tools for business decision making. John Wiley & Sons.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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