Case Study on

Sports Drinks

Tech-Tonic
Made By:
Tushar Singhal
Amikav Kothiala
Ishan Goyal
Lalit Sondhi
Nishant Goyal

Cost accounting

Itisaprocessofcollecting, recording, classifying, analyzing,

summarizing, allocating and evaluatingvariousalternativecoursesof
action&controlofcosts.

Itsgoalistoadvisethemanagementonthemostappropriatecourseof
actionbasedonthecost efficiency and capability.

Costaccountingprovidesthedetailedcostinformationthatmanagement
needstocontrol current operations and plan for the future.

Elements of cost

Material
Directmaterial
Indirectmaterial

Labour
Directlabor
Indirectlabor

Overhead(Variable/Fixed)

Productionoverheads
Administrationoverheads
Sellingoverheads
Distributionoverheads
Maintenance&Repair(Officeequipment/Factorymachinery)
GasElectricityWaterRates
Salaries
Rent
Depreciation

Process costing

Itisatermusedincostaccountingtodescribeonemethodforcollecting
and assigning manufacturing coststotheunitsproduced.
Processcostingisusedwhennearlyidenticalunitsaremassproduced.

Itisalsoreferredasanaccountingmethodologythattraces and
accumulates direct costs, and allocates indirect costsofamanufacturing
process.

Importance of process costing

Costingisanimportantprocessthatmanycompaniesengageintokeep track of
where their moneyisbeingspentintheproductionanddistributionprocesses.

Thefirststepinbeingabletoidentify them.Itisveryimportantthatacompany
choosestheappropriatetypeofcostingsystemfortheirproducttypeandindustry.

Processcostingunitcosts are more like averages,theprocess-costingsystem

requireslessbookkeepingthandoesajob-ordercostingsystem.Thus,companies
oftenprefertousetheprocess-costingsystem.

Features of Process Costing

AseparateprocessaccountispreparedforeachprocesswhereallInputs
and ExpensesarerecordedontheDEBITside.

Theoutput of one process becomes the inputofthenextprocessandso

onuntilthefinishedproductisobtained

Whenthegoodsaresold,theamount will be transferred to the cost of

goods sold account.

Whenthegoodsarecompleted,theywillbetransferredtofinishedgoods
account

Process costing procedures

FourbasicstepsinaccountingforProcesscost:
Summarizetheflow of physical unitsofoutput.
Computeoutput in terms of equivalent units.
Summarizetotal costs to account forandComputeequivalent
unit costs.
Assigntotal costs to units completedandtounits in ending work
in process inventory.

Losses in Process Costing

Normallosses-arethosewhichwecannotstopbutarepredictable.Theseare
naturalwastage.
Forexample,ifyoudoingthebusinessoftimberonthebasisoftheirweight.It
issurethataftercuttingoftree,weightofwoodwilldecrease.

Abnormallosses-Allthoselosseswhichhappenduetoabnormalreasonsarecalled
abnormallosses.Followingareitsmainexample.
Ifyouusebadqualityrawmaterialintheproduction,thereisbigriskofwastage
inproduction.So,useofbadqualityrawmaterialisthereasonofabnormalloss.

Limitations of Process Costing:

Thecostobtainedattheendoftheaccountingperiodishistorical in natureandis
oflittleuseforeffective'smanagerialcontrol.

Sinceprocesscostisaveragecost,it may not be accurate for analysis, evaluation

and control the performanceofvariousdepartments.

Onceanerroriscommittedinoneprocess,itiscarriedtothesubsequent
processes.

Processcostingdoesnotevaluatetheefficiency of individual workers or

supervisor.

Thecomputationofaverage costisdifficultinthosecaseswheremorethanone
typeofproductismanufactured.

Tech-Tonic Sports Drink

Western Beverage Companyisamarketinganewproduct,

Tech-Tonic Sports DrinkSyrup.

Thewayofconsumptionofthisdrinkisbymixing5 parts of
water and 1 part of Tech-tonic Sports drinksyrup.

Companyclaimsittobeadrinkwhichreplenishesvitalbodily
fluidsfollowingexertion.

Theproductsellsfor$16 per gallonwitharecentmonths

salesof525,000gallonspermonth.

Quantity Reconciliation
Quantity
Reconciliation

Beginning WIPof2,00,000unitstostartwith
100%materialand50%conversioncosts.

Units in beginning
WIP(100% material,
50% conversion costs)
Units Started

200000
500000

InmonthofApril,5,00,000unitsareaddedto

Units to account for

700000

InTotal,7,00,000unitsareincurredforthe

Units Completed
Units in ending
WIP(100% material,
20% conversion cost)
Lost Units

300000

Units Accounted for

700000

100000
300000

production.
monthofApril.
3,00,000unitsgotcompletedattheendof
April.
3,00,000unitsgotlostduetoworker error.
1,00,000unitsarecurrentlyinending WIPwith
100%materialand20%conversioncosts.
Intotal,7,00,000unitsareaccountedatthe
endofmonthApril.

Cost
Beginning WIP
Cost incurred during April
Total
Units

$
$
$

Cost Per Equivalent Unit Calculation

Material
Labour
Overhead
111,000
$
50,000
$
100,000
450,000
$
373,000
$
800,000
560,000
$
423,000
$
900,000

$
$
$

Total
260,000
1,623,000
1,883,000

Units Completed
Equivalent units, ending
WIP

300,000

300,000

300,000

100,000

20,000

Total

400,000

320,000

320,000

Cost Per Equivalent Unit

1.40

1.32

2.81

20,000

5.53

Cost Reconciliation
Total Cost to account for

1,883,000

Cost of completed units

Transferred to finished
goods(300000 x 5.53)

1,659,000

Cost of Ending WIP

Material(100000 x 1.40)

140,000

Labour(20000 x 1.32)

26,000

Overhead(20000 x 2.81)

56,200

222,600

1,881,600

Difference due to rounding

1,400

Total Cost accounted for

1,883,000

Approach 1

Thecostoflostunitsischargedindividuallytothecost
ofgoodscompletedinthisapproach.

Cost per equivalent good is comparatively estimated

higher.

Cost Per Equivalent Unit Calculation

Material
Labour
Overhead

Cost
Units in beginning
WIP(100% material, 50%
conversion costs)
Cost incurred during April
Total
Units

$
$
$

111,000
450,000
560,000

$
$
$

50,000
373,000
423,000

$
$
$

100,000
800,000
900,000

Total
$
$
$

260,000
1,623,000
1,883,000

Units Completed
Equivalent units, ending
WIP

300,000

300,000

300,000

100,000

20,000

20,000

Lost Units

300,000

300,000

300,000

Total

700,000

620,000

620,000

Cost Per Equivalent Unit

0.80

0.68

1.45

2.93

Cost Reconciliation
Total Cost to account for

1,883,000

Cost of completed units

Transferred to finished
goods(300000 x 5.53)

879,000

Cost of lost units

879,000

122,600

Cost of Ending WIP

Material(100000 x 1.40)

80,000

Labour(20000 x 1.32)

13,600

Overhead(20000 x 2.81)

29,000

Approach 2

Thecostoflostunitsischargedseparatelyinthis
approach.

Costperequivalentgoodisverylowascomparedto
Approach1.

(A) Assume that 80% of units are sold in that month, what will be the
difference in reported profits between the two approaches:

80%of3,00,000=2,40,000unitsaretobesold.
According to Approach 1
Selling Price
Cost Price
Profits

= 2,40,000 x $16*
=
2,40,000
$5.53**

= 38,40,000
x = (13,27,000)
= 25,13,000

According to Approach 2
Selling Price

= 2,40,000 x $16*

= 38,40,000

Cost Price

= 2,40,000 x $2.93**

= (7,03,200)

Cost for lost Units = 3,00,000 x $2.93**

= (8,79,000)

Profits

= 22,57,800

Therefore,Approach1givesmoreprofitthanApproach
2as:
Approach1hashighercostpricebutalsomoreprofits.
Approach2alsoincludesthecostoflostunitswhichreduces
theprofits.
Therefore,itcanbesaidthatApproach1ismorebeneficialto
thecompany.

(B) Which approach is most appropriate from a conceptual standpoint?

Approach 1 is most appropriate from a conceptual

standpointbecause:
Volumeofprofitishigherinthisapproach.
Itisgivingtherealpictureofthebusinessscenario.
Itgivesahasslefreebusinesscriteriaforprofitcomputation.
It is portraying a clear picture of how the future business
transactionsaretobemade.

(C) Senior mangers at /Western Beverage receive monthly bonuses

determines as a percent in excess of a targeted level of profit. Which
method

will

they

favour?

Profits according to Approach 1

$25,13,000

Profits according to Approach 2

$22,57,800

Difference in Profit

$2,55,200

Approach1ismakingthemearnmoreprofits.

Managers will prefer Approach 1 for determining the

bonusesastheysolelydependonpercentageofprofit.