International Decorative Products

In contrast to absorption costing system, the material usage variances account has at least one significant advantage: it counts real material expenditures (and absorption costing system douse not it). Indeed it is very important for manufactures as IDP, where row materials expenditures (the materials costs, quantity of materials etc) take a big part of total cost. Absorption costing system of IDP takes stock of production overheads for products in total kilograms produced. But in such case it does not take stock of the defective goods, waste or the other such materials expenditures. For example, 1 kilogram of vermillon (needed for production of red paint) costs 50 $. To make 100 units of paint the 50 kilograms of vermillon should have been used, or 2500 $ (by calculation in absorption costing system). But really for 100 units of paint the 53 kilograms of vermillon were used. 3 kilograms over = 150 $. So, from every 100 of units usage variance in $ is 150$, which were not calculated before production. That is why the costs of work-in-progress (WIP) never agree with the book balance. Evidently, stock loss £15,000 for last period in IDP (in the guidelines) - that is total material usage variance, which have been not calculated with absorption costing system.

Also absorption costing system of IDP makes errors in prices of products. Every month material price variance, fixed overhead volume variance and fixed overhead expenditures variance are calculated. The results of these calculations determine the prices (all these costs are included in the price of an every unit). But again – the expenditure of real materials usage are not calculated and not included in price. For manufactures as IDP the increasing of production may not influence significantly on overhead costs; the row materials price is not depended directly from production scale; but with increasing of production the material usage variance would be more appreciable. So, for IDP the calculation of material usage variances is more appropriate account system than absorption costing system. For manufacture, where material usage is very significant expenditures, calculation of material usage variances helps to calculate all significant expenditures.      

Production overheads are specific expenditures – they do not correlate directly with the manufacture’s output. Absorption costing system includes all costs for one unit production in the price for this unit (or almost all costs as it was mentioned above). So, in absorption costing system the unit price are determinate by expenditures for this unit production. But it is impossible to correlate all production overheads (which are not related directly to the output) with production of every kilogram of IDP products. The production overheads may not change with increasing or decreasing of output. It is so-called economy of scale (when production increases). For example, we need the same place, same number of workers, same machines to produce 100 kilogram of paint and to produce 1000 kilogram of paints. The workers’ salary would be direct costs, and it may be calculated in the unit price. But the donations for workers (if the work is harmful) would be the production overhead, and the donations amount would be the same for 100 kilograms and for 1000 kilograms of products. In the same time the production overheads may increases when production does not. Therefore, the calculation of production overheads by the use of absorption costing system may be not appropriate at such manufactures as IDP where output is calculated in kilograms. 

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