An Introduction To Cost Accounting Accounting Essay

Category: Accounting

In the field of accounting, Financial Accounting is the records of the financial dealings of an organization. It also measure economic performance as a replacement for factor of production. It involves the entire system of monitoring and control of money as it flows in and out of an organization as assets and liabilities, and revenues as well as expenses. Financial accounting gathers and summarizes financial data to prepare financial reports such as balance sheet and income statement for the organization's management, investors, lenders, suppliers, tax authorities, and other stakeholders.

The main reason an organization keep their records because can help them to track the details of the transactions. A record such as sales ledger which shows how much is the outstanding payment by customers who have bought on credit whereas purchase ledger is shows how much is the unsettled payment by the business to suppliers who have provided goods and services on credit. In addition, cash book and bank statements shows all transactions involving cash such as receipts from customers, payments to suppliers, and employee wages.

Financial accounting produces profit and loss account which shows how the business has operated for a specific period. The two accounts are balance sheet and cash flow. Balance sheet is a statement of the assets and liabilities of a business at a particular time and how those assets and liabilities have been financed whereas, cash flow statement is a statement showing how cash has come into the business and for what it has been spent on.

Task 1

1.1 Introduction to Cost Accounting

Cost accounting is one of the methods used for accounting in which all costs acquired in carrying out an activity of an organization or else accomplishing various alternative courses of action such as collecting, classifying and recording data. This data is then summarized and analyzed to decide on the selling price and provides the detailed cost information that management needs to control current operations and plan for the future. In difference to financial accounting which considers money as the measure of economic performance cost accounting deliberates money as the economic factor of production. The managers don't need the information to be comparable to similar information from other organizations. As a substitute, information must be relevant for a particular environment.

The classification of costs can be according to their nature or else purpose. According to their nature, they can be categorized as materials cost, labor costs, overhead costs and further more. According to purpose it can be classified as period costs, product costs, indirect and direct costs, normal and abnormal costs and further more. Costs can be variable, fixed or semi-variable/semi-fixed. Variable costs show a discrepancy with the volume of output, fixed costs persist the same irrespective of output whereas semi-variable costs comprises of both fixed and variable cost elements and will be partially affected by the changes in the volume of activity. Semi-variable costs also can be acknowledged using high-low method. There are various types of costing methods such as unit costing, job costing, contract costing, batch costing, operating costing, process costing, multiple costing as well as uniform costing.

1.2 Types of Costing Method

i) Unit Costing

Unit costing is the costs acquired in the continuous production of a unit of a good or service and it is usually calculated as average cost. This method also can be used for products which can be expressed in equal measureable units. Another name for this method is 'Single Output Costing'. Cost is suitable to ensure the production units. For examples, brick making, mining, cement manufacturing, dairy, flour mills and many more.

ii) Job Costing

Job costing is a specific technique costing system which is used in situations where each job is different as well as separated and is made according to customer specifications. These costs are recorded in the general ledger accounts for life or work batch and summarized in the final trial balance before preparing the statement of work or the cost of production at once. For an instance, this method is used in construction, motion picture as well as shipping industries, in fabrication, repair, and maintenance works, plus in services such as auditing.

iii) Contract Costing

Contract Costing is the amount that a contracted job will cost to perform including labor and material cost. This type of contract is used by an organization who does some type of construction as a part of the services they offer, as those types of jobs are almost or always done on a per contract basis. This method also can be termed as 'Terminal Costing'. This can include various types of construction including ship building, airplane building, road construction, and dam construction. The term typically applies to long term contracts.

iv) Batch Costing

Batch costing is the identification and obligation of costs related to producing a set amount of goods. This includes all fixed and variable costs for producing the batch. The unit cost can be calculated from a series of products costs paid by dividing the number of units produced. For an example, industries like bakeries and pharmaceutical center usually use batch costing method.

v) Operating (Service) Costing

Operating costing is a costing system that is applied to continuous operations in mass production or in the service industries. In the simplest form of operating costing, the costing period is set at a specific length of time, usually a calendar month or four weeks. Moreover, associated costs incurred during the period to the number of units produced and the division of the former to the concluding the average unit cost for the period. For an instance, in the case of a Nursing Home, a unit is treated as the cost of a bed per day and taxi operating cost for a kilometer is treated as a unit.

vi) Process Costing

Process costing is an accounting methodology applied to production carried out by a series of chemical or operational stages or processes. The characteristics accumulate costs throughout the production process and calculate the average unit cost of production at each stage. Moreover, it also traces and accumulates direct costs and allocates indirect costs of a manufacturing process. For an instance, it is applicable to industries such as oil, paint manufacturing, steel, textiles, and food processing somewhere production is repetitive and continuous.

vii) Multiple Costing

Multiple costing is to calculate the cost of product's units which are produced after processing in different operations. The system of determining cost in this way is appropriate where a product consist of of many assembled parts. For an example, motor cars, engines, machine tools, typewriters, radios, cycles and many more. As various components are different from each other in a variety of ways such as price, materials used and manufacturing process, a separate method of costing is employed in respect of each component. It is multiple costing in the sense that more than one method of costing is employed.

viii) Uniform Costing

Uniform costing is the identical approach to costing operations and production expenses by multiple undertakings which may or may not be under the same management. This helps in fixation of price of the product and inter-firm comparisons. Moreover, cost audit and closer relations between members of a trade association have required the establishment of uniform costing. Under this method cost sheet is prepared to find out cost per unit and profits or loss on production and by the availability of cost data of other firms in the industry enables each firm to know its standing in the industry.

1.3 Suggestion of Costing Method for branching in Sarawak

I would suggest that branching of Olympia College in Sarawak should use the Contract Costing because this costing method which involves construction may use heavy machinery, more expenditure as well as the time stretches over a long term period. This is a suitable contract for building the branch campus.

Task 2

2.1 Introduction to Capital Costs, Operation and Maintenance Costs

The built facilities costs to the owner include both the initial capital cost and subsequent operation and maintenance costs. Each of these broad categories of cost consists of a number of elements of cost. Capital costs is the opportunity cost of the funds employed as the result of an investment decision plus the rate of return that a business could earn if it chose another investment with equivalent risk. It is also a one-time setup cost of a plant or project, after which there will only be frequent operational or running costs. The capital cost for a construction project includes the expenses related to the initial establishment of the facility such as Land acquisition which is including assembly, holding and improvement, Planning and feasibility studies, Architectural and engineering design, Owner's general office overhead, Equipment and furnishings not included in construction, Construction which is including materials, equipment and labor, Field supervision of construction, Construction financing which also includes Insurance and taxes during construction as well as Inspection and testing.

The operation and maintenance costs are the expenses incurred in carrying out an organization's daily activities but not directly associated with production. Operating and maintenance expenses include such things as payroll, sales commissions, employee benefits and pension contributions, transportation and travel, land rent, periodic renovations, amortization and depreciation, rent, repairs, taxes as well as owner's other expenses. These expenses are usually divided up into selling expenses and administrative and general expenses. It is also known as non-manufacturing expenses.

2.2 Magnitude and Importance of Capital Costs, Operation and Maintenance Costs

The magnitude of each and every of these cost components is dependable on the nature, size and the location of the project as well as the management organization among many considerations. The owner is interested in achieving the lowest total cost of the project in accordance with the investment objectives.

It is very important for design professionals and construction managers to be aware of construction costs which may be the largest component of the capital cost and further expenses are not unimportant. For instance, land acquisition costs are major expenses for building construction in high-density urban areas and construction costs can reach the similar order of magnitude in the large projects such as building construction costs of nuclear power plants.

Maintenance is an important factor in quality assurance which is another basis for the successful competitive edge. From the owner's perspective, in order to analyze the life cycle cost, it is also important to estimate for each activity proposed program's installation and maintenance. Excessive expenditure is required for maintenance mainly for public infrastructure to take full justification of the impact in the past operation and maintenance costs in the design phase.

2.3 Cost Estimation for new branch of Olympia College in Sarawak

Estimation of Capital Costs

Storey

Facilities

Assets / Equipment's

Quantity

Cost per Unit (RM)

Total Cost (RM)

1

(a). 3

Computer Labs

1). PC

3 x 20 = 60

2,500

150,000

Â

Â

2). PC's Tables

3 x 20 = 60

110

6,600

Â

Â

3). Chairs

3 x 20 = 60

45

2,700

Â

Â

4). White Boards

3 x 2 =

6

90

540

Â

Â

5). Projectors

3 x 1 =

3

1,500

4,500

Â

(b). Library

1). Tables

15

140

2,100

Â

Â

2). Chairs

55

45

2,475

Â

Â

3). Books Racks

10

210

2,100

Â

Â

4). Photostat Machine

2

1,200

2,400

Â

Â

5). Lockers

5

350

1,750

Â

(c).Cafeteria

1). Tables

10

120

1,200

Â

Â

2). Chairs

60

50

3,000

Â

(d). Kitchen

1). Kitchen Equipment's

-

-

2,000

Â

Â

2). Ovens

5

800

4,000

Â

Â

3). Refrigerator

3

1,300

3,900

Â

(e). 2 Housekeeping Training Rooms

1). Bed

2 x 3 =

6

750

4,500

Â

Â

2). Mattress

2 x 3 =

6

300

1,800

Â

Â

3). Pillow

2 x 12 =

24

50

1,200

Â

Â

4). Blanket

2 x 3 =

6

40

240

Â

Â

5). Bed Sheet

2 x 3 =

6

75

450

Â

(f). Marketing Office

1). Tables

8

150

1,200

Â

Â

2). Chairs

8

120

960

Â

Â

3). PC

8

2,500

20,000

Â

Â

4). Cabinet

3

700

2,100

Â

Â

5). Photostat Machine

2

1,200

2,400

Â

(g). Cashier Counter

1). Tables

2

150

300

Â

Â

2). Chairs

2

120

2,400

Â

Â

3). PC

2

2,500

5,000

Â

Â

4). Books Racks

2

220

440

2

(a). 8 Offices

1). Tables

8 x 3 =

24

150

3,600

Â

Â

2). Chairs

8 x 3 =

24

120

2,880

Â

Â

3). PC

8 x 3 =

24

2,500

60,000

Â

Â

4). Books Racks

8 x 3 =

24

150

3,600

Â

(b). 15

Class Rooms

1). Tables

15 x 10 = 150

120

18,000

Â

Â

2). Chairs

15 x 40 = 600

45

27,000

Â

Â

3). White Boards

15 x 2 = 30

80

2,400

Â

Â

4). Projectors

15 x 1 = 15

1,200

18,000

Overall

Â

1). Air Conditioner

50

2,000

100,000

Â

Â

2). Light

600

80

48,000

TOTAL COSTS

515,735

Estimation of Operation & Maintenance Costs

Facilities

Total Cost per month (RM)

1). Rental

10,000

2). Electricity

5,500

3). Utilities

4,500

4). Air Conditioner Services

5,000

5). Salaries

80,000

6). Uniforms

5,000

7). PC Maintenance

5,000

TOTAL COSTS

115,000

Task 3

The routine cost report of the new branch of Olympia College in Sarawak is as follow:

The college is required under State law to obtain preapproval of the capital project or acquisition by a designated Sarawak planning authority in the State in which it is located.

The college fields an initial application for a certificate of need on or before December 31, 2013 that includes a detailed description of the project and its estimation cost and had not received approval or disapproval on or before March 31, 2014.

The college expended the 10 percent of the estimated cost of the project on or before May 31, 2014.

Construction in Process - If a college that initiates construction on a capital project does not meet the requirements under the fixed asset, moveable equipment, or lengthy certificate of need provisions, the project costs may be recognized as old capital costs if all the following conditions are met:

(a). The college's Board of Directors formally authorized the project with a detailed

description of its scope and costs on or before May 31, 2014.

(b). The estimated cost of the project as of May 31, 2014 exceeds 5 percent of the

college's total student revenues during its base year.

(c). The capitalized cost incurred for the project as of May 31, 2014 exceeded the 10

percent of the estimated project cost.

(d). The college began actual construction or renovation (groundbreaking) on or before

December 31, 2014, and

(e). The project is completed before May 31, 2015.

Planning, Design or Feasibility Agreements. - If these agreements do not commit the college to undertake a project, they are not recognized as obligating capital expenditures.

Cost Limitation - Construction Contracts. - The amount if obligated capital costs recognized as old capital costs cannot exceed the estimated construction costs for the project as of May 31, 2014. Additional costs are recognized as old capital costs only if the additional costs are directly attributable to changes in life safety codes or other building requirements established by government ordinance that became effective after the project was obligated.

New capital costs are defined as all allowable classroom capital-related costs that do not meet the definition of old capital costs. Betterment or improvement costs related to old capital costs are new capital assets. Capital costs incurred as a result of extraordinary circumstances are new capital. Direct assignment of new capital costs must be done. This cost center normally includes only the cost of administration. The salary is direct to the administration staff.

Classroom costs are those costs associated with formal, didactic instruction on a specific topic or subject in a classroom that meets at regular, scheduled intervals over a specific time period (e.g., semester or quarter) and for which a student receives a grade.

For cost reporting periods beginning on or after Jan 1, 2014, if you do not operate the program, the classroom portion of the costs are not allowable as pass through costs and therefore not reported pass through costs.

The college receives a benefit for the support it furnishes to the education program through the provision of services.

The lecturers training costs must be incurred by the provider or by an educational institution related to the provider by common ownership or control (cost to related organizations). Costs incurred by a third party, regardless of its relationship to either the provider or the educational institution, are not allowed.

The costs incurred by the college for the program do not exceed the costs that would have been incurred by the college if the program had been operated by the college.

Task 4

4.1 Introduction of Variance Analysis

Variance analysis is an analysis aimed in seeking causes for variances between standard costs and actual costs and to observe how well a business performs. Analysis of variances reveals the causes of these deviations. These feedbacks assist managers in planning future goals, controlling costs, evaluating performance, and taking corrective action or decision-making. Exception management is based on analysis of variance plus attention is given to the corrective measures which need only variance.

A variance is considered favorable if actual costs are less than standard costs. This means that the revenues were more than the expected amount or costs were below the budgeted amount. It is unfavorable if the actual costs exceed the standard costs. If the income is less than expected or higher than the standard cost, the variance is known as adverse or unfavorable. On the other hand, this analysis is often used to provide information and to help administrators when there is a problem to avoid the unfavorable situation from happening again. A change in the comparative proportions of sales possibly will explain some of the differences of the profits in the company.

4.2 Variance Analysis for new branch of Olympia College in Sarawak

Variance Analysis

Title

Budgeted Amount (RM)

Actual Amount(RM)

Cost Variance (RM)

Volume Variance (RM)

Favorable / Unfavorable

1).Maintenance Costs on PC

30 x RM300 = RM9,000

20 x

RM250 = RM5,000

RM50 x 30 = RM1,500

10 x RM250 = RM2,500

Favorable

Â

Â

Â

Â

Â

Â

2). Part-time Lecturers Salaries

180 hr x RM40 = RM7,200

200 hr x RM45 = RM9,000

RM5 x 180 = RM900

20 x RM45 = RM900

Unfavorable

Â

Â

Â

Â

Â

Â

3). Air Conditioner Services

10 x RM300 = RM3,000

8 x

RM200 = RM1,600

RM100 x 10 = RM1,000

2 x RM200 = RM400

Favorable

Â

Â

Â

Â

Â

Â

4). Renew of Staffs' Uniforms

20 x RM30 = RM600

25 x

RM40 = RM1,000

RM10 x 20 = RM200

5 x RM40 = RM200

Unfavorable

Â

Â

Â

Â

Â

Â

5). Renew of Classrooms' Tables

20 x RM150 = RM3,000

15 x

RM140 =

RM 2,100

RM10 x 20 = RM200

5 x RM140 = RM700

Favorable

Conclusion

Accounting involves the creation of financial records of business transactions, financial flows, and the process of wealth creation in the organization as well as summarized the financial position of a company at a given time whereas, Financial accounting concerned about its records of the financial dealings of an organization. For an instance, recording daily financial activities, and at a more advanced level with preparation of the final accounts such as the profit and loss account and balance sheet to check whether there is a profit or not in a business. It is important for every organization to know the knowledge of financial and accounting to make effective decision making so they can manage the business efficiently and constantly to improve their decision making capabilities. This is especially factual when analyzing accounts using ratios. Without some financial background, the organizations cannot contribute sound input to the decision process and it is hard for the organizations to grow as well as they don't earn much profit.