1.0 Introduction
In this report, my theme for case study is HELP University College and cost assignment (Financial Model) will be applied. The cost assignment (Financial Model) which in order to charge overheads to cost unit, a series of distributions will be used. There are includes primary distribution, secondary distribution and final distribution. Primary distribution is allocation and or apportionment of overheads to cost centre. Secondary distribution is reapportionment of overheads from service cost centre to production cost centre. Additionally, the final distribution also applied in this report for absorption of overheads from production cost centre into cost unit. The recommendation on this cost assignment is given in this report to analysis the cost assignment and then, to conclude the whole report at the end.
2.0 HELP University College (HUC) - Background
HELP University College was formed in year 1986 and has developed into the leading institution of higher learning in Malaysia and to provide affordable quality educational opportunities for Malaysians with a firmly established international reputation among universities, scholars, corporate leaders and business in Asia Pacific, North America and Europe (Then 2010). HELP University College is the flagship subsidiary of HELP International Corporation which was incorporated in year 2005 and become the investment holding company for the HELP Group (About HELP International Corporation: History 2010).
HELP offering programs which includes law, economics, business, management, social sciences, the humanities and IT at undergraduate and graduate levels (Private Colleges and University Colleges in Malaysia 2010). HELP impart the quality of education based on responsible leadership roles and also the graduates preferred employment by multinational companies. In year 2004, the Government status out the conferment of University College as a tacit recognition of HELP's distinguished achievements, then they play their role as a tertiary education in the future (About HELP: Overview of HELP 2008).
HELP's vision is "to help everyone succeed in life and live a life of significance through education" (HELP International Corporate 2009). One of HELP's missions is to be a university college focuses on sound academic standards through with a strong culture of leadership and quality, then, continuous to improve, and talent development of staff and students. It will also provide learning experiences that improve lifetime values, career development and personal fulfilment. Its next missions are to share its success with the community and stakeholders it serves (Institution Profile 2010).
Academic strengths of HELP University College is reputed to have an outstanding teaching faculty by it all teaching staff possesses Master's degrees with many holding PhDs. Many international academics and scholars from top universities like Cambridge, University of Texas Austin, and Harvard who serve as visiting professors, examiners and lecturers was been complemented in local faculty (University Colleges Private 2010). Besides that, a lot of HELP's success situated its unique educational pedagogy and philosophy. Its educational philosophy is holistic (Institution Profile 2010).
3.0 Financial Model - Cost Assignment:
3.1 Primary Distribution
Overhead analysis sheet which is shown in Appendix 1.1 are using the information given in Appendix 1.0 for the initial objective is to assign all manufacturing overheads to cost centres. Cost centre means that some object, activity, or area for which costs are separately collected (Black 2008). At Appendix 1.0, that the direct wage related costs and supervisory salaries have been directly traced to cost centres. They are direct costs when cost centres are the cost object and indirect costs when products are the cost objects. Thus, they are traced directly to the cost centres shown in the overhead analysis sheet in Appendix 1.1. The remaining costs shown in Appendix 1.0 must be allocated to the cost centre using appropriate allocation bases and cannot be traced directly to the cost centres.
Applying the allocation bases to the data given in respect of the HELP University College in Appendix 1.0 it is assumed that lighting and heating, building insurance and depreciation of building are related to the total floor area of the building, and the benefit received by each cost centre can therefore be determined based on the proportion of floor area which it occupies. The total floor area of the building shown in Appendix 1.0 is 17 000 square metres; faculty of applied sciences and multimedia occupies 29% of this and faculty of law and government a further 59%. Thus, refer to the overhead analysis sheet in Appendix 1.1, which 29% lighting and heating, building insurance and depreciation of building are allocated to faculty of applied sciences and multimedia, and 59% are allocated to faculty of law and government.
The maintenance wages cost is generally regarded as being related to the direct labour hours (Drury 2004). Because the direct labour hours for the faculty of applied sciences and multimedia department is 30% of the total labour hours and faculty of law and government department is 54% of the total labour hours then 30% and 54% of the maintenance wages cost is allocated to faculty of applied sciences and multimedia department and faculty of law and government department.
Refer to the Working 1.0, there are showing the calculation to get the figure after allocation for the four cost centres which includes faculty of applied sciences and multimedia, faculty of law and government, canteen and cleaning. The amount of four cost centres are calculate separately each other with the difference number of items of expenditure such as direct wage related costs, maintenance wages, lighting and heating, building insurance and depreciation of building . As a result, that all manufacturing overheads for the HELP University College at the overhead analysis sheet shown in Appendix 1.1 have been assigned to the four cost centres.
3.2 Secondary Distribution:
3.2.1 Ignore Inter-service Method
Ignore inter-service method is illustrated in Appendix 2.1. It ignores inter-service department service reallocations. Thus service department costs are reallocated only to production departments (Drury 2007). This means that the proportions allocated have changed as 10% of the costs of canteen service department have not been allocated to cleaning service department. Thus 60% out of a 90% total, or 6/9 of the costs of canteen service department, are allocated to faculty of applied sciences and multimedia department and 3/9 is allocated to faculty of law and government department. Similarly the proportions allocated for cleaning service department have changed with 5/8 (50% out of 80%) of the costs of cleaning service department being allocated faculty of applied sciences and multimedia department and 3/8 to faculty of law and government department. However, even the ignore inter-service method is simplicity and ease of use (Siegel & Shim 2006), but since it ignored interdepartmental services, then it become less accurate than the other method (Direct Method of Cost Allocation-Service Department Costing 2010).
3.2.2 Repeated Distribution Method
Repeated distribution method is a method which deals with reciprocal services (Bhattacharyya, 2005). This method is the most accurate allocation method because it recognizes and given due weight to inter service transfer (Das 2010). The main advantage of this method is to start from any service cost centre and assign its cost to other cost centre as per prescribed percentages (Drury 2007). Then, after allocation the other service cost centre costs will be allocated to other cost centers. In this way the allocation is continually until the costs become smaller to be significant. Refer to line 2 of Appendix 2.2 that the overheads of canteen service department are allocated according to the specified percentages. Therefore, some of the overheads of canteen service department are transferred to cleaning service department. In line 3 the overheads of cleaning service department are allocated, which means that canteen service department receives some further costs. Then, the costs of canteen service department are again allocated, and cleaning service department receives some further costs. And this process will repeats until line 7, by which time the figures become too small that any further detailed apportionments are needless. Hence, the total overheads after reapportion in line 8 of $872 001 are allocated to production departments only.
3.3 Final Distribution
Budgeted overhead which is illustrated in Appendix 3.0 are using the cost of overhead given in Appendix 2.2 from repeated distribution method. At Appendix 3.0, refer to line 2 that the labour hours are the predominant activity in the faculty of applied sciences and multimedia department and faculty of law and government department. Therefore direct labour hours are used as the allocation base in the faculty of applied sciences and multimedia department and faculty of law and government department. In line 3 the overhead absorption rate can be calculate by using the direct labour hour method, which means that the budgeted overhead divided by budgeted direct labour hours of faculty of applied sciences and multimedia department and faculty of law and government department respectively. Then in line 4, it is assumed that the actual direct labour hour for faculty of applied sciences and multimedia department is 3100 per hours and faculty of law and government department is 6600 per hours. In line 5, the actual overhead absorbed can be calculate from overhead absorption rate multiply by actual direct labour hour of faculty of applied sciences and multimedia department and faculty of law and government department respectively. Additionally, in line 7, the faculty of applied sciences and multimedia department represents an under recovery of overhead of $40,045 when the actual overhead incurred in line 6 were $458,545 greater than actual overhead absorbed of $ 418,500. On the other hand, the actual production activity ($442,200) was greater than budgeted production activity ($413,456) and this will result in an over recovery of overhead of $28,744 in faculty of law and government.
However, it is recommended that budgeted overhead rates should be used than actual overhead rates in HELP. It is because the actual overhead rates will cause a delay in service or product costs. And also the monthly rates used causes fluctuations in the overhead rates throughout the year. To estimate the budgeted overhead rates, an under- or over- recovery of overheads is given whenever actual overhead expenditure or activity is different from budget (Drury 2005). Any under- or over- recovery is treated as a period cost adjustment and written off to loss and profit statement, and therefore not allocated to products.
4.0 Recommendation and analysis on cost assignment (financial model)
In secondary distribution, the simple way of ignore inter-service method is the only justification for using this method compare to the repeated distribution method (Drury 2004). This method is recommended when inter-service reallocations are insignificant. Refer to the Appendix 2.1, the total overhead after allocated and apportioned for faculty of applied sciences and multimedia department is $ 458,160 and faculty of law and government department is $ 413,841. As a result, the total overhead after allocated and apportioned for faculty of applied sciences and multimedia department is obviously higher than the faculty of law and government department.
It is assumed that the reason for this situation is the total amount of direct wages related cost in faculty of applied sciences and multimedia department, $ 213, 333 which is showing in primary distribution (Appendix 1.1) is higher than faculty of law and government department, $120, 000. However, the total amount of other items of expenditure for faculty of applied sciences and multimedia department is lower than faculty of law and government. Means that, the high total amount of direct wage related costs for faculty of applied sciences and multimedia department have to been reduce or amend. Recommend here for amend the direct wage related costs is change the way of salary been given. HELP University College can reduce the direct wage related costs by pay the lecturers on the basis of a salary, and then give commission and bonus to the excellence lecturers. HELP also can hire part time lecturer and pay them salaries on the number of course they teaching. This not only can reduce the costs of direct wage, but also would not affect the lecturer's motivation and still can maintain the performance of university.
Besides that, the lighting and heating expenses of the faculty of applied sciences and multimedia department, $21,765 which showing in Appendix 1.1 also can be amend to reduce the total overhead after allocated and apportioned in this centre. HELP University College can organise a campaign to refresh the lecturers and students mind on saving the energy of electronic and this way indirectly also will save the green environment. Therefore, the cost of lighting and heating will be using by the lecturers and students in more temperance.
Apart from that, in final distribution, the cost of overhead in repeated distribution method is the most accurate, so which is adopted on budgeted overhead. When the service department are continually allocated in the prescribed percentages until the costs become smaller to be significant, then the cost of overhead in the repeated distribution method will become more accurate. However, the service department costs are reallocated only to production departments in ignore inter-service method, and then the cost of overhead is inaccurate.
5.0 Conclusions
It is important to understand how cost systems assign costs to cost objects because it will represent the cost of products to be generated for profit measurement purpose in HELP. Additionally, it is necessary to ensure that the cost is incorporated in the overhead analysis are suitably coded so that different overhead rates can be extracted for different combinations of costs. As a result, there will be enable relevant cost information to be extracted from the database for meeting different purpose in HELP.
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