Cost Accounting Is A Process That Aims To Capture A Companys Production Accounting Essay

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Cost accounting is a process that aims to capture a companys production, to evaluate the input cost of each production. Cost accounting is often used in the company to help the management with decision making. Cost accountants are a beneficial as a tool for management in budgeting and in setting up cost control which improves the net margins of the company in future. Cost accountants in traditional manufacturing companies would usually make use of machines that automate certain operations. Production activity is measured in machine hours. Traditional manufacturing is also labour intensive where there are high labour costs and low overheads. Traditional manufacturing allocates the companies' indirect cost to the items produced in order of their volume, number of units produced, direct labour hours and machine hours. The use of machine hours implies that machine hours are cause basis of the factory overhead, this implication is done when only machine hours are used to allocate the manufacturing overhead to products. Cost accountants in traditional manufacturing companies use a single head pool, this method of allocating indirect costs usually results in the incorrect cost of data. Products with high volumes have high labour costs similarly products with lower volumes would usually be understated and be ignored. Traditional manufacturing companies cost accountants are needed to help in the managing of costs which is usually not an easy task to do, but the cost accountants have found a way of managing them.

Modern manufacturing was developed to solve the complexities of running a huge business. Modern manufacturing companies make use computers and robotics; they control the whole production/manufacturing process. Cost accountants would usually need modern manufacturing companies because they have an inherent flexibility to provide special reports and help management with decision making regarding cost activities undertaken. Modern manufacturing firms are usually not forced to abide by the financial reporting requirements. Modern manufacturing companies would usually assign costs to activities and products based on how the costs and resources are consumed by the process or product. Cost accountants are needed in the modern manufacturing companies because it gives them a clearer picture of cost of process and the profitability of customers and products. They are also needed because it would help them with budgeting techniques for the accuracy of financial forecast and also increasing the comprehension of the managers. Cost accountants are needed in the modern manufacturing companies because modern manufacturing firms use computers and robotics this helps in the quick and accurate production of financial plans to help the accountants in wise decision making. Productivity is really improved in modern manufacturing companies because there is a wider set of related element here, which is computers and robotics.

Absorption costing is no longer for modern car producer such as BMW discuss.

Your answer should include suggestions of other costing methods that are more relevant for a modern car producer and provide your explanations.

Absorption costing is absorbing all the manufacturing through units produced. It absorbs all the direct labour, direct materials, with all the variable and fixed costs. It is Generally Accepted Accounting Principles which means it is used for external reporting.

Absorption costing because it absorbs all the cost is not suitable for modern manufacturing firms, because with this costing pricing is lesser extent than it appears to be in the case. Cost is calculated to decide how much profit you have made, and then the price while be set. Because absorbs all the costs, that establishes the fact that it does not recognise the importance fixed costs. This makes it hard to differentiate between fixed and variable costs. The variability of profits also causes confusion because the sales and stock change. Absorption costing recognises the importance of fixed costs in production by including them in the production process. It is used to prepare financial accounts. When production remains constant while sales rise and fall irregularly in number this method will show a less fluctuation in net profit. Absorption costing is not suitable for the modern car manufacturers like BMW because it is not so useful to the management to make wise decisions, to plan and control that is it does not help managers to develop the company's mission and objectives to be the decisive factor in accomplishing them and not establishing performance standards, measuring and reporting actual performance and comparing them to take a corrective action as necessary. This really shows that it is not suitable manufacturing companies like BMW because they need to use the cost information for good decision making purposes and budgeting. But rather modern manufacturing firms like BMW need to use Activity Based Costing because is the method of costing that assigns costs to their activities based on the resources rather than products or services. Other costs and resources are evenly distributed to the products and services they use. This method does not eliminate any costs; it gives more information and takes into account how costs are consumed. This method is suitable for BMW because BMW is involved process improvement and reducing costs. Activity Based Costing assigns all the individual activities involved in the manufacturing process are accurately costed, that is it makes visible waste and non value added. Thus making it easier to identify the cost of each process. It uses unit cost rather total cost. It facilitates benchmarking which means there is a standard reference against which things can be compared and assessed. It provides a better understanding of overheads and it is easily understood by everyone because since companies like BMW discloses their financial reports to the public they can understand why things are the way they are. Activity Based Costing helps with future product planning because for example all the activities associated with BMW can be accurately determined before it is launched. This can also help to determine the price and other expenditures.

Question 3

Cost

£

Material X & Y working 1

4,000

Material which can be used in another machine

6,000

Labour - Department A (working 2)

-Department B (working 3)

12,800

3,600

Sale of machine

5,000

Modification work

2,000

Total

33,400

Total = £ 33,400 + £125, 000

= £ 158, 400

Working 1

5000 - 1000 = 4000

Working 2

Department A 200 x 2 x 4 x 8 = £12,800

Working3

Department B 150 x 4 x 6 = £3,600

Working 4 = £ 33, 400 = 125, 000

= £ 158, 400 x 10%

= £ 174, 240

The minimum price that should be quoted to the new buyer is £174, 240 (working 4). This is because this price includes all the modification work costs. MM should accept the offer made by the new buyer because it more than the amount willing to be paid by the first buyer. MM should also ignore the £2000 deposit made by the original buyer because it is a historical cost that is it is a cost that has already occurred thus making it an irrelevant cost. I would also advice MM to continue with modifications asked for by the new buyer as would bring him more profit than of the original buyer. The profits made would also help him to cover the costs he incurred when making the modifications.

Cost

£

Material X & Y working 1

4,000

Material which can be used in another machine

6,000

Labour - Department A (working 2)

-Department B (working 3)

12,800

1,500

Sale of machine

5,000

Modification work

2,000

Total

31, 300

Working 1

5000 - 1000 = 4000

Working 2

Department A Mach Dept B = £150 x 5 x 2

= £1, 500

Working3

Department B 150 x 4 x 6 = £3,600

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