Review of Cost Accounting

Published:

Part one

Introduction:Cost accounting plays very significant role in the success of the any business, manufacturers, retailers, service industry firms, agribusiness companies, nonprofitcompanies, and government agencies all use the cost accounting process to be competitive in the market place. Every organization has goals and objectives like profitability,customer satisfaction etc., in persuasion of goals Business needs information, that information would of management range across financial,production,marketing,legal, environmental issues and information is needs increase as size of organization increase, Cost Accounting is process of identifying,measuring,analyzing, interpreting and communicating information to achieve organizational goals.

Role of cost accountant in organization is very important , role of cost Accountant now a days has completely changed what it used to be a decade or two ago, in past cost Accountant operated in a strictly staff capacity usually physically separated from the managers for whom they provided reports ad information, but now a days cost accountant work as very important figure of organization, Cost accountant serves as internal business consultants, working side by side with cross functional teams of organization. My role would be same of the cost accountant, I will work as leader of the teams and would sought out valuable information for Gracie Faye International (GFI). My role would be more significant as being advisor, business partner of the Gracie Faye International (GFI). Working with Gracie Faye International (GFI) I will create value for company by managing resources, activities, and people to achieve organizational goals effectively and efficiently.

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Cost management following applications

  1. Provide information for decision making : Cost management play very important role virtually in all major decisions of the organization, companies like of Disney for example Disney wants to establish new theme park would be heavily influenced by estimates of costs like how much it will costs animal kingdom and managing it throughout its life. Cost estimates are produced by cost management team which will be guiding Gracie Faye International (GFI) for large scale goals and small goals.
  2. Assist, direct managers and control operations: Cost management helps organizations to control day to day operations, it is cost accounting which gives the demand estimates for Gracie Faye International (GFI) through this we can producetoka balls according to budget and if there is variation in actual and budgeted value we will find out the reasons for variances. If cost of production or administrative costs increased marginally cost management would guide Gracie Faye International (GFI) and takes attention of managers such situations.
  3. Motivates mangers and other employees to achieve Gracie Faye International (GFI goals: Cost management and cost accounting will motivate managers and employees because they will be responsible to answer and explain reasons to management for variation in actual results from expected results (Budgeted). Employee empowerment will also help Gracie Faye International (GFI) to motivate its employees because when you will make people authoritative they feel good and put efforts to achieve goals.
  4. Performance measurement of activities, sub units, managers through cost management helps Gracie Faye International (GFI) to achieve goals: Gracie Faye International (GFI) can use performance appraisal of employees to motivate employees and managers.

Corporations not only exist for profits being team leader of the cost accounting department at the Gracie Faye International (GFI) I would be keenly interested to motivate my team members to take the Gracie Faye International (GFI) to achieve organizational goals which ultimately will serve the societies. Secret of Success of the big companies in this world is that they manage people, resources, and environment pretty well which cannot be done without cost accounting. Dell computers, wall mart, and shell their success is depending on efficient utilization of resources these companies use cost accounting estimates and make a computerized systems which is based on cross functional departments. Cost accounting works wonderfully well when you have cross functional collaboration because without input from marketing department about the insights of customers production department cannot produce what they should produce, and production department cannot produce whatever they are asked by marketing department because they will produce according to kind of technology , also production department cannot produce if it costs too much, so collaboration is very vital of different departments in success of firms which would be provided by cost accounting. It is very important for the Gracie Faye International (GFI) to achieve corporate strategies they have to establish a cross functional Cost accounting department, which will decrease costs, make the Gracie Faye International (GFI) more effective in managing resources,

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Part 2 Cost classification

Product Cost

Variable

Fixed

Direct

Indirect

Electricity

Real Estate Taxes

Wood for toka sticks

Leather to tie wood together

Manufacturing Labor

Water

Lubricants for Machinery

Equipment depreciation

Justification for classification of costs

  • Electricity: Electricity is variable costs and indirect costs as well. Electricity costs are variable costs because more time you run machines fans, etc. in business on electricity more will bebill of electricity, so if company increase level of production . This costs is indirect because electricity is not integral part of product, which can be categorized as manufacturing overhead.
  • Real Estate Taxes: These costs are fixed, because taxes are fixed rates. Whatever the level of production will be taxes will be same and fixed. These are overhead costs which means indirect costs as taxes are not integral part of products.
  • Wood for toka sticks: These costs are variable costs as Gracie Faye International (GFI) increase production level more wood will be required wood quantity increases it increases costs. Wood for toka sticks by nature is direct costs of product as this material is integral part of product which can be classified as direct material.
  • Leather to tie wood together: These kinds of costs are also variable costs as Gracie Faye International (GFI) increase production level costs of leather will also increase so we can classify it as variable costs. By nature in terms of (Direct or indirect ) leather costs are indirect costs because these costs are hard be measured or calculate per unit, which means these costs cannot easily be traced easily, how much it will per unit costs of leather. These costs are classified as indirect material.
  • Manufacturing Labor: These kinds of costs are variable costs, normally wages are paid on hourly bases, so it is depending on the level of production as level increase more labor is requiredmore costs will incur. These kinds of costs are direct costs, these costs are classified as direct labor costs, as labor is directly involved with product.
  • Water: These costs are variable costs, costs of water depending on the level of production, as level of production increase which means more units to be produced that means more water is required it costs Gracie Faye International (GFI) more. Waters costs are indirect costs as these cannot be easily traced to specified object.
  • Lubricants for Machinery: Lubricants for machines is variable costs, these costs depends on how much time you run machines which it depends on level of production, as machines are run more time it will costs more for using lubricants for machinery. These kinds of costs are indirect costs
  • Equipment depreciation: Depreciation costs are fixed costs. These costs remain constant regardless of level of activity.

PART 3

  1. Cost of direct materials used.

Direct materials:

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Beginning raw materials inventory June 30

$ 62,000

Add: Purchases of raw materials

510,000

Raw materials available for use

572,000

Deduct: Ending raw materials inventory July 31

75,000

Raw materials used in production

497,000

  1. Cost of direct labor used

Direct Labor ………………………………

745,000

  1. Cost of goods manufactured.

Gracie Faye International

Schedule of cost of Goods Manufactured

For month Ended July 31

Direct materials:

Beginning raw materials inventory June 30

$62,000

Add: Purchases of raw materials

510,000

Raw materials available for use

572,000

Deduct: Ending raw materials inventory July 31

75,000

Raw materials used in production

497,000

Direct Labor ………………………………

745,000

Manufactured overhead ……………………

Indirect materials

24,000

Indirect labor

132,000

Other overhead costs

220,000

Total Manufacturing Overhead cost………………

376,000

Total manufacturing costs ………………………..

1,618,000

Add: beginning Goods in Process Inventory June 30 …….…..

85,000

Subtotal …………………

1,703,000

Less: ending Goods in process July 31…………………….

95,000

Cost of Goods Manufactured …………………………….

$ 1,068,000

  1. Cost of goods sold. (Do not consider any under-applied or over-applied overhead.)

Gracie Faye International

Schedule of cost of Goods Sold

For month Ended July 31

Beginning Finished Goods, June 30

$ 103,000

Add: Cost of Goods Manufactured

1,068,000

Cost of Goods Available for sale

$ 1,171,000

Less: Ending Finished Goods inventory ,July 31

58,000

Cost of Goods Sold

$ 1,113,000

  1. Gross profit.

Gracie Faye International

Income Statement

For month Ended July 31

Sales Revenue

$ 3,500,000

Less: Cost of Goods Sold

1,113,000

Gross Profit

$ 2,387,000

  1. Over-applied or under-applied overhead.

Actual Overhead= 376000

Applied overhead =387400

Over applied = 11400

PART 4

  1. Under a costing system that uses direct labor hours as a driver for the allocation, how much of the inspection costs would be allocated to softball machine?

Total Inspection costs

40,000

Softball pitching machine

Units

20

Direct Labor hours per unit

200

Total direct labor hours of softballs

4,000

Hardball pitching machine

Units

20

Direct labor hours per unit

200

Units

20

Labor hours per unit

200

Number of inspections

15

Total direct labor hours of pitching machine

4,000

Total Allocation base direct labor hours of two products

8,000

POHR = Total Manufacturing Overhead /Allocation Base

5

inspection Costs allocation on Softball on direct labor (5*4000)

20,000

  1. Repeat the same question for hardball machine.

Total Inspection costs

40,000

Softball pitching machine

Units

20

Direct labor hours per unit

200

Number of inspections

5

Softball pitching machine

Units

20

Direct Labor hours per unit

200

Total direct labor hours of softballs

4,000

Hardball pitching machine

Units

20

Direct labor hours per unit

200

Units

20

Direct Labor hours per unit

200

Total direct labor hours of pitching machine

4,000

Total Allocation base

8,000

POHR = Total Manufacturing Overhead /Allocation Base

5

inspection Costs allocation onHardball pitching machineon direct labor (4000*5)

20,000

Both Hardball pitching machine and softball have same numbers of direct labor hours required for 20 units so costs would be same for these both products.

  1. Using ABC and the number of inspections as a driver for allocation, recalculate the allocation for the softball machine

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  1. Repeat the activity mentioned in question 3 for hardball machine.

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Conclusion: Cost accounting plays vital role in managing operations, people, resources to achieve organizational goals, cost accounting provides reliable analysis for management on the bases of information correct decisions are made by companies. Cost accounting sets standards and motivates the employees and managers to achieve those to successfully implement corporate strategy. Cost accounting department is more internalized body which keeps eagle eyes on costs of companies, this department helps businesses to take decisions of capital budgeting, new projects initiatives decisions, new production introduction decisions which cannot be under taken without cost accounting information. To be efficient and effective in this competitive world “Gracie Faye International” have incorporate a cross functional cost accounting department. Competitive advantage in cost cannot be achieved by Gracie Faye International if does not have cost accounting department, it is very necessary to have cost management department which will have to work with production department sales department, marketing department to achieve mission of Gracie Faye International.

References

  1. Managerial Accounting “Ronald W.hilton”8th edition, chapter 1
  2. Managerial Accounting “Ray H. Garrison D.B.A.,CPA”, 12th edition
  3. Cost Accounting: A Managerial Emphasis, 14th Edition by Charles T. Horngren
  4. Management and Cost Accounting by Colin Drury
  5. Managerial Accounting: Tools for Business Decision Making