Cost Accounting systems and their objectives in various establishments


Cost Accounting Systems are the methods and techniques used by enterprises to track resources consumed in creating and delivering products and services to consumers.

Employees use the information to manage resources efficiently.

Management uses the information to evaluate and reward employee performance.

In addition, the information is used for external reporting requirements (balance sheet and income statement).

Cost accounting systems are typically designed to accommodate the specific needs of individual companies

2.What are the major objectives of a cost accounting system in a hospitality establishment?

The main objectives of a cost accounting system are: the ability for measuring various departments' needs such as F&B and Front Office as well as the revenues they generate. In order to control these, the hotel must use the system. Every department of the hotel is being controlled and all the related information is then used in order to evaluate the costs and make any proper adjustments.

3.What are the major objectives of a cost accounting system in a hospitality establishment?

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In manufacturing and service companies, cost accounting systems help attain two important management objectives:

To determine unit manufacturing costs.

To provide managers with useful information for planning and cost control functions.

This includes the total and unit costs of the following:

Direct materials is the raw material used in production whose costs are directly traceable to the products manufactured.

Direct labour is wages and other payroll costs of employees whose efforts are directly traceable to the products they manufactured.

Manufacturing overhead is a catch all classification, which includes all manufacturing costs other than the costs of direct materials and direct labour.

4.What are the procedures in job order costing, process costing and activity based costing.

- When a company operates using job-order costing, a specific set of events will usually occur with each job. Generally, the process is as follows:

An order (or sales order) is received for the batch of products

A production order is issued from the sales order

Materials and labour are ordered and tracked for the set of products

Manufacturing overhead is allocated to the job using a predetermined rate (usually per labour hour or per machine hour)

Actual manufacturing overhead will not affect the work-in-process account, instead it is charged to a control account

Direct labour and materials are charged by the accountant to the work-in-process accounts using the actual amounts incurred These amounts are all tracked using a job-costing sheet, which will most likely be in a computerized format and a subsidiary ledger is kept for each job

Abnormal spoilage (spoilage that is above and beyond what would be expected from the job) is considered a period cost and is reclassified from the work-in-process account into a separate account so it can be addressed by management.

Process costing systems follow specific procedures, and while exact procedures

may vary by company or by industry, they will generally follow these steps:

While other types of costing start with a sales order, a sales order is not needed for process costing as it is a continuous process

The work-in-process accounts are divided by department and are named as such - for example: Work-in-process - Department Name

The first department in the process makes the first entry into the work-in-process account, generally for the direct raw materials

As the products move from department to department, entries are made to each work-in-process department account

Direct labour costs are recorded by period

Actual overhead costs are recorded; no contra-account is needed because there is no over- or under-applied overhead due to the actual cost being applied

Indirect costs are applied to the overhead account in actual amounts

Normal spoilage is recorded as a cost to the work-in-process account; abnormal spoilage is removed from the work-in-process account and applied to a separate account so it can be addressed by management.

Activity-based costing (ABC) is designed to assign costs to activities.

ABC has become popular due to the fact that as businesses grow in complexity, so does their need to assign increasingly large indirect costs to the appropriate area or activity.

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Computers have contributed both to the complexity of businesses and to their ability to track costs more closely through systems like activity-based costing.

5.Which costing methods (job order costing, process costing and activity based costing) are best suited to the following business and why:

a) Old Home Bakery, Inc (a bakery that produces to order): Is actually an industry that sells items in batches that will be able to use job-order costing most effectively. It will use the job order costing, because it is destined to order rather than mass production.

b) Apache Oil and Gas Refinery: Process costing is proper when products are all the same Process costing is appropriate when products are homogeneous (or identical).

c) The Sea View Resort Hotel: It will use the job order costing, because it is better suited for the businesses that offer services.

d) Willie Wonker's Chocolate Factory: This Company will use the process costing which is a type of costing system that is used for uniform or homogeneous products. Process costing averages the costs over all units to come to the per unit cost. This is in contrast to other types of costing systems, such as job-order costing that is used for products that are in differentiated batches.

e) Harris and Harris Law Firm: This Company will use the job order costing. This method is used for production of large unique and high-cost items.

6.Explain and evaluate LIFO, FIFO and AVCO techniques

LIFO stands for last-in, first-out, meaning that the items that are purchased last are actually the ones recorded as first sold. LIFO valuation is permitted in the belief that an ongoing business does not realize an economic profit solely from inflation.

FIFO is a common method for recording the value of inventory. It is appropriate where there are many different batches of similar products. The method presumes that the next item to be shipped will be the oldest of that type in the warehouse. In an economy of rising prices (during inflation),

AVCO is a method of determining the value of an inventory by calculating unit cost that is the result obtained by dividing the total cost of goods available for sale by the number of units available for sale.