Cost analysis at Vang Company



Today business environment are very hard, competitive and even complex. In order to survive and run a business successfully manager need to have sufficient experience and knowledge in term of management accounting, which will relate to business. This paper will provide relevant information to manager of Vang Company about accounting method, routine cost report. It will help he makes better decision and set up new planning for expand the business. In addition, company can control the cost and increase the profit effectively. The report is also suggest some method to reduce the cost, enhance the value and quality of product.

1.1 The different types of cost incurred in the Vang Company:

In any company, the accountant department is very important to control and manage the cost and profit of company. There are various type of cost in business such as fixed cost, variable cost, semi-variable cost and marginal cost. In addition, it also classify the direct cost and indirect cost. The type of cost incurred in Vang Company include material cost, labor cost. It is very important for company to prepare the financial report, make planning budget or make strategy decision. Therefore, cost must be classified.

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1.1.1 Cost classification for stock valuation and profit measurement: it will be follow three important cost element include material, labour and other expenses. In addition, each element have two types are direct cost and indirect cost.

Direct material cost: It influence on the finished product in the production. For Vang Company will use shirt, sew machines, ink and printer for producing product. Therefore, any cost incurred in buying and handling of these raw materials can be taken under this cost.

Direct labour cost: it is the cost of employees and workers work for company that directly involves the process of production. The cost of benefits, employment related taxes, and overtime pay must be also accounted for. Vang Company has 25 employees include 21 in production department and 4 on administration, sales department. Company should pay the salaries for all employees to maintain the activities of business.

Direct expenses: the cost of services that making a specific product, providing services or running a department. The cost could be the charger for electricity usage for the sew machines and other equipment. Other cost is the maintenance costs of tools, jigs fixtures and so on. Thus, this cost is very important for any organization.

Overhead include all indirect cost incurred by business activities. All cost not charged directly to a product and production in company. In Vang Company, the overhead is the cost of supervisor and manager wages, cleaning equipment, the employees’ insurance and so on. The production overheads can be classified three types are indirect material, indirect wages and indirect expenses.

1.1.2 Cost classification for decision-making: The types of cost in accounting can be classified based on how frequent they reach to production. It include fixed cost, variable cost and semi-variable cost.

Fixed costs are a period charge and relate to a span of time. It does not vary with the level of activity or production. The main example of fixed cost are rent, property taxes, executive salaries, etc. When Vang Company want to expand the capacity, they need to increased demand for its product.


Figure 1 Fixed Cost

Variable cost: the cost will change depend on the change of output. In case of Vang Company, the major variable cost is the cost of material raw. When the volume of output increase, the fixed cost will remain the same but the variable cost will increase. The variable cost can be the cost of raw materials, sales commission and direct labour cost.


Figure 2 Variable Cost

Semi-variable cost (or semi-fixed costs or mixed cost): it is contain both fixed and variable cost and changes in the level of activity. The semi-variable cost include the electricity bills, sales representative’s salary. In addition, it is the maintenance cost of plant and machinery.

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Figure 3 Semi-variable Cost

1.1.3 Cost classification for control: other mission of cost accounting is control and manage the cost effectively. In fact, the manager can control a particular cost item through two types of cost include a controllable cost and uncontrollable cost.

A controllable cost: it will be influence the management decision and action in company.

An uncontrollable cost: this cost could be any cost that cannot affected by management within a given time span.

1.2 The need and operation of different costing methods use by Vang Company:

Company use the costing method to identify and control the pricing and stock valuation in the managerial decision-making. It also contribute to make the right decision for the success of company. There are many reasons for the need and operation of costing method. First, it will plan how much profit is needed or measure the capacity of the business. The manufacturer usually use the costing method to analyse the expenses involved with making product and compare other cost Costing for pricing and stock valuation. This method will help company for choosing the price of product in the next period time. For stock valuation, company can use two methods are FIFO (First in, First out) and LIFO (Last in, First out). In managerial accounting, there are many number of different costing method used by company. All of them will be described as below:

1.2.1 Job Costing: it applied where work is undertaken to customers’ special requirements and each order is of comparatively short duration. Manager can use daily or weekly timesheet for job costing. Vang Company can use the method to plan and carry out for distinct jobs or customer.

1.2.2 Contract Costing: This method will applicable where the work is very and involved the customers’ special requirement in a long duration. This method is so difficult to control and then it not suitable for a manufacturing as Vang Company.

1.2.3 Batch Costing: A batch is a group of identical products so the method will determine the cost associated with each batch of product. Therefore, costing a batch of similar products is treated as a separate unit for ascertaining cost.

1.2.4 Service Costing: This method is used in some kind of services such as canteen, restaurant, personnel, etc. It just suitable with the service organization, which not make or sell tangible goods.

1.2.5 Process Costing: This method will determine the cost for various different manufacturing activities or process. It is suitable for manufacturing company that use continuous process or mass production techniques. Thus, it consist with manufacturing clothes as Vang Company. The firm has many different processes to produce a finished product. Therefore, the process costing will use to calculate the cost of each stage of process. In order to produce finished product, company use the electric sewing machine and then print by hand silk-screens. Finally, the T-shirt will wrap in recycle brown paper bag. Therefore, accountant must calculate the material cost and administrative such as electricity bill to run the machines.

In conclusion, Vang Company will decide the suitable costing method for them depend on the objectives and situation. Each method have different advantages will support company so all of them are important.

1.3 Calculate cost:

Using the appropriate techniques to calculate for Vang Company based on the given information. This paper will show the result as follow:

Task 1:

Product Department

Services Department






$ 60,000

$ 90,000

$ 20,000

$ 20,000

$ 10,000





Total cost

Producing - S

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Producing - P








Service - X




Service - Y




Service - Z










General Office







X = 20,000 + 20% Y

X = 20,000 + 20% (20,000 + 20% X)

X = 20,000 + 4.000 + 0,04X = 24,000 + 0,04X

X = 25,000

Y = 20,000 + 20% X

Y = 20,000 + 20% (20,000 + 20% Y)

Y = 20,000 + 4.000 + 0,04Y = 24,000 + 0,04Y

Y = 25,000

Z = 30% X + 10% Y = 30% x 25,000 + 10% x 25,000 = 10,000

The total cost incurred by Vang Company: 70,000 + 60,000 + 90,000 = 220,000. It include 60,000 from department S and 90,000 belong to department P.

Task 2:

According to case study, there are the solution of task 2 will describe as follow:

Factory overhead rate is "" = 60%

Administrative, selling and distribution overhead rate is "" = 35%

According to case study, we have:

Direct material cost: 60000$

Direct labor cost: 40000$

Factory overhead is 60% * 40000 = 24000$

Administrative, selling and distribution overhead is:

35% * (60000 + 40000 + 24000) = 43400$

Total factory cost is 60000 + 40000 + 24000 = 124000$

Administrative, selling and distribution cost is 43400$

Total cost incurred by Vang company is 124000 + 43400 = 167400$

1.4 The cost data of Vang Company:

In the management accounting, there are many approach techniques to collect and analyse the cost data for business. It is very important for any company to get the high performance.








Variable factory cost




Fixed factory cost




Gross profit




Administrative and selling expenses




Net income




Table 1 The cost of Vang Compay

From the table below, the sales of company and gross profit increased very quickly. In 2006, the gross profit is $ 60,000 however, the profit is triple in 2008 ($ 250,000). This is a good condition for their business expansion. Besides, the cost is also increased that mean company should have plan to control it carefully. When the demand is high, firm must produce more products and increase the work hour labour so the cost will increased. All performance indicator have risen very quickly.


Figure 4 The Revenue of Vang Company


Figure 5 Gross Profit Margin

According the cost data collected, Vang Company are being effective performance in the industry. The gross profit margin is increased through the sales that mean company are having good performance. This is a good sign that company should maintain in order to achieve the high efficiency. Therefore, Vang Company are growing quickly.

2.1 The routine cost report:

The routine cost report will include the financial performance of company in daily activities. It will provide relevant information to help manager make better decision and set up new plan. The content is profit, debit, production cost and so on. The weakly cost report of Vang Company will show as below:

Weekly Cost



£ 400,000.00

Material cost

£ 2,301.37

Labor cost

£ 575.34

Telephone charges

£ 747.95

Electricity bill

£ 920.55

Table 2 The weekly cost


Figure 6 Weekly Cost

The material cost = (Variable factory cost/365)*7

The labour cost = (Fixed factory cost/365)*7

Telephones charges = (30% Administrative/365)*7

Electricity bills = (40% Administrative/365)*7

According the routine cost report, Vang Company can identify and control the daily cost easily. It will support manager for making decision and create the daily activities.

2.2 The potential improvement:

Performance measure for the cost centres: the productivity indicator will measures how efficiently resources are being used in production process. The cost centres could be department, group, machine, project and so on. Therefore, it consist of some indicators such as gross profit percentages, profit per unit, expenses, etc.

Performance measure for the revenue centres: They are include sales performance to against price and volume targets. They may be analysed in detail by coutry, by region, by individual and so on.

Performance measures for investment centres: It include two important things are Return on capital employed (ROCE) and Residual income (RI).

Performance measure for profit centres:

Gross profit margin


40 %


58 %


63 %

From the table, the company’s profit has risen with high performance. It show that the company are having good business now and they can attract a lot of investor. Thus, the gross profit is a positive indicator of company.

Potential Improvement: The efficiency of company will show through the reduction of direct cost of output. Increase the demand of specific product will help company to expand the operation. They must research carefully many information and data before do business in the new market. The demand of market is high so this is a good opportunity for company to expand. Company can use a various key performance indicator to identify the potential improvement. From the result of performance, Vang Company are having a good performance in business that show the revenues and sales product. The number of sales increased year-by-year that mean the product satisfy the demand of customer. For many years, clothing industry is still growth so company should have good strategy plan to achieve the long-term goals. The KPIs is vital for company to decide the relevant indicator and the performance tasks. The quality should be improved as it cost as a performance indicator. Other thing is the demand of shirt always high so it is a great chance for firm try to do something new. The booming of technology is a good condition for business. Firm want to expand the business in new market so they can create a website to sell product. It will enable them reach the potential customer and reduce the marketing cost. It will allow company create more activities and projects. Improving the quality and performance on their websites is an important area that company should focus on.

2.3 The improvement to reduce, enhance value and quality:

Vang Company is a production company so the manager need to develop the plan for improving the quality of product and reducing the cost. First, they should find the way to reduce the direct material cost. In clothing manufacturing, company can substitute less expensive raw material. For Vang Company, they can use cheaper acrylic or polyester materials instead of cotton. The main reason is the cost of raw material affect directly the price of finished product. Therefore, finding a lower-cost supplier who supply good material is necessary for company to reduce the production cost. Moreover, company can also bulk purchase discounts to reduce the cost. Besides, the equipment and machine to produce is also increase the direct cost. Vang Company may borrow the expensive equipment instead of buying them. In order to wastage, company should change the specification for cutting solid materials or identify poor quality output at an earlier stage in the operational process. Minimizing the work hours of labour can decrease the cost and at the same time increase the profit. Thus, Vang Company must control their cost of production to gain more business that is effective.

Nowadays, customer require more from the manufacture include the high level of quality, on-time delivery and immediate response to their request. In order to enhance the quality of product, company can do some special method as follow. Maintaining a clear and dry workplace, including warehouse and shipping area. The customer satisfaction is increased as customers receive the high levels of product without concern and complaint. Providing the proper tools and training to each worker about the standard of quality. After that, company will increase the sales by selling good product with cheap price. It is a good competitive in order to compete other company in local market.

The principles of value: In order to build the business value, manager should make the right decision about core value and essential. The value of product has four distinct aspects are cost value, exchange value, use value and esteem value. Another important principle is the core value, which effect directly product.

The Total Quality Management (TQM): Company use TQM to improve the quality of product and services. Every organization has own their TQM and they will apply to everything of business activities. In addition, company should have affiliation other standard from International Organization for Standardization (ISO). The cost of quality concern for good quality saves money and poor quality will cost money. Therefore, the business plan use the TQM can focus on how to reduce cost while raise the quality of satisfied customer and market. The TQM has four mains quality-related cost are prevention cost, appraisal cost, internal failure cost and external failure cost. The basic principle of TQM is that cost of prevention are less than the cost of correction. The quality product always more cost because their cost production is higher. There are various types of roles are involved in term of quality include assurance, reliability, customer-driven and continuous improvement. As the result, continuous improvement is enable Vang Company to develop quality and reduce wastage effective. In addition, the quality of product depend on the input so firm should maintain the long-term relationship with supplier. A good raw material will increase the quality of output.


Management Accounting will build the business and help manager make right decision. Planning and controlling the business cost are necessary for any company to get the highest profit and reduction cost. The accounting is a vital tool for management and support manager to control and make better decision. From this report, manager can understand the importance of accounting in business.


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