Cost Estimation For New Branch Accounting Essay

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Olympia Collage is honoured to be affiliated with a number of institution/ partners locally and internationally from Malaysia, UK, Australia, Switzerland, Poland, and etc. Together we strive to create better education opportunities for students worldwide. Keeping with the principle that everyone should be able to enjoy education, all 6 Olympia College centres offer certificates, pre-university, undergraduate and postgraduate programmes. These programmes lead to external awards from United Kingdom, United States, Switzerland, Canada and Australian institutions that Olympia is affiliated with.

As a newly appointed Finance Director, you are tasked to make a research and proposal for the 2015 expansion plan, a branch in Sarawak, Malaysia where an old 2-storey storage building constructed on a lacre land, is to be rented.

Task 1

In the preparation of your research, present the different types of costing methods necessary for the branching in Sarawak. (LO 1)

Task 2

Present a project cost estimation associated with constructed facilities. What constitutes Capital Costs and, Operation & Maintenance costs, explain its magnitude and importance. (LO 1)

Task 3

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In a service oriented industry like Olympia College, propose on possible routine cost reports that has to be accomplished, prepare a sample format. (LO 2)

Task 4

Considering the possible costs to be incurred, from the construction of facilities to the first year of operation, calculate and evaluate indicators of productivity, efficiency and effectiveness of the 2015 expansion. (LO 2)

Introduction

A field of accounting that treats money as a means of measuring economic performance instead of as a factor of production. It encompasses the entire system of monitoring and control of money as it flows in and out of an organization as assets, liabilities, revenues and expenses.

Financial accounting gathers and summarizes financial data to prepare financial reports such as balance sheet and income statement for the organization's management, investors, lenders, suppliers, tax authorities, and other stakeholders. It concerned with classifying, measuring and recording the transactions of a business. Financial accounts are geared towards external users of accounting information. To answer their needs, financial accountants draw up the profit and loss account, balance sheet and cash flow statement for the company as a whole in order for users to answer questions.

Cost means an amount that has to be paid or given up in order to get something. In business, cost is usually a monetary valuation of effort, material, resources, time and utilities consumed, risks incurred, and opportunity forgone in production and delivery of a good or service. All expenses are costs, but not all costs are expenses. The cost why cannot be an expenses, such as those incurred in acquisition of an income-generating asset.

Task 1:

In the preparation of your research, present the different types of costing methods necessary for the branching in Sarawak.

Nowadays, business and industry needs costing systems to meet their individual requirements. Costing experts have developed different methods of costing to fulfill everyone's needs. Costing methods are accounting techniques that are used to help understand the value of inputs and outputs in a production process. By tracking and categorizing this information according to a rigorous accounting system, corporate management can determine with a high degree of accuracy the cost per unit of production and other key performance indicators. Management needs this information in order to make informed decisions about production levels, pricing, competitive strategy, future investment, and a host of other concerns. Such information is primarily necessary for internal use, or managerial accounting. Different business or industry will follow different methods for ascertaining cost of their products. The different types of costing methods are job costing, contract costing, batch costing, process costing, operation costing, service costing, uniform costing and unit costing.

Job Costing

Job costing is concerned with the finding of the cost of each job or work order. This method is followed by these concerns when work is carried on by the customer's request, such as printer general engineering work shop etc. under this system a job cost sheet is required to be prepared find out profit or losses for each job or work order.

Contract Costing

Contract costing is applied for contract work like construction of dam building civil engineering contract etc. each contract or job is treated as separate cost unit for the cost ascertainment and control.

Batch Costing

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A batch is a group of identical products. Under batch costing a batch of similar products is treated as a separate unit for the purpose of ascertaining cost. The total costs of a batch are divided by the total number of units in a batch to arrive at the costs per unit. This type of costing is generally used in industries like bakery, toy manufacturing etc.

Service Costing

Service costing method is used in those industries which rendered services instead of producing goods. Under this method cost of providing a service is also determined. The organization like water supply department, electricity department etc. are the examples of using service costing.

Operating Costing

Operating costing is suitable for industries where production is continuous and units are exactly identical to each other. This method is applied in industries like mines or drilling, cement works etc. Under this system cost sheet is prepared to find out cost per unit and profits or loss on production.

Multiple Costing

 It means combination of two or more of the above methods of costing. Where a product comprises many assembled parts or components (as in case of motor car) costs have to be ascertained for each component as well as for the finished product for different components, different methods of costing may be used. It is also known as composite costing. This type of costing is applicable to industries producing motor vehicle, T.V and others.

In my opinion, costing method that most suitable to be apply by Olympia college is service costing method. Olympia College provides education service to all students. Costing of college can be done according to courses and other education services rendered to each student such as experiment theater cost, science lab cost, utility cost in classroom and others. Those costs have been charged into student's fees to cover total cost bear by college. Thus, service costing can helps college to determine cost per service charged to each student.

Task 2:

Present a project cost estimation associated with constructed facilities. What constitutes Capital Costs and, Operation & Maintenance costs, explain its magnitude and importance.

2.0 Definition of Capital Costs, Operation Costs & Maintenance Costs and its magnitude and importance.

In business terms the word capital refers to money. Capital costs are the fees associated with the initial setup of a plant or project. It is including the price of purchased assets such as land, equipment, or other supplies, and the cost of going into debt or issuing stock in order to fund the project. Calculating alternate capital costs allow a business to decide which funding models will provide the best net return on investments. Capital costs will usually only occur at the beginning of a project, as the operational costs cover reoccurring business expenses. The important of capital cost is because it's a major standard for comparison used in finance decisions. Acceptance or rejection of an investment project depends on the cost that the company has to pay for financing it.

The day-to-day expenses incurred in running a business, such as sales and administration, as opposed to production, also called operating expenses. Operating costs include both fixed costs and variable costs. Fixed costs, such as overhead, remain the same regardless of the number of products produced; variable costs, such as materials, can vary according to how much product is produced. Businesses have to keep track of both operating costs and costs associated with non-operating activities, such as interest expenses on a loan. Both costs are accounted for differently in a company's books, allowing analysts to see how costs are associated with revenue-generating activities and whether or not the business can be run more efficiently. An operating cost is an item that will ensure that the property will continue to produce income. Examples of these expenses are; property taxes, utilities, property management fees, the cost of repairs, trash removal and so on.

One universal measurement of maintenance performance, and perhaps the measure that matters most in the end, is the cost of maintenance. The costs incurred to keep an item in good condition. When purchasing an item that requires upkeep, consumers should consider not just the initial price tag, but also the item's ongoing maintenance expenses. Maintenance costs are a major reason why home ownership can be more expensive than renting, for example. However, sometimes even items that are merely leased, not owned, such as a leased car, will require the owner to pay maintenance expenses. The main purpose of regular maintenance is to ensure that all equipment required for production is operating at 100% efficiency at all times. Through short daily inspections, cleaning, and making minor adjustments, minor problems can be detected and corrected before they become a major problem.

2.1 Cost Estimation for New Branch of Olympia College in Sarawak

Estimation of Capital Costs

Story

Facilities

Assets/ Equipment

Quantity

Cost per

unit(RM)

Total Cost

(RM)

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This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Examples of our work

1

Reception& Marketing

Office Tables

8

160

1,280

Chairs

8

120

960

Telephone

8

100

800

Photostat Machine

1

1,900

1,900

Cabinet

3

100

300

PC

8

2,400

19,200

Cashier

Printers

2

250

500

PC

2

2,400

4,800

Cabinet

2

100

200

Coffer

1

250

250

Cafeteria

Chairs

40

60

2,400

Tables

10

120

1,200

Kitchen& Bar

Stainless-steel Tables

2

350

700

Kitchen equipment

-

-

2,000

Refrigerator

1

1,500

1,500

Gas Stove

2

150

300

Blender

1

120

120

6 Offices

PC

12

2,400

28,800

Tables

12

160

1,920

Chairs

36

120

4,320

Cabinet

20

100

2,000

Books Racks

8

150

1,200

Printer

2

250

500

Raffles Hall

Projector

2

1,000

2,000

Chairs

120

100

12,000

PA System

1

1,500

1,500

Library

Long Tables

10

500

5,000

Chairs

80

60

4,800

Books Racks

10

500

5,000

PC

2

2,400

4,800

Cabinet

3

100

300

Photostat Machine

1

2,300

2,300

Security Room

PC (CCTV)

1

2,500

2,500

Table

1

150

150

Chair

1

80

80

2

12 Class Rooms

White Boards

12

100

1,200

Tables

120

200

24,000

Chairs

360

60

21,600

Projectors

5

1,000

5,000

Hotel Housekeeping Training Room

Bed

1

700

700

Pillows

3

15

45

Blanket

2

50

100

Mattress

1

400

400

Bed Sheet

2

60

120

3 Computer Labs

PC

40

2,400

96,000

Tables

90

100

9,000

Chairs

90

70

6,300

Projector

3

1,000

3,000

White Board

3

100

300

Student Lounge

TV

2

500

1,000

Sofa (set)

2

1,200

2,400

Chairs

15

120

1,800

Pool Table+ Dartboard

1

2,500

2,500

Overall

Air Conditioner

46

1,500

69,000

Light

250

30

7,500

Fire extinguisher

5

80

400

Total Costs

369,945

Estimation of Operation & Maintenance Cost

Facilities

Total cost per month (RM)

Electric Bill

5,000

Air Conditioner Services

2,500

CCTV maintenance

1,000

PC maintenance

1,000

Staff Uniforms

3,000

Salaries

60,000

Utilities

3,000

Rental

10,000

Property management fees

300

Total Costs

85,800

Task 3:

In a service oriented industry like Olympia College, propose on possible routine cost reports that has to be accomplished regularly by the finance officer during the construction of facilities, and how it is to be accomplished, prepare a sample format.

The routine cost report of the new branch of Olympia College in Sarawak is as follow:

The college is required under State law to obtain preapproval of the capital project or acquisition by a designated Sarawak planning authority in the State in which it is located;

The college fields an initial application for a certificate of need on or before December 31, 2013 that includes a detailed description of the project and its estimation cost and had not received approval or disapproval on or before March 31, 2014.

The college expended the lesser if 10 percent of the estimated cost of the project on or before May 31, 2014.

Construction in Process - If a college that initiates construction on a capital project does not meet the requirements under the fixed asset, moveable equipment, or lengthy certificate of need provisions, the project costs may be recognized as old capital costs if all the following conditions are met:

(a). The college's Board of Directors formally authorized the project with a detailed description of its scope and costs on or before May 31, 2014;

(b). The estimated cost of the project as of May 31, 2014 exceeds 5 percent of the college's total student revenues during its base year;

(c). The capitalized cost incurred for the project as of May 31, 2014 exceeded the lesser of 10 percent of the estimated project cost;

(d). The college began actual construction or renovation (groundbreaking) on or before December 31, 2014, and

(e). The project is completed before May 31, 2015.

(5). Planning, Design or Feasibility Agreements. - If these agreements do not commit the college to undertake a project, they are not recognized as obligating capital expenditures.

(6). Cost Limitation - Construction Contracts. - The amount if obligated capital costs recognized as old capital costs cannot exceed the estimated construction costs for the project as of May 31, 2014. Additional costs are recognized as old capital costs only if the additional costs are directly attributable to changes in life safety codes or other building requirements established by government ordinance that became effective after the project was obligated.

(7). New capital costs are defined as all allowable classroom capital-related costs that do not meet the definition of old capital costs. Betterment or improvement costs related to old capital costs are new capital assets. Capital costs incurred as a result of extraordinary circumstances are new capital. Direct assignment of new capital costs must be done. This cost center normally includes only the cost of administration. The salary is direct to the administration staff.

(8). Classroom costs are those costs associated with formal, didactic instruction on a specific topic or subject in a classroom that meets at regular, scheduled intervals over a specific time period (e.g., semester or quarter) and for which a student receives a grade.

(9). For cost reporting periods beginning on or after Jan 1, 2014, if you do not operate the program, the classroom portion of the costs are not allowable as pass through costs and therefore not reported pass through costs.

(10). The college receives a benefit for the support it furnishes to the education program through the provision of services.

(11). The lecturers training costs must be incurred by the provider or by an educational institution related to the provider by common ownership or control (cost to related organizations). Costs incurred by a third party, regardless of its relationship to either the provider or the educational institution, are not allowed.

(12). The costs incurred by the college for the program do not exceed the costs that would have been incurred by the college if the program had been operated by the college.

Task 4:

Considering the possible costs to be incurred, from the construction of facilities to the first year of operation, calculate and evaluate indicators of productivity, efficiency and effectiveness of the 2015 expansion.

Variance analysis is a process aimed at computing variance between actual and budgeted or targeted levels of performance, and identification of their causes. Variance literally means difference. Variance therefore, means the difference between the actual costs and the standard costs. Variances can be computed for all the three cost element of production-materials, labor and factory overhead. Once computed, variances are analyzed and evaluated to provide managers with useful information for measuring efficiency and improving performance. It is performed to know two things; they are the difference between actual and standard costs and the reasons for such difference. In variance analysis, therefore, it should not just be to know the amount of variance. In fact, it is more important to know the reasons for such variance since these will be the management's basis for making the appropriate economic decisions.

Variances may be described as either favorable or unfavorable. When the actual costs incurred are less than the standard, the variance is favorable, since this means that the company incurred less than what it is allowed to spend. On the other hand, when the actual cost is greater than standard, the resulting variance is unfavorable, meaning that there was overspending during the period. To be meaningful, the variance should always be presented with the appropriate description. Omitting this description is considered as a very serious oversight.

4.1 Variance Analysis for New Branch of Olympia College in Sarawak

Variance Analysis

Title

Budgeted Amount (RM)

Actual Amount(RM)

Cost Variance (RM)

Volume Variance (RM)

Favorable / Unfavorable

Conclusion

The financial accounting in the present days can be defined as the backbone of any business venture. No matter whether you are an entrepreneur or an established business house, it's the management of your finances that are going to decide upon the future prospects of your company or even its stability in the near future. A company that has a well-oiled financial management system in place would really be in a better position than a company or an organization that does not have much control on their flow of finances.

Financial reports are a necessary tool used by investors and potential investors to see how a company functions and stands financially. It is a deciding factor in what and how much will an investor invest in a company. It is also used to analyze and assess a company's potential areas of growth as well as its areas of loss. It is also a way for a company to track its earnings and losses of past years.