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Many companies’ especially non-profit companies have many prospective projects than can actually be funded. For that reason, managers must select individual projects that promise the greatest future return. It is critical to the company how well managers make these capital budgeting decisions for the long run profitability of the company. Every business needs a long-term plan to invest in equipment and facilities to further the corporate mission and increase success. Improper planning outcome in unsuccessful enterprises and a loss of resources; but proprietorships and corporations which make careful decisions about what, when, and how much money to allocate to new facilities or improve on existing ones will have a chance at staying in the black. In this paper we will look at how important cost accounting is to a company and methods used to allocate expenses.
The main intention of cost accounting is being able to translate cost data and information to management for use in planning, controlling, and evaluating resources. Cost accounting is an accounting method dealing with the cost of goods manufactured. Manufactured manager’s job is to make decisions based on cost data that would enable them to find activities that would bring value to a company (Lanen et al, 2011). Manufacturing costs consist of direct labor, material, and manufacturing overhead. Direct labor is the workers that makes the products for a company or has direct association with an order. Direct material is all the raw material which is the material used into making a product. I use to work at a manufacturing company that made ice machines for restaurants and hotels. When we had to do inventory and good thing it was only twice a year. If there was a screw or nut that went into the finish product it was considered raw material and included in the inventory. Manufacturing overhead is all the cost for a company that are not directed to the product including administration cost and marketing cost.
Non-profit company projects can actually be funded. Managers have to decide on which projects would give the maximum potential return. Every business must come up with a plan to invest in equipment and amenities to meet the corporate mission and a good place to start is with a capital budget. Failed planning will result in failed companies. I work for a non-profit company that is based on winning proposals and are funded by the government. Within these proposals in order to win you have to budget every penny. So all cost is allocated to a project rather it’s allowable or unallowable they just go to a different general ledger account. They are both included on the income statement and during audits haves to be accounted for. The project which include employee labors and expense are all direct cost and holidays, PTO, Finance department and Human Resources are all considered as indirect but are allocated as such.
A project manager can keep track of a software project through elements of project planning. This plan sets a foundation for the project. In case a situation occurs, the project is good to refer back to keep everything as plan. Some of the planning elements consists of: describing a project scope with alternatives and feasibility, dividing the project into manageable task, creating a resource plan, developing a preliminary schedule, developing a communication plan, discuss project standards and procedures, identify and access risk, create a preliminary budget and setting a baseline project plan (Prosci, n.d.). The analysis phase and the design phase are both complimentary for a good project. The analysis phase is fully to, understand what works we must do to solve the problem that was define in the first phase. Included in this phase should be a logical model. The design phase will then convert the logical model into a physical model. In other words, the analysis phase is “what to do,” and the design phase will be the “how.”
There are three principles that have to be performing during the analysis phase. The information and functional domains of a problem have to be represented and understood. The problem must then be partition in a manner that uncovers detail in a layered fashion. Lastly, the system is first model by representing essential information and then refined to specify implementation detail.
A great deal of time spent discussing possible problems, coming up with good solutions, and determining the means for implementation. It is so important to know who should be involved when decisions need to be made between groups or just as an individual should make them. Nevertheless, no one can accomplish much alone. Successful performance is a requirement of everyone, working to achieve a common goal. When an individual’s work in team, value grows, creating bigger productivity for everyone involved. I once received a candy bar from a supervisor that had a ribbon wrapped on it with a label that said TEAM T- Together, E-Everyone, A-Achieves, and M-More (Chambless).
Information used for decision-making can be categorized into three types:(1) Strategic information used to help plan the objectives of the business, (2) Tactical Information is used to decide how the resources of the business should be employed, and (3) Operational Information is used to make sure that specific operational task are carried out as planned/intended (Shrianjani & Higgins, 2001). Certain personalities of people in decision making role have to focus more on improving the quality of their decisions. Decision-makers who make quality assessments naturally, also so need to be more decisive in responding to the assessments made.
Decision-making process can be identified as: (1) define and clarify the issue, (2) gather all the facts and understand their causes, (3) think about or brainstorm possible options and solutions, (4) consider and compare the pros and cons of each option,(5) select the best option, and (6) explain your decision to those involved and affected, and follow up to ensure proper and effective implementation (Chapman, n.d.).
Accounting records are a major source of internal information. They are transactions used to prepare financial statements and reports. The financial reports are primarily the recording of transactions and that shows where expenses and revenue are allocation and give a picture of the financial status of a company.
Cost-Volume-Profit Analysis (CVP)
Cost-Volume-Profit Analysis is used to help managers answer practical questions necessary for a business analysis. Such as, at what point will the company breakeven with spending and productions. Breakeven point is when the business will actually cover expenses and begin to make a profit. Fixed and variable costs are needed in order to calculate what the breakeven point will be. To determine breakeven point the formula will be fixed cost / (unit selling price – variable costs).
The traditional method of cost accounting refers to the allocation of manufacturing overhead costs to the products manufactured. The traditional method (also known as the conventional method) assigns or allocates the factory's indirect costs to the items manufactured on the basis of volume such as the number of units produced, the direct labor hours, or the production machine hours (Lanen et al, 2011).
When using only machine hours to allocate the manufacturing overhead to products, it imply that the machine hours are the primary cause of the factory overhead. By tradition this has been reasonable or at least enough for the company's external financial statements.
Methods of Cost Accounting
Costing is usually used for large projects. The costs associated with the project are allocated to each individual project and kept separate. Examples of uses for this type of accounting are non-profit organizations that must keep track of funds received during a proposal through the state or federal agencies. The method of accounting used will depend on the project or service being performed. The management is responsible for monitoring the cost system and staying within budget for the project.
It is the least expensive to implement and maintain, and can give reasonably accurate costs. However, it is not the most accurate system because burden is allocated as percentage of direct labor or machine time.
A manufacturer who likes to keep track of the true cost of producing a specific product, using the traditional method of cost accounting might not be the better option. Activity based costing (ABC) was created to conquer the traditional method. ABC has many cost drivers in which to allocation the indirect cost of the manufacturer. Number of machine setups, the pounds of material purchased or used, the number of engineering change orders, and the number of machine hours are just a few of those cost drivers.
Methods of Allocating cost:
1. Easy to Calculate
2. Easy to Implement
1. Misstates Opportunity Costs
2. Does not charge service departments for the use of other service departments
Direct allocation method
Within this method, the costs obtained by the services department are allocated directly to the producing warehouse of the company and to a specific product. Direct allocation is one of the simplest cost allocation methods. One of the benefits for companies under this method the service department’s cost does not get allocated between any other service departments.
Step down method
1. Reduces the subsidization of service department use of other service departments
1. Misstates Opportunity Costs
2. Some service departments are not charged for the use of other service departments.
3. Selection of which department is allocated first results in different cost allocations.
The step-down allocation method unlike the direct method does allocation cost between support departments and in the end to the operating departments. Step-down name is based how the rank that each percentage of cost is allocated starting with the highest percentage allocated first. In the end, all costs are allocated.
1. Theoretically correct method of allocating costs
2. Closest measurement of opportunity cost
1. Seldom used because math is misunderstood
2. Assumes all costs are variable, fixed costs should be allocated based on expected use, which
The reciprocal method gives full recognition to interdepartmental services. Underthe step-method, only partial recognition of interdepartmental services is possible.The stepmethod always allocates costs forward never backward. The reciprocal method, by contrast, allocatesservice departmentcosts in bothdirections. The reciprocal allocation requires the use of simultaneous equations.
The accountant’s model of the world is supplement with many discretionary practices. Financial accounting is strongly controlled by legislation concerning who is obliged to do accounting, what is to be accounted for, how allocations should be made, how valuations should be carried out, and what should be presented in public. However, even in the procedures there are many discretionary practices, the use of which guide by conventions and general ideals like, for example, by a ‘true and fair view’ or a ‘good accounting practice’. An audit report is a factual document. Obviously, it reaches a judgment, but it is not intend to be judgmental, in the sense of condemning a company for moral failure. Specific responsibilities of the accounting profession are express in the various codes of ethics promulgated by major organizations such as the AICPA. The AICPA’s first principle of professional conduct states: “In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities.”
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