Introduction To Cost Accounting Accounting Essay

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Olympia College is honored to be affiliated with a number of institutions/ partners locally and internationally from Malaysia, UK, Australia, Switzerland, Poland, and etc. Together we strive to create better opportunities for students worldwide. Keeping with the principle that everyone should be able to enjoy education, all 6 Olympia College centers offer certificates, preuniversity, 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.

Task 2

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

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.

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 year 2015 expansion.

Table of Content

TITLE

PAGE

Introduction

3

Task 1

4 - 7

Task 2

8 - 12

Task 3

13 - 15

Task 4

16 - 17

Conclusion

18

Bibliography

19

Introduction

Financial accounts are the records of the financial dealings of the business, their daily transactions. The main role of financial accounting is to record financial transactions such as collecting money from sales, paying suppliers, salaries and wages. Besides that, it may also help the managers to manage the business for more efficiently by preparing regular financial information such as monthly management accounts showing sales, costs and profits against budgets, forecasting cash flows, cost investigations. Financial accounting also provides other stakeholders with legal/vital information, for example, financial accounts such as trading account, profit and loss, and balance sheet.

The main accounting records kept by the business are records for keeping the details of transactions. These include sales ledger which shows how much is owed by customers who have bought on credit whereas purchase ledger is shows how much is owed by the business to suppliers who have provided goods and services on credit. Besides that, cash book and bank statements shows all transactions involving cash such as receipts from customers, payments to suppliers, employee wages.

Financial accounting produces profit and loss account which showing how the business has traded for a specific period; balance sheet is a statement of the assets and liabilities of a business at a particular time, and how those assets and liabilities have been financed; cash flow statement is a statement showing how cash has come into the business and what it has been spent on.

(239 words)

Task 1: In the preparation of your research, present the different types of costing methods necessary for the branching in Sarawak.

1.0 Introduction to Cost Accounting

Cost accounting has been defined as "the process of accounting for cost from the point at which expenditure is incurred or committed to the establishment, of its ultimate relationship with cost centers and cost units. In its widest usage it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of profitability of activities carried out or planned". Cost accounting is needed so that there can be an effective management accounting system.

The classification of costs can be according to their nature or purpose. According to their nature, they can be classified as materials cost, labor costs, overhead costs and further more. According to purpose it can be classified as period costs, product costs, indirect and direct costs, normal and abnormal costs and further more. Costs can be variable, fixed or semi-variable/semi-fixed. Variable costs vary with the volume of output, fixed costs remain the same irrespective of output and semi-variable costs consists of both fixed and variable cost elements and will be partly affected by the changes in the volume of activity. Semi-variable costs can be identified using high-low method.

2.0 Types of Costing Methods

(i). Unit Costing

Another name for this method is 'Single output costing'. This method of costing is used for products which can be expressed in identical quantitative units and is suitable for products which are manufactured by continuous manufacturing activity. Costs are ascertained for convenient units of output. For examples, brick making, mining, cement manufacturing, dairy, and flour mills.

(ii). Job Costing

This method is used when production consists of separate jobs. This method is followed by these concerns when work is carried on by the consumer's request. Job costing also applies where batches of items are made. For examples for this method are painting, car repair, decoration and repair of building.

(iii). Contract Costing

Under this method costing is done for big jobs which involves heavy expenditure and stretches over a long period and often it is undertaken at different sites. Each contract is treated as a separate unit for costing. This is also known as Terminal Costing. Examples of this method are construction of bridges, roads and buildings.

(iv). Batch Costing

A batch is a group of identical products. This method of costing is used where the units produced in a batch are uniform in nature and design. For the purpose of costing each batch is treated as a job or separate unit. The total costs of a batch are divided by the total number of units in a batch to arrive at the costs per unit. Industries like Bakery and Pharmaceuticals usually use batch costing method.

(v). Operating (Service) Costing

This method of costing is used to ascertain the cost of such particular service. Each particular service is treated as separate units in operating costing. For examples, water supply department, electricity department are using this costing method. On the other hand, in the case of a Nursing Home, a unit is treated as the cost of a bed per day and for buses operating cost for a kilometer is treated as a unit.

(vi). Process Costing

Process costing is used where production is regarded as a continuous flow. Costs are determined separately for each process. The main feature of process costing is that output of one process becomes the raw materials of another process until the final product is obtained. It is applicable to industries such as oil, paint manufacturing, steel, textiles, and food processing, where production is repetitive and continuous.

(vii). Multiple Costing

This method is used when the output comprises many assembled parts or components such as in television, motor car or electronic gadgets, costs have to be ascertained or each component as well as the finished product. Such costing may involve different methods of costing for different components. Therefore this type of costing is known as composite costing or multiple costing.

(viii). Uniform Costing

This is not a separate method of costing. This is a system of using the same method of costing by a number of firms in the same industry. It is treated as a common system of using agreed principles and standard accounting practices in the identical firms or industry. This helps in fixation of price of the product and inter-firm comparisons. Under this system cost sheet is prepared to find out cost per unit and profits or loss on production.

3.0 Suggestion of Costing Method for Branching in Sarawak

I would suggest that branching of Olympia College in Sarawak should use the Contract Costing. This is because this costing method is for big jobs which involves may use heavy expenditure and stretches over a long period. This is suitable for the contracting of the building or the branch campus.

(794 words)

Task 2: Present a project cost estimation associated with constructed facilities. What constitutes Capital Costs and, Operation & Maintenance costs, explain its magnitude and importance.

1.0 Introduction of Capital Costs, Operation & Maintenance Costs

The costs of a constructed facility to the owner include both the initial capital cost and the subsequent operation and maintenance costs. Each of these major cost categories consists of a number of cost components.

The capital cost for a construction project includes the expenses related to the initial establishment of the facility such as: Land acquisition, including assembly, holding and improvement, Planning and feasibility studies, Architectural and engineering design, Construction, including materials, equipment and labor, Field supervision of construction, Construction financing, Insurance and taxes during construction, Owner's general office overhead, Equipment and furnishings not included in construction, Inspection and testing. The operation and maintenance cost in subsequent years over the project life cycle includes expenses such as: Land rent, if applicable, Operating staff, Labor and material for maintenance and repairs, Periodic renovations, Insurance and taxes, Financing costs, Utilities, Owner's other expenses.

2.0 Magnitude and Importance of Capital Costs, Operation & Maintenance Costs

The magnitude of each of these cost components depends on the nature, size and location of the project as well as the management organization, among many considerations. The owner is interested in achieving the lowest possible overall project cost that is consistent with its investment objectives.

It is important for design professionals and construction managers to realize that while the construction cost may be the single largest component of the capital cost, other cost components are not insignificant. For example, land acquisition costs are a major expenditure for building construction in high-density urban areas, and construction financing costs can reach the same order of magnitude as the construction cost in large projects such as the construction of nuclear power plants.

From the owner's perspective, it is equally important to estimate the corresponding operation and maintenance cost of each alternative for a proposed facility in order to analyze the life cycle costs. The large expenditures needed for facility maintenance, especially for publicly owned infrastructure, are reminders of the neglect in the past to consider fully the implications of operation and maintenance cost in the design stage.

3.0 Cost Estimation for New Branch of Olympia College in Sarawak

Estimation of Capital Costs

Storey

Facilities

Assets / Equipments

Quantity

Cost per Unit (RM)

Total Cost (RM)

1

(a). 3

Computer Labs

1). PC

3 x 15 = 45

2,500

112,500

 

 

2). PC's Tables

3 x 15 = 45

120

5,400

 

 

3). Chairs

3 x 15 = 45

50

2,250

 

 

4). White Boards

3 x 2 =

6

100

600

 

 

5). Projectors

3 x 1 =

3

1,500

4,500

 

(b). Library

1). Tables

10

150

1,500

 

 

2). Chairs

50

50

2,500

 

 

3). Books Racks

10

220

2,200

 

 

4). Photostat Machine

2

1,200

2,400

 

 

5). Lockers

2

600

1,200

 

(c).Cafeteria

1). Tables

10

120

1,200

 

 

2). Chairs

50

80

4,000

 

(d). Kitchen

1). Kitchen Equipments

-

-

2,000

 

 

2). Ovens

5

1,500

7,500

 

 

3). Refrigerator

3

1,100

3,300

 

(e). 2 Housekeeping Training Rooms

1). Bed

2 x 1 =

2

800

1,600

 

 

2). Mattress

2 x 1 =

2

400

800

 

 

3). Pillow

2 x 2 =

4

80

320

 

 

4). Blanket

2 x 2 =

4

60

240

 

 

5). Bed Sheet

2 x 2 =

4

80

320

 

(f). Marketing Office

1). Tables

8

150

1,200

 

 

2). Chairs

8

120

960

 

 

3). PC

8

2,500

20,000

 

 

4). Cabinet

3

700

2,100

 

 

5). Photostat Machine

2

1,200

2,400

 

(g). Cashier Counter

1). Tables

2

150

300

 

 

2). Chairs

2

120

2,400

 

 

3). PC

2

2,500

5,000

 

 

4). Books Racks

2

220

440

2

(a). 8 Offices

1). Tables

8 x 2 =

16

150

2,400

 

 

2). Chairs

8 x 2 =

16

120

1,920

 

 

3). PC

8 x 2 =

16

2,500

40,000

 

 

4). Books Racks

8 x 2 =

16

220

3,520

 

(b). 15

Class Rooms

1). Tables

15 x 10 = 150

120

18,000

 

 

2). Chairs

15 x 40 = 600

50

30,000

 

 

3). White Boards

15 x 2 = 30

80

2,400

 

 

4). Projectors

15 x 1 = 15

1,200

18,000

Overall

 

1). Air Conditioner

50

2,000

100,000

 

 

2). Light

500

80

40,000

TOTAL COSTS

447,370

Estimation of Operation & Maintenance Costs

Facilities

Total Cost per month (RM)

1). Rental

10,000

2). Electricity

5,000

3). Utilities

5,000

4). Air Conditioner Services

5,000

5). Salaries

80,000

6). Uniforms

5,000

7). PC Maintenance

5,000

TOTAL COSTS

115,000

(726 words)

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 $750,000 or 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 $750,000 or 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.

(615 words)

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 year 2015 expansion.

1.0 Introduction of Variance Analysis

Variance analysis can be used to observe how well a business is performing and also how close actual costs and revenues are to expected costs and revenues.

In accounting, a variance is defined as the difference between the expected amount and the actual amount of costs or revenues. Variance analysis uses this standard or expected amount versus the actual amount to judge performance. The analysis includes an explanation of the difference between actual and expected figures as well as an evaluation as to why the variance may have occurred. The purpose of this detailed information is to assist managers in determining what may have gone right or wrong and to help in future decision-making.

Favorable variance is a variance can be put into the favorable category when the results are better than expected. This means that revenues were more than the expected amount or costs were below the budgeted amount. A favorable variance might earn a bonus for a manager, or perhaps a move up the corporate leader. Unfavorable variance

is the variance that the results are worse than expected. If the revenues were below expectations or the costs were higher than standard, the variance would be termed unfavorable or adverse. However, the analysis is typically used to help mangers prevent a negative situation from recurring by providing information about what went wrong.

2.0 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

1). Maintenance Costs on PC

30 x RM300 = RM9,000

20 x

RM250 = RM5,000

RM50 x 30 = RM1,500

10 x RM250 = RM2,500

Favorable

 

 

 

 

 

 

2). Air Conditioner Services

10 x RM300 = RM3,000

8 x

RM200 = RM1,600

RM100 x 10 = RM1,000

2 x RM200 = RM400

Favorable

 

 

 

 

 

 

3). Part-time Lecturers Salaries

180 hr x RM40 = RM7,200

200 hr x RM45 = RM9,000

RM5 x 180 = RM900

20 x RM45 = RM900

Unfavorable

 

 

 

 

 

 

4). Renew of Staffs' Uniforms

20 x RM30 = RM600

25 x

RM40 = RM1,000

RM10 x 20 = RM200

5 x RM40 = RM200

Unfavorable

 

 

 

 

 

 

5). Renew of Classrooms' Tables

20 x RM150 = RM3,000

15 x

RM140 =

RM 2,100

RM10 x 20 = RM200

5 x RM140 = RM700

Favorable

(387 words)

Conclusion

The financial functions of the business impact non-financial activities such areas as record keeping, performance evaluation, variance analysis, and getting and utilization of resources. The non-financial manager must comprehend the goals, procedures, techniques, yardsticks, and functions of finance to optimally perform his or her duties. Ignorance of finance will not only lead to incorrect analysis and decisions but will also prevent you from moving up in the organization.

An important reason for which the organizations need financial and accounting knowledge is that without a good understanding of these disciplines they do not have the tools needed for effective management decision making. They will have to rely totally on the financial manager, whose recommendations they may not be able to totally understand or, if necessary, dispute. A successful operation blends production, marketing, and finance with some degree of goal congruence. Decisions that make sense in terms of marketing and sales must also make financial sense. Without some financial background, the organizations cannot contribute sound input to the decision process.

(168 words)

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