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Financial accountancy is used to prepare accounting information for people outside the organization or not involved in the day-to-day running of the company. Management accounting provides accounting information to help managers make decisions to manage the business.
In short, financial accounting is the process of summarizing financial data taken from an organization's accounting records and publishing in the form of annual or more frequent reports for the benefit of people outside the organization. Financial accountancy is governed by both local and international accounting standards.
In the preparation of your research, present the different type of costing methods necessary for the branching in Sarawak.
A managerial accounting method that describes when all fixed and variable costs, including manufacturing costs, are used to compute the total cost per unit. Full costing includes these costs when computing the amount of money it takes to produce and distribute one unit of output. Full costing is also known as "full costs" or "absorption costing". How a firm expenses its production and distribution costs will impact the structure of internal income statements. Because all costs incurred to sell a product are included with cost of goods sold, the firm's gross margin will be lower under the full costing method than the absorption costing method.
Today business and industry needs costing systems to meet their individual requirements. Costing experts believe that it may not be possible to devise a single costing system to fulfill everybody's needs. They have developed different methods of costing for different industries depending upon the type of manufacture and their nature. As per the nature and peculiarities of the business, different Industries follow different methods to find out the cost of their product. There are different principles and procedure for doing the costing. However the basic principle and procedure of costing remain the same. Some of the methods mentioned are Unit Costing, Job Costing, Contract Costing, Batch Costing, Operating Costing, Process Costing and Uniform Costing.
Unit Costing. This method also called '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. Examples: Brick making, mining, cement manufacturing, dairy, flour mills etc.
We all recognize that absolute costs can increase year on year; but what exactly are we getting for our money? Are we providing more services? Or are the services we provide just getting more costly? Without linking what we spend (input) to what we provide (output) we do not know how cost effective we are. Measuring the cost per unit produced (unit cost) is therefore one way that we can define Value for Money. By comparing the unit cost of the service over time we can track our progress on cost effectiveness. Comparing unit costs with other similar organizations we can assess our relative efficiency. The calculation of unit cost is very simply represented by taking the total cost of a service and dividing it by the number of service units provided.
= Unit Cost
Number of cost units
It sounds simple, but to be meaningful we need to understand our costs and how they behave and also be able to identify units that most meaningfully measure the performance of the service.
Job Costing. Job Costing is method of costing in which we calculate the cost of each job. Job here means a small work or group of small activities which we can identify in any product's production. It is also necessary for producing any product. Some, customer can order for getting specific job not all products. So, it is very necessary to find that job order's cost through job costing method.
Job Costing is used in that industry where we differentiate one job with other job. In that situation, we can collect cost of each work order or product line. For making furniture or machinery or its tools or ship building, its work can be divided in small parts and each part will be collected under job costing.
In job costing, we make job account which demonstrates material, labor and direct expenses at different dates because we use these expenses at different period. So, when we expand, we record at that time. After this, we add for calculating prime cost of that job.
Procedure of Job Costing Accounting
1. Material Cost Accounting
In job costing procedure's first step, we have to identify each job's material cost and to record it. When any material is issued from store, summary of that material cost of each job is posted to individual job cost sheet. On this basis, we find what material cost of each job is when production is in work-in-process. Here are two points which you should know.
First point is if there any material which is surplus after using it to specific job, we will return it to store and it will be sent with store debit note and relevant job account will be credited with that cost of material. Second point, if there is any surplus material which is adjusted with any other job work, then we will make a material transfer note and on that basis, we will transfer material and its cost from one job to other job
2. Labour Cost Accounting
On the basis of job time card or sheet, we can allocate labour cost to each job or work order. We also adjust of total idle time from labour cost in each job.
3. Overhead Cost Accounting
On the basis of machine hour rate, labour hour rate or any other basis we allocate and identify different overhead expenses for each job. It is difficult but with suitable overhead rate to each individual article manufacturing, we identify overhead in each job.
Contract Costing. Contract costing is that method of costing in cost accounting which is used to collect and identify all the expenses relating to a specific contract. For this purpose, Contractor has to maintain contract ledger in which he has to show contract account.
Contract here means an agreement to complete construction of building or any other engineering work which need many days, months or years to complete.
Contact account is that account who shows all the expenses in its debit side. Credit side of this account, we show value contract price or work certified value. Difference between debit and credit side of will show notional profit or loss.
Following are main Contract Expenses and Costs which shows in Contract Account under Contract Costing :-
1. Material Cost
Material or raw material which is used for construction is the main expense or contract cost and it will be debited in contract account. It is supplied from store or purchased from market directly. If material is transferred from any other contract, then its cost will be adjusted on the basis of material transfer note.
2. Labor Cost
On the basis of wages analysis sheet, labor cost is calculated for a specific contract order. If same laborer is used more than one contract, then time devoted to each contract is calculated and on this basis, labor cost is allocated.
3. Direct Expenses
Direct Expenses are those costs directly related to the principal activity of the business. Examples include the raw materials used to manufacture a product and the labor costs associated with the work performed to produce the product.
Overheads can be allocated on the basis of some % on cost of material, wages or prime cost or MHR or LHR.
5. Sub- Contract Cost
It will also include in contract cost, if to complete sub-construction for main construction.
6. Cost of Extra Work.
The extra work amount payable by the contracted should be added to the contract price. If extra work is substantial, it is better to treat it as a separate contract. If it is not substantial, expenses incurred should be debited to the contract account as "Cost of Extra work".
Importance of Contract Costing
Contract costing is important because with this method, we can calculate cost of big jobs. If we do not know contract costing and calculating of profit under this method, we will use job costing method and result will not be awesome because many items like value of work certified, notional profit, contract price are not used in job costing. So, it is better for us to learn all things which is in contract costing.
Batch Costing. 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. Industries like Bakery, Pharmaceuticals etc. usually use batch costing method.
Operating Costing or Service Costing. Where the cost of operating a service such as nursing home, Bus, railway or chartered bus etc. 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. 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.
Process Costing. This kind of costing is used for the products which go through different processes. For example, manufacturing cloths goes through different process. Fist process is spinning. The output of spinning is yarn. It is a finished product which can be sold in the market to the weavers as well as use as a raw material for weaving in the same manufacturing unit. For the purpose of finding out the cost of yarn, the cost of spinning process is to be ascertained. The second step is the weaving process. The output of weaving process is cloth which also can be sold as a finished product in the market. In such case, the cost of cloth needs to be evaluated. The third process is converting cloth in to finished product such as shirt or trouser etc. Each process is to be evaluated separately as the output of each process can be treated as a finished good as well as consumed as a raw material for the next process. In such industries process costing is used to ascertaining the cost at each stage of production.
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.
Task 2 :
Present a project cost estimation associated with constructed facilities. What constitutes Capital Cost and Operation & Maintenance costs, explain its magnitude importance
Task 3 :
In a service oriented industry like Olympia College, propose on possible routine cost report that has to be accomplished regular by the finance officer during the construction of facilities and how it is to be accomplished, prepare a sample format.
The college is required under Ministry of Education and Sarawak to obtain preapproval of the capital project or acquisition by a designated State or local planning authority in the state in which it is located. The college filed an initial application for a certificate of need on or before 31 December 2014 that includes a detailed a detailed description of the project and its estimated cost and had not received approval or disapproval on or before 30 September 2014. The college expended the lesser of RM 900,000 or 15 percent of the estimated cost of the project on or before 31 December 2014.
Assume construction in process. If a college that initiates construction on a capital project does not meet the requirements under the fixed assed, moveable equipment, or lengthy certificate of need provision, the project costs may recognized as old capital cost if all the following condition are me. The College Board of Directors formally authorized the project with a detailed description of its scope and cost on or before 31 December 2014. The estimated cost of the project as of 31 December 2014 exceeds 5 percent of the college total patient revenues during its base year. The capitalized cost incurred for the project as of 31 December 2014 exceeded the lesser of RM 900,000 or 15 percent of the estimated project cost and the college began actual construction or renovation groundbreaking on or before 31 May 2013 and the project is completed before 1 October 2015.
This cost center normally includes only the cost of administration staff. The salary cost of direct administration staff. Classroom cost are those associated whit formal, didactic instruction on a specific topic or subject in a classroom that meets at regular, scheduled intervals over a specific time period example semester or quarter and for which a student receives a grade.
While it may involve occasional or periodic meetings to discuss or analyze case, critique performance or discuss specific skill or techniques, it involves no class room instruction. For cost reporting period beginning on or after 1 October 2014 if you do not operate the program, the classroom portion of the costs are not allowable as pass through cost and therefore not reported pass through cost. The college receives a benefit for the support it furnishes to the education program through the provision of services. The lecture training cost must be incurred by the provider or by an education institution related to the provider by common ownership or control cost to related organizations. Cost provider or the education institution, are not allowed. The cost incurred by the college for the program does not exceed the cost that would have been incurred by the hospital if the program had operated by the college.
Task 4 :
Considering the possible cost 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.
The conclusion functions of finance, and the environment which finance operates, and how the non-financial manager fits in a typical company`s structure.
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 you need financial and accounting knowledge is that without a good understanding of these disciplines you do not have the tools needed for effective management decision making. You will have to rely totally on the financial manager, whose recommendations you 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, you cannot contribute sound input to the decision process.