Question

COST ACCOUNTING PROBLEM
Solve the problem with an example based in a computers (cpu) company

Indications:
1. Create a fictitious, manufacturing or service company, with two different jobs (production lines) clearly identified. (10)

2. Estimate the sales prices, variable costs, fixed costs and the break-even point in sales units and income to be able to estimate the total sales and costs that the company will incur during a year. (10 + 10 + 10)

3. Describe the costing process that the company could use (simple and ABC).
to. What would the purchasing process be like? (10)

b. How would you classify indirect costs? (5)

C. What would be the allocation bases or activity generators? (5)

d. Describe the rates (5)
and. Publicize “real” fictitious costs at the end of a year. (5)

F. Obtain and compare the utilities of both lines, according to each cost. (10 +10)

4. Conclude and recommend the management of the company and the best costing system and why. (5 + 5)

Thanks

Answer 1

Answer 1

Create a fictitious, manufacturing or service company, with two different jobs (production lines) clearly identified

Assume company is involved in Manufacturing company and mainly Product lines are as follows:

A product line mean assembled of multiple product under on brand and sale as a “ Product” Product line created by Company as per their own Marketing strategy and they keep on add or less in product line as per customer preference . With help of product line , company can easily target consumer and increase top line growth . Companies sell multiple product lines under different brand name

Answer 2 - Please see below revenue , cost , margin model of any IT service Industry ( they normally have AMC revenue and other than AMC revenue includes Fixed Bid revenue . Fixed Price base revenue)

Also consider some Support cost as fixed overhead cost , Corporate allocate cost etc. Please remember below number is Random number - use only for below example purpose

IT Service Industry	Amnt-$'000
	Annual No
Revenue
AMC	108
other than AMC	352
Total Revenue (a)	460
Cost
AMC	52
other than AMC	304
Total Cost)b)-Variable Cost	357
Margin
AMC -c	56
other than AMC -d	48
Total Margin (a-b)	104
Margin %
AMC (c/a)	52%
other than AMC (d/a)	14%
Margin ( before allocation of Overhead cost
Support Cost@ Div Level	180
Margin	-77
Margin %	-17%
Corp Allocation cost	35
Overhead Cost	101
Margin	-213
Margin %	-46%

Q3- costing process that the company could use (simple and ABC).

Company should use Activity based costing process system . This process system will help company to provide more accurate method product/ service costing , leading to more accurate pricing method . It will help us to understand about Overhead cost , allocation of cost , cost driver identification, ABC costing system mainly help us to in relates to allocation of Overhead cost.

Identify the cost – need to identify those cost which needs to be allocated. Identification of Secondary pool cost ,allocation of Primary cost – It is very important to have primary cost and allocation of cost in relates to direct product and service

Measure activity driver , allocate costs in secondary to primary pool , charge cost to cost objective ,Formulate report

With help of ABC system , we can able to generate Customer base profitability ,understand of distribution cost . Margin , Make or Buy decision and more about pricing

purchasing process ( procurement Process)

Followings are major purchasing process in any standard organization , like :

1. Purchase requisition – any material purchased must be supported by Purchase requisition .Must be panel of authorization process to approve purchase requisition .
2. Selection of supplier – Normally any company used to take three competitive quotation while selecting any vendor . The important factor to note is great Quality of product with low price   
3. Purchase Order and follow up –After selection of vendor , Purchasing department will generate PO with terms & condition relates to Price , Quantity , Payment terms etc. Mainly companies generate number of PO copies and distribute the same ( like one copy with Supplier , one with Purchasing department, another copy with Finance etc.
4. Receipt of Material – inspection , Quality checking after receipt of material
5. Return / Rejects of material
6. Accounting entry into financial books ( GR /IR ) – Goods received note
7. Passing Invoice for payment

3b)classify indirect costs- Indirect cost mainly relates to Overhead cost o costs which are not directly connect with production . Like any IT service industry , all support cost appearing under

Indirect cost like – HR, Finance , Marketing cost , Quality cost , CEO + COO’s cost , Pre sale cost etc.

C. What would be the allocation bases or activity generators?

Mainly cost allocation relates to Overhead cost. We normally follow multiple base to allocate the cost like Machine Hours , labour hour work . We used to allocate service department cost to Operating department and operating department cost allocate to service / product.

Computer service department allocates cost based on number of personal computers used by each operating department .

Sometime we allocate cost on the basi of space occupied – mainly allocation of rent amount

HR department allocate cost on the basis of number of head count

d) Publicize “real” fictitious costs at the end of a year- Normally Fictitious meaning which cost are not real in nature and written on over the period of time from PNL . Some of very common fictitious cot would be –a) Promotional Expenses of a business , b) Preliminary expenses

F. Obtain and compare the utilities of both lines, according to each cost.

Product cost is none of the important tools under manufacturing company to determine cost which all are necessary to manufacture a Product . Mainly this cost sum of direct Material , Labour and overhead cost . We can determine product cost per unit, labour hour for further analysis of cost in details

With help of product cost , it will help us to develop base price to quote for any product

4. Conclude and recommend the management of the company and the best costing system and why.

Service Industry - Job Costing is the best

Costing system is designed in a such a way to monitor entire cost incurred by the Company. This system includes multiple department. With help of proper costing system company can fine tuning operations to generate higher profitability , decide to where they need to cut the cost , they used to compare actual cost v budgeted cost to determine variance analysis , generate profitability report customer wise , region wise . They can understand expense trend reports and control cost accordingly

In general two process of costing is very famous – a) Process costing and b) Job costing .

In any service base Industry , Job costing or Project costing is very helpful to identify ; determine project wise profitability after considering all direct cost relates to project .

Where as in manufacturing company , more popular is Process costing . With help fo this costing system m we can identify complete flow of traction pass through different process / department and derived abnormal as well as normal loss etc.