- Justify the importance of Cost Accounting for different types of organizations (eg. manufacturing organizations, service organizations, government organizations).
Organizational leaders are tasked with a myriad of responsibilities and so this capacity costs accounting chips into organizational systems. Organizations are majorly formed to grow the wealth of shareholders, as it may seem from the investors’ perspective, and to grow the wealth and value for the investors the organizations must put in place mechanisms of increasing revenue and reducing the operating costs of the businesses. In that light, cost accounting is important for different types of organizations mainly including the provision of a structured approach to the general measurement of costs, providing guidance required in arriving at cost of a product, and enabling the users to arrive at the cost of products and services where the law requires such computations. To comprehensively help in understanding the importance of cost accounting, this paper delves into the importance of cost accounting in manufacturing, service, merchandising, and government institutions.
One of the areas where cost accounting receives wide application is in the manufacturing entities. In a nutshell manufacturing organization deals with the conversion of raw materials to finished products a good example is the conversion of wheat to bread. The manufacturing organization, therefore needs to know what costs will be incurred in the entire manufacturing process until the bread arrives to the final consumer. The costs involved may include the costs of raw materials, costs of direct labor, and costs of operating the machines alongside other overhead costs such as administrative expenses. Cost accounting is therefore important for manufacturing organizations as it provides the basis for computing the cost incurred in making a product.
Secondly, manufacturing organization employ cost accounting standards and methods in the computation of the appropriate market price of a product. This takes place after the production costs have been accounted for. The price of the product may be determined by adding the manufacturer’s premium or margin to the production cost per unit as a means of arriving at the market price of the product. Thirdly, the manufacturing organizations benefit from cost accounting because it provides comparative basis among manufacturing entities operating in the same industry. The manufacturing entities also use the product costs in determining the profitable and unprofitable products and lastly, manufacturing entities use cost accounting in inventory control measures.
In service organizations cost accounting is important in determination of the costs involved in offering services similar to the manufacturing organizations, cost accounting is used in the services industry to determine the price charged for the service by its provider. Hairdressing, for instance, requires the service provider to determine the cost per head. The cost elements majorly include labor and other utilities such as power and water. The service providers may charge their customers differently, but this depends on a variety of factors including the overhead costs for service providers located in different locations and the labor hours that are dedicated to a certain style. Other than the determination of costs and price of services cost accounting also provides the basis for filing returns through the computation of the statutory costs. This means that cost accounting is important in statutory compliance for service providers as it provides the basis and standards applied in computation of such costs.
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Merchandising entities basically deal with acquiring products or merchandise from the vendors, majorly in bulk, and transmitting those products to the final consumers and small-scale consumers. The activities that merchandising organizations engage in may including bulk breaking, further processing, packaging, and branding among others. The transmission of the products to the consumers involves a lot of costs whose determination require the application of cost accounting methods.
For government organizations and institutions cost accounting is applied in the preparation of short-term and long-term budgets including the annual budgets prepared by many governments globally. Apart from that, governments engage in many public service activities including the provision of health and education facilities as well as the control of pollution. Cost accounting therefore helps the governments in determining the costs involved in the provision of such services. Thirdly, governments unlike business entities operate expenditure-revenues perspective meaning that they start by budgeting for the expenditure and use the budget as the basis of looking for public revenue. Cost accounting therefore provides the governments with the basis for taxation among other methods collecting public revenue. Lastly, some government set the floor and peak prices for certain commodities. This requires determination of the production cost incurred by the manufacturers and suppliers based on which they set the prices.
- Briefly explain different costing methods and techniques
Costing methods and techniques generally refer to the systems employed by companies in the ascertainment of costs. The costing methods employed in a certain business entity largely depend on the nature of business conducted by the firm and as well as the activities in which the firm engages during the production process. Generally, there are three broad costing methods, which include standard costing methods; activity based costing methods (ABC), and job costing methods.
Standard costing methods are based on historical or predetermined costs. Standard costing therefore involves the setting of achievable standard costs, which are determined based on previous performance. The standard costs remain constant over time and any deviations from the set standards are recorded and analyzed as variances. As such, standard costs are at times referred to as the target costs which are meant to be the yardsticks or measuring an organization’s performance in terms of cost efficiency by comparing the standard or target costs to the actual costs and seeking explanations for any variances especially such variances happen to raise the actual costs above the standard costs. The bottom line in the application of standard costing is that the costs must be achievable, but not necessarily ideal with the aim of encouraging the organization towards achieving certain set standards without demotivating the employees. Standard costing methods are widely applied in organizations due to the low cost and convenience of operating the system.
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Activity based costing is the method that is widely applied after standard costing. ABC involves the identification of all activities performed by a business entity followed by assigning the indirect costs to the products involved. In other words, ABC provides a platform for the recognition of the relationship that subsists between the product and the costs involved in the production activities. Activity based costing thereby results in a more specific way of absorbing indirect costs such as administrative and other office expenses as opposed to the traditional methods, which arbitrarily assign overhead costs. By solving the problem of assigning indirect costs to products ABC has gained a niche in many entities in the manufacturing sector. Process costing happens to be the major example under ABC.
The last costing method is the job order costing also famously known as job costing. Job costing basically assigns all manufacturing costs to as single product of a batch of products. The costing method happens to be famous where the jobs are highly differentiated and due to this, the management requires to prepare a job cost card for each order. The job cost card record all the direct and indirect costs involved in that particular job. Contract and batch costing are good examples of job costing.
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Costing techniques fall into five categories. Uniform costing requires that costs are assigned similarly to all departments without consideration of the percentage of contribution to such cost. Marginal costing technique assesses the incremental cost per every additional unit of the product. Standard costing basis the costs of products on predetermined standards while historical costing basically assesses the historical costs and assumes that the trends continue into foreseeable future. Lastly, absorption technique assigns proportionate overheads to departments in the organization.
- Observe the cost accounting system in any organization of your choice and explain the system followed
Lucky Group Ltd. is Dubai based scrap metal recycler. The company transforms waste metals into ally rims, which are then sold in over 40 countries globally. The products are highly similar in that the differences may only be in the designing and sizes. Therefore, the company produces the alloy rims not based on job orders, but as a continuous process of production.
Lucky Group Ltd. employs processing costing method in its process of assigning costs. The process entails assigning direct costs to the product upon every stage of completion. Process costing allows the company to precisely approximate the cost of both finished products and the good in the process of completion. For the production overheads, Lucky Group Ltd. assigns overhead costs through absorption costing. Absorption costing enables the company to ascertain the costs involved in operating every department in the organization as well as helping in assigning the costs to the final products. The assignment is based on the activities of each process and department as it pertains to the production process rather than using uniform costing, which would assign the overheads equally.