May jiManagement Accounting

Prepared for: Lecturer Ms Giang Nam Dao

Prepared by: Pham Duy Thanh Pepsibob ITP F04A - 153

Number of words: 4,000 words

Submission Date:

9th May , 2012

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Executive summary
Binh Minh Company is a family-owned enterprise that locates in Ha Tay province and makes lamps for the local market. These lamps are highly prized in the local market for their intricate ironwork and detailing. The company has been in business for over 10 years and grown continuously in recent years. However, Mr. Nguyen Minh, the owner of the company, thinks that there may be some problems in controlling the cost in the company.

I have to prepare a report analyzing cost and cost control in the company. In my report, I present the following information and analyses: Identify and classify different types of cost incurred in Binh Minh company Calculate manufacturing overhead cost absorbed to jobs in 2011. Is Manufacturing Overhead under absorption or over absorption for the year? How should Binh Minh account for the under absorption or over absorption overhead? Prepare an income statement for the year 2011. Calculate and evaluate indicators of productivity, efficiency and effectiveness within Binh Minh Company. Propose some possible standards and control measures on the utilization of materials, labor and other manufacturing expenses Mr. Nguyen Minh is also want to know more about quality improvement and value enhancement etc explain the principles of quality and value and also identify potential improvements based on information given in the scenario. Moreover, I prepare a report in order to: Collect, analyze and present data based on the information given in the scenario using of appropriate techniques as well as prepare and analyze routine cost reports Explain the need of and operation of different costing methods used by Binh Minh Company Furthermore, I have to Based on information given above, calculate costs using appropriate techniques

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Table of contents
Contents
Introduction ................................................................................................................................................. 5 Task 1 ........................................................................................................................................................... 6 1) Identify and classify different types of cost incurred in Binh Minh company (1.1) ................ 6 1.2classify different types of cost incurred in Binh Minh Company .......................................... 7 2) Calculate manufacturing overhead cost absorbed to job in 2011 (1.3)................................ 8 3) Prepare an income statement for the year 2011. Calculate and evaluate indicators of productivity, efficiency and effectiveness within BinhMinh company (2.2) ............................... 8 Income statement .......................................................................................................................................... 8 Calculate ratio ..................................................................................................................... 9 4) The principles of quality and value: .................................................................................... 9 Task 2: ........................................................................................................................................................ 14 Prepare an absorption costing income statement, with one column showing the results if 45,000 units are produced and one column showing the results if 50,000 units are produced. ..............................................................................................................................................14 Prepare a variable costing income statement, with one column showing the results if 45,000 units are produced and one column showing the results if 50,000 units are produced. ..........15 Reconcile the difference in net incomes under the two approaches and explain what accounts for this difference. ..................................................................................................................15 If the market demand drops suddenly, how does this trend affect to the company?...............16 Discuss the relative usefulness of the variable costing income statements versus the absorption costing income statements for decision making and for evaluating the managers performance ..........................................................................................................................17 Task 3: ........................................................................................................................................................ 19 Explain the main different between Job costing and Process costing. Explain why Tri Tue company should use process costing ....................................................................................19 Compute the equivalent units of production. ..........................................................................20 Compute the costs per equivalent unit for the month .............................................................20 Asm1- MA - PepsiBob Page 3

Determine the total cost of ending work in process inventory and the total cost of units transferred to the next department.........................................................................................20 Conclusion ................................................................................................................................................. 21 References .................................................................................................................................................. 22 Works Cited............................................................................................................................................... 22

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Introduction
The purpose of this assignment is to understand how to collect and analyze cost information within a business and propose methods to reduce costs and enhance value within a business. For that reason, my report following below task: Identify and classify different types of cost Explain the need for, and operation of different costing methods Calculate costs using appropriate techniques Collect, analyze and present data using appropriate techniques Prepare and analyze routine cost reports Calculate and evaluate indicators of productivity, efficiency andd effectiveness Explain the principles of quality and value and identify potential improvements

Sources of Information: knowledge comes from course book, marketing books. Besides that, the internet helps me applying theories in practice. Many books in library very useful to help me understand deeply the theory.

Limitations of report: i meet many problem when we research information. The time is limited and we cant discussion deeply in some part.

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Task 1
1) Identify and classify different types of cost incurred in Binh Minh company (1.1)
1.1 Definition different types of cost Definition of cost: An amount that has to be paid or given up in order to get something. In business, cost is usually a monetary valuation of effort, material, resources, time and utilities consumed, risks incurred, and opportunity forgone in production and delivery of a good or service. All expenses are costs, but not all costs are expenses. (definition costs, n.d.)

The total cost of a unit is came from three element included: Materials cost Labour cost Expenses And each cost element can be direct/ indirect cost A Direct cost is a cost that can be traced in full to the product, service, or department that is being costed. (BPP, 2004 p.6) An indirect cost (or Overhead) is a cost to a business that is not directly related to making a product (Farlex, 2012) Finally, we can classified total costs as below: Materials cost = Direct materials cost + Indirect materials cost + + + Labour cost = Direct Labour cost + Indirect labour cost + + + Overhead = Direct overhead + Indirect overhead Total cost = Direct cost + Indireact cost In order to produce, control and sale a product there are two types of cost consist of manufacturing cost and nonmanufacturing cost. In manufacturing cost we have: Direct material: is all material becoming part of the product (unless used in negligible amounts and/or having negligible cost) (BPP, 2004, p. 7) Direct labour: When a business hires workers, it classifies some workers as direct and other workers as indirect. The direct workers produce the product in the factory, and their wages are added to the cost of goods sold. Direct labor cost is one of the two main production costs; the other production cost is the direct materials cost. Overhead: includes all costs of manufacturing except direct material and direct labor (Cost Classification, n.d.) In non-manufacturing cost we have:

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Selling costs (or marketing cost) : include all costs necessary to secure customer orders and get the finished product into the hands of the customers. These costs are often called order getting or order filling costs Administrative costs: include all executive, organizational, and clerical costs associated with general management of an organization rather than with manufacturing, marketing, or selling. (anon, www.accountingformanagement.com, n.d)

1.2classify different types of cost incurred in Binh Minh Company

In order to be more clearly about different types of cost we see some example below: During the year, the following transactions were completed: a. Raw materials purchased for cash, $200,000. => direct material cost b. Costs for employee services were incurred as follows: Direct labor .............. Indirect labor in factory Sales commissions ... Administrative salaries $130,000 => direct labor cost $50,000 $20,000 $40,000 => Overhead cost => selling cost => administrative cost

d. Rent for the year was $35,000. ($20,000 of this amount related to factory operations, and the remainder related to selling and administrative activities.) => overhead cost e. Utility costs incurred in the factory, $77,000. => overhead cost f. Advertising costs incurred, $80,000. => selling cost g. Depreciation recorded on equipment, $90,000. ($72,000 of this amount was on equipment used in factory operations; the remaining $18,000 was on equipment used in selling and administrative activities.) => Overhead cost The table below classified cost of Binh Minh company: Name of the cost Variable cost Direct material Indirect material Direct labor Indirect labor Sales commision Admin. salaries Rent (factory) Rent (selling&admin.)
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Fixed cost

X X X X X X X X

Production cost Direct Direct material labour $150,000 $130,000

Manufacturing overhead $45,000 $50,000

Period cost

$20,000 $40,000 $20,000 $15,000

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Utility cost Advertising cost Depreciation (factory) Depreciation (Selling& admin. equipment) Total

X X X X

$77,000 $80,000 $72,000 $18,000

$150,000

$130,000 $264,000

$173,000

2) Calculate manufacturing overhead cost absorbed to job in 2011 (1.3)

As the table above, the total manufacturing overhead cost absorbed in 2011 is 264,000$ Besides that, Predetermined absorption rates = $240,000/ $120,000 = $2 (per direct labor costs). Overhead absorption = $2 x $130,000 = $260,000 So manufacturing overhead under absorption = $264,000 - $260,000 = $4,000 In this case, Binh Minh should make an adjusting entry by debiting Cost of Goods Sold for $4,000 and crediting Manufacturing Overhead for $4,000. COGS = $560,000 + $4,000 = $564,000

3) Prepare an income statement for the year 2011. Calculate and evaluate indicators of productivity, efficiency and effectiveness within BinhMinh company (2.2)

Income statement Sales Less COGS Gross profit Less: Selling and Admin. Expenses Sales commission Admin salary Rent in selling and admin. Adverting Depreciation on selling and admin. Net Income 750,000 564,000 186,000 $20,000 $40,000 $15,000 $80,000 $18,000

173,000 13,000

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Calculate ratio

a) Net profit margin= Net profit / Sales b) Gross profit = Gross profit / Sales c) COGS to sale = COGS / Sales d) Operation cost to sale = Operation cost/ Sales Table1) calculate the ratio in three years 2009 Net profit margin 7.7% Gross profit COGS to sale Operation cost to sale 30.77% 69.23% 23.08%

2010 4.14% 27.14% 72.86% 23% 1.73% 24.8% 75.2% 23.06%

2011

In three years, the net profit ratio are reduce from 7.7% (in 2009) to 1.73% (in 2011). So Gross profit also decrease from 30.77% (in 2009) to 24.8% (in 2011)

e) Stock turnover: Calculate: Ending material inventory = beginning inventory + purchased material in use = 24,000 Ending work in process inventory = beginning inventory + Manufacture cost COGM = $25,000 + $540,000 - $530,000 = $35,000 Ending Finished Good Inventory = Beginning finished goods inventory + COGM COGS = $50,000 + $530,000 $560,000 = $20,000 Average Inventory = average material inventory + average WIP inventory + average FG inventory = (19,000 + 24,000)/2 + (25,000 + 35,000)/2 + (50,000 +20,000)/2 =$86.500 Stock turnover = COGS/ Average Inventory = 560,000/ 86.500= 6.47 times f) Stock turnover period = 365/ Stock turnover = 365/ 6.47 = 56.41 times

4) The principles of quality and value:

In the past, customers usually lack of money or they do not want to spend too much money when they purchase a product or service. Customer may accept a little poor quality with the price is cheap. At that time, company also focus on reduce price and production as many units as possible. They do not concentrate in marketing, customer service, and delivery in time, etc in order to reduce the cost. Nowadays, the economy is developed more than in the pass. Consumers willing pay more money to receive a product or service with high quality. Therefore, company has to focus on quality and value if they want success in their business.
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Definition of quality: Based on customer, quality can define as "Quality consists of the capacity to satisfy wants."(C.D. Edwards, "The Meaning of Quality", in Quality Progress Oct.1968) Besides that, based on value "Quality is the degree of excellence at an acceptable price and the control of variability at an acceptable cost." (A.Broh, 1982) Cost of quality: Prevention costs Appraisal costs Internal failure costs External failure costs

Are the cost of any action taken to investigate, prevent or reduce defects and failure Are the costs of assessing the quality achieved Are the cost arising within the organization of failing to achieve the required level of quality Are the costs arising outside the organization of failing to achieve the required level of quality (Resources: BPP, 2004, p.96)

For example, in order to reduce cost and improve quality, Binh Minh Company can invest more money in Prevention costs and Appraisal costs such as: Rent professional in quality engineering, administration of quality control Invest more money to training in quality control Acceptance testing Performance testing

Therefore, company can reduce their incurred in internal and external failure costs. There are many reason lead to failure costs include: Failure analysis Re-inspection costs Losses from failure of purchased items Costs of reviewing product specification after failures Administration of customer complaints section Cost of repairing products returned from customers (BPP, 2004, p.97)

The definition of value: The value of a product or service to a customer can therefore be considered in term of its fitness for purpose and the prestige or esteem attached. The value of a product has four different aspects include: Cost value: is the cost of producing and selling an item/providing a service Exchange value is the market value of the production or service
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 Use value is what the product or service does the purpose it fulfils Esteem value is the prestige the customer attaches to a product (BPP, 2004, p.93) Enhance the value: Every manager wants to increase exchange value (market value of a product or service) and decrease cost value (costs of producing and selling). Therefore they can increase price and decrease costs. The Of course, it will bring a lot of profit for company and lead to the success of company. In order to improve exchange value of a product or service manager has to enhance the use value or esteem value. For example, they can add value for their product by use better material, improve shape, colors so consumers have more option and they can chose product suitable with their characteristic. The customer service such as e-mail, online consultant, warranties, and deliver system also add value for their product. In addition, some company add value by add expensive diamond to their product. For example, the most expensive mobile in the world named Goldvish has priced is 1million USD (Linh, 2007) . For service, closing later can improve use value of a shop, a supermarket, etc. besides that, many company enhance esteem value by increasing price or produce a product in limited quantities. For example, a company can produce 10,000 cars and sale with price is 50,000$. However, they can just produce 100 cars and sale each car 700,000$. Binh Minh Company can enhance the value upgrade their lamps. They can improve the shape, color or use model technology in their product. Binh Minh Company can enhance the use value and esteem value in order to increase exchange value of their lamp. Besides that, the company needs to reduce the costs. There are two main way to reduce the cost. Firstly is cost control techniques. Cost control is all about keeping cost within predetermined limits (BPP, 2004, p.88). This techniques to ensure that all costs incurred are controlled, too much overhead cost can lead to the loss of business. The overhead cost must be predetermined. Secondly is cost reduction. The purpose of cost reduction is reducing cost below a previously accepted level, without adversely affecting the quality of the product or service being provided. The list below shows some simple way to reduce cost: Improve the efficiency of materials: decrease wastage Improve labour productivity: training for labour, changing work method Improve the efficiency of equipment usage: upgrade model equipment Reduce material costs and labour cost: Save on finance costs: by early payment discount or payback early to decrease interested
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Improve control over spending decisions Value analysis:

Definition: value analysis can be defined as a process of systematic review that is applied to existing product designs in order to compare the function of the product required by a customer to meet their requirements at the lowest cost consistent with the specified performance and reliability needed (Rich, 2000) Value analysis process: The first step in the value analysis process is to define the problem and its scope. Once this is done, the functions of the product and its items are derived. These functions are classified into "basic" and "secondary" functions. A Cost Function Matrix or Value Analysis Matrix is prepared to identify the cost of providing each function by associating the function with a mechanism or component part of a product. Product functions with a high cost-function ratio are identified as opportunities for further investigation and improvement. Improvement opportunities are then brainstormed, analyzed, and selected. Detailed cost estimates become more important following function analysis, when evaluating value improvement proposals. The total cost and percent contribution of the functions of the item under study will guide the team, or analyst, in selecting which functions to select for value improvement analysis. (anon, 2002)

Total quality management (TQM) If Binh Minh company want to control the quality of their product more effect they should has a control system such as TQM Four basic step of total quality control: Step1: establish standard of quality for a product or service Step2: establish procedures or production methods which ought to ensure that these required standard of quality are met in a suitably high proportion Step3: monitor actual quality Step4: take control action when actual quality falls below standard (BPP, 2004, p.94) The main characteristic of TQM is:
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Quality is the most important The orientation focus on customer, not producer Ensure the information and statistical is an important tool The management base on the spirit of humanity The synchronous in quality management (anon, 2007)

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Task 2:
Prepare an absorption costing income statement, with one column showing the results if 45,000 units are produced and one column showing the results if 50,000 units are produced.
Unit product cost = Direct material + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead Unit production cost for 45,000 units = $12 + $9 + $3 + ($900,000/ 45,000) = $44 Unit production cost for 50,000 units = $12 + $9 + $3 + ($900,000/ 50,000) = $42 45,000 units Sales ($61 per unit) Less cost of goods sold: Beginning inventory Add COGM Goods available for sale Ending inventory Gross margin Less selling& admin. Exp. Variable ($4 x units) Fixed Net operating income $180,000 $640,000 820,000 $(55,000) $180,000 $640,000 820,000 $35,000 $$1,980,000 $1,980,000 $$1,980,000 765,000 $$2,100,000 $2,100,000 $ 210,000 $1,890,000 $855,000 $2,745,000 50,000 units $2,745,000

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Prepare a variable costing income statement, with one column showing the results if 45,000 units are produced and one column showing the results if 50,000 units are produced.
Unit production cost = Direct material + Direct labor + Variable manufacturing overhead Unit production cost = $12 + $9 + $3 = $24 45,000 units Sale ($61 per units) Less variable expense: Beginning inventory Add COGM Goods available for sale Less ending inventory $$1,080,000 $1,080,000 $$1,260,000 $1,485,000 $900,000 $1,540,000 $(55,000) $640,000 $1,540,000 $(55,000) $$1,200,000 $1,200,000 $ 120,000 $1,080,000 $180,000 $1,260,000 $1,485,000 $2,745,000 50,000 units $2,745,000

Variable cost of goods sold $1,080,000 Variable selling and admi $180,000 Contribution margin Less fixed expenses Manufacturing overhead $900,000 Selling and admi expenses $640,000 Net operating income

Reconcile the difference in net incomes under the two approaches and explain what accounts for this difference.
We can see that the result of two costing method have different In marginal costing have net operating income is $(55,000) In contract, absorption costing have net income is $35,000 (if produce 50,000 units) and $(55,000) (if produce 45,000 units) According to management accounting book (BPP,2004) two method will have same net income if production equal to sales Besides that, if stock level increase absorption costing will report the higher profit because some of the fixed production overhead incurred during the period will be carried forward in closing

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stock to be set against sales revenue in the following period instead of being written off in full against profit in the period concerned (BPP, 2004, p.73) The different in the net income of two methods is: $35,000 - $(55,000) = $90,000 The income will be same if we deduct the fixed manufacturing overhead costs released from inventory Marginal costing net income Deduct the fixed manufacturing overhead costs released from inventory (5,000 units * $18 per unit) Absorption costing net income $(55,000) $35,000 $90,000

If the market demand drops suddenly, how does this trend affect to the company?
Break-even point: Variable cost per unit = $4 + $12+ $9+ $3 = $28 Contribution per unit = unit sales variable cost per unit = $61- $28 = $33 Break-even point in units = fixed cost/ contribution per unit = 46,666.66 (units) Margin of safety: Break-even point sales = fixed costs/ contribution margin per units = 1,540,000/ 33 = 46,666.66 units Margin of safety = (actual sales break-even point sales)/ actual sales = [(45,000 46,666)/ 45,000] * 100% = -3.702 % We can see that the company in this year cannot achieve break-even point. In fact, every company usually cannot achieve break-even point in first year. Because of they do not have loyalty customer. These companies have to hard working to attract more
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customers in order to made profit. If the market drop suddenly, it will be harder for company to achieve break-event point. They can be loss more money in next year. In the worse case, company may has to face with bankrupt. The margin of safety now is (-3.7%) that mean the company is operated at loss now. Company have to increase th e sales of 3.7% to achieve break-even point (no profit no loss).

Discuss the relative usefulness of the variable costing income statements versus the absorption costing income statements for decision making and for evaluating the managers performance
There are advantage and disadvantage of absorption costing: Fixed cost are incurred to make output; it is therefore fair to charge all output with a share of these costs Closing stock value, by including a share of fixed production overhead, will be valued on the principle required for the financial accounting valuation of stocks by the statement of standard accounting practice on stocks and long term contracts A problem with calculating the contribution of various products made by a company is that it may not be clear whether the contribution eared by each product is enough to cover fixed costs, whereas by charging fixed overhead to a product it is possible to ascertain whether it is profitable or not.

There are some characteristic of marginal costing include: It is simple to operate There are no apportionments, which are frequently done on an arbitrary basic, of fixed costs. Many costs such as the managing directors salary are invisible Fixed costs will be the same regardless of the volume of output, because they are period costs. It makes sense to charge them in full as a cost to the period The cost to produce an extra unit is the variable production cost. It is realistic to value closing stock items at this directly attributable cost. Under or over absorption is avoid Marginal costing information can be used for decision making but absorption costing information is not suitable foe decision making Fixed costs relate to a period of time and should be charge against the revenues of the period in which they are incurred (Resource: BPP, 2004, p.75)

Conclusion, marginal costing has some feature more useful than absorption costing. For example, marginal costing not emphasized on total cost (both of variable and fixed cost)
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so manager can depend on the information in this method costing to made decision, control and planning. Binh Minh Company may want to use marginal costing method because it is very easy to understand. Besides that, it can be combined with other forms of costing.

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Task 3:
Explain the main different between Job costing and Process costing. Explain why Tri Tue company should use process costing
Definition: JOB COSTING Job costing is a costing method applied where work is undertaken to customers special requirements and each other is of comparatively short duration PROCESS COSTING Process costing is a costing method used where it is not possible to identify separate units of production, or jobs, usually of the continuous nature of the production process involved

(Resource: BPP, 2004, p.107-p.136) There are some features that made Process costing different from Job costing The continuous nature of production in many process means that there will usually be closing work in process which must be valued. In process costing it is not possible to build up cost record of the cost of each individual unit of output because production in process is an indistinguishable homogeneous mass There is often a loss in process due to spoilage, wastage, evaporation and so on. The output of one process become the input to the next until the finished product Is made in the final process Output from production may be a single product, but there may also e a byproduct or joint-products (BPP, 2004, p.136) Tri Tue company should use process costing for some reason: The company produces a lot of wooden toy (also called mass product) thought three process. They do not produce for special requirement of customer. The materials are added at several stages during the molding process. Therefore, company cannot separate units of production by the continuous nature of the production process

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Compute the equivalent units of production.

Depend on the production data, units at the end July 31 = 12,000 + 110,000 107,000 = 15,000 units

Unit completed and transferred to next apartment Equivalent work in process, July 31 7,500 units 15,000 x 50% 15,000 x 40% 114,500 units Equivalent units of Production in during the month Table 1) Equivalent units of Production in during the month

Material 107,000 units

Conversion 107,000 units

6,000 units 113,000 units

Compute the costs per equivalent unit for the month

Cost to be accounted for $9,600 Work in process, July 31 Cost added $184,400 $84,290 Total $202,370 $93,890 93,890/114,500=$0.82 Equivalent cost per equivalent unit Table 2) Equivalent cost per equivalent unit Total Cost $17,970 Materials Conversion $83,290 $100,110 $108,485 108,485/113,000= $0.96

Determine the total cost of ending work in process inventory and the total cost of units transferred to the next department
Material Conversion End. WIP in inventory Equivalent units of 7,500 6,000 production Equivalent cost per 0.82 0.96 equivalent unit $ 6,150 $ 5,760 Cost of ending work in process inventory Table 3) Cost of ending work in process inventory Therefore, the total cost of units transferred = $6,150 + $5,760 = $11,910

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Conclusion
In conclusion, my report discuss about the different costs in Binh Minh company. Besides that, I also discuss about the characteristics of two method costing is marginal costing and absorption costing. And I calculate the income statement depend on the two method costing, explain why two method give two different result. I also discuss about the value and quality and how to enhancing value for the product of company. For Tri Tue company, my report has information and calculate equivalent units of production, cost per equivalent unit for the month and the total cost of ending work in process inventory and total cost of unit transferred to the next department. I hope that my report will be useful for both of two companies to more understand about costs, method costing, value, quality and they can made better decision for the success of business.

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References

Works Cited
A.Broh. (1982). Retrieved May 4, 2012, from www.kfmaas.de: http://www.kfmaas.de/qualidef.html anon. (2002). Retrieved may 2, 2012, from http://www.npd-solutions.com/va.html anon. (2007). Retrieved May 4, 2012, from http://saga.vn/Kynangquanly/Lythuyetquantri/6426.saga anon. (n.d). Retrieved May 3, 2012, from www.accountingformanagement.com: http://www.accountingformanagement.com/Manufacturing_and_nonmanufacturing_cost.htm#M anufacturing Overhead Cost BPP. (2004). management accounting. London: Aldine. Cost Classification. (n.d.). Retrieved May 1, 2012, from www.accountingformanagement.com: http://www.accountingformanagement.com/Manufacturing_and_nonmanufacturing_cost.htm#M anufacturing Overhead Cost definition costs. (n.d.). Retrieved May 1, 2012, from www.businessdictionary.com: http://www.businessdictionary.com/definition/cost.html Farlex. (2012). indirect cost. Retrieved May 2, 2012, from financial dictionary.com: http://financial-dictionary.thefreedictionary.com/Indirect+Cost Linh, H. (2007). Retrieved April 27, 2012, from vietbao.vn: http://vietbao.vn/Vi-tinh-Vienthong/10-dien-thoai-dat-nhat-the-gioi/30199739/219/ Rich, N. (2000). Value analysis - value engineering. United kingdom: cardiff.

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