cost accounting and product's price calculation for ba ding printing company - ministry of public security

Variable cost method normally is selected to calculate price for simple products that are required to pass through few steps and short period to be finished.. A software system tailored

Cost accounting and product’s price calculation for

Ba Dinh Printing Company – Ministry of Public

Security

By TRAN TRIEU LONG

E0500067

BARCHELOR OF BUSINESS (ACCOUNTING)

HONS HELP UNIVERITY COLLEGE

OCTOBER, 2011

DECLARATION OF THE PROJECT’S

my research without their support

Lastly, I would also like to extend my heartfelt gratitude to my family and friends for their continuous support, encouragement and contribution

Without your supports, my thesis cannot be finished

TABLE OF CONTENT

DECLARATION OF ORGINALITY AND WORD COUNT

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ACKNOWLEDGEMENT

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TABLE OF CONTENT

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LIST OF FIGURES v

LIST OF TABLES v

ABSTRACT vi

CHAPTER 1: INTRODUCTION Er ror! Bookmark not defined 1.1 Topic Introduction Er ror! Bookmark not defined 1.2 Problem statement 3

1.3 Research structure Er ror! Bookmark not defined CHAPTER 2: LITERATURE REVIEW Er ror! Bookmark not defined 2.1 Objectives of cost accounting in a company 5

2.1.1product costing 5

2.1.2 Planning and control 5

2.1.3 Information for decision 6

2.1.4 The role of cost accountant 7

2.2 Relationship between manufacturing overhead and product cost 8

2.3.2 Activity based costing method (ABC) 11

Figure 1: Activity based costing 12

2.3.3 Variable costing method 13

2.4 Cost accounting in decision making process 15

CHAPTER 3: RESEARCH AND METHODLOGY 18

3.1 Objective of the project 18

3.2 Method of the research 19

3.3 Data sources 19

3.4 Research scope 20

CHAPTER 4: COMPANY ANALYSIS 21

4.1 Company background 21

Table 1: Profit from 2008 to 2010 23

4.2 Characteristic of Company business activity 24

Figure 2: Printing processes in Ba Dinh Printing Company 25

4.3 Types of cost appear in product price calculation 26

 Direct and Indirect Product Costs 27

 Direct Materials 27

 Direct Labor 28

 Manufacturing overhead 29

4.4 Cost accounting and product price calculation in Ba Dinh Printing Company 30

4.4.1 Cost accounting for direct materials 30

4.4.2 Cost accounting for direct labor 31

Table 2: No.1 Printing Firm Pay-sheet 32

4.4.3 Cost accounting for manufacturing overhead 32

Table 3: Manufacturing overhead account 34

4.4.4 Product price calculation in the company 35

Table 4: Product's price bill 36

CHAPTER 5: CONCLUSION AND RECOMMENDATION 37

5.1 Conclusion

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5.2 Recommendation 38 REFERENCE 39

List of Table

Table 1: Profit from 2008 to 2010

Table 2: No.1 Printing Firm Pay-sheet

Table 3: Manufacturing overhead account

Table 4: Product's price bill

List of Figure:

Figure 1: Activity based costing

Figure 2: Printing processes in Ba Dinh Printing Company

ABSTRACT

This paper is covered with the analysis of cost accounting methods and the impact of the selected costing methods to the company business reality activities The purpose of this thesis is to analyze the use of cost accounting methods to the company as well as the effectiveness of cost accounting system that the selected company adopted The three costing methods are mentioned in this thesis namely Absorption costing method, Activity-Based costing method, and Variable costing method Each method will leads

to different financial statement to company managers, and hence affect to the manager‟s decision making The research focuses to analyze the company‟s selected costing method by providing the relevant costing statements, and from that I will provide self opinions and also recommendations to hopefully enhance the effectiveness

of the company‟s cost accounting performance

CHAPTER 1 INTRODUCTION

This chapter provides an over view of cost accounting Throughout this chapter is the most basic knowledge of cost accounting and its role in the corporation control The link between cost accounting and manager‟s decision making as well as the product‟s cost and price definition will be considered in order to help users to have an over view of company‟s costing system and the importance of cost accounting which directly affect to the company‟s financial

1.1 TOPIC INTRODUCTION

The Institute of Cost and Management Accounting, London defines “Cost accounting is the process of accounting from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units In the widest usage, it embraces the preparation of statistical data, application of cost control methods and the ascertainment of profitability of activities carried out or planned” Costing includes the techniques and processes of ascertaining costs The word technique refers to principles which are applied for ascertaining costs of products, jobs, processes and services The `process‟ refers to day-to-day routine of determining costs within the method of costing adopted by a business enterprise Costing involves “the classifying, recording and appropriate allocation of expenditure for the determination of costs of products or services; the relation of these costs to sales value, and the ascertainment of profitability” (1)

In today market economy, competition is inevitable; it forces companies to enhance their production as well as the quantity and quality of the products However, at high quality, the product‟s price must be acceptable to customer This is the reason why every company needs cost accounting to accurate measure and record any costs and expenses appear at the right time, and from that information, managers could produce ideas and make decision for future production development in order to generate as much profit as possible for the company Making things simple, we can say that there are three points should be attempt by every corporation: product quality and design, low down production costs and expenses, and low price for the products and services

All of the requirements above are considered to be covered by cost accounting as itself objectives Cost accounting covers classification, analysis, and interpretation of cost In other words, it is a system of accounting, which provides the information about the ascertainment, and control of costs of products, or services It measures the operating efficiency of the enterprise It is an internal aspect of the organization Cost Accounting is accounting for cost aimed at providing cost data, statement and reports for the purpose of managerial decision making

In this thesis, my research focuses on the cost accounting system of one of the biggest company in Vietnam, Ba Dinh Printing Company, which is under the control

of Ministry of Public Security As its name, the company activities are all related to the printing industry Company‟s products are normally the special documents or reports for the government and also magazines or journals from the outside orders of newspaper offices The main research purpose about this company is to:

- Analyze the realistic performance of the company‟s cost accounting and the accounting department, how they define the cost of production processes as well as product‟s price

- Base on the analyzing of collected data; propose some ideas to upgrade the process of cost accounting system in the company

1.2 PROBLEM STATEMENT:

Through all of the objectives mentioned above, cost accounting is always considered the centre stage of the accounting process To make clear about the important role of cost accounting, base on the knowledge I have learnt and the advices from lecturers, I plan to do a deep research about cost accounting for a selected company

In this thesis, I discuss about:

- Relationship between cost and price

- Objectives and method of cost accounting in generally

- The company method to determine production cost and price

- How to estimate the cost and price of uncompleted product at the end of finance year

There are several methods to calculate product‟s price and production cost, in this thesis, I will consider three cost accounting methods, due to their application to the accounting system of the selected company The three methods that I mentioned are absorption costing method, variable costing method and activity-based costing (ABC) method All of the three methods above are actually could be selected by the company‟s managers to determine the product cost, base on the specific product that

company provides to customers Variable cost method normally is selected to calculate price for simple products that are required to pass through few steps and short period to be finished On the other hand, ABC method is useful to determine the cost of large product orders that required to run through complex processes and manufacturing activities to be done The last method is absorption costing, it is different from the other costing methods because it takes into account fixed manufacturing overhead (includes expenses such as factory rent, amortization, utilities)

In this traditional costing method, the aim is to soak up all the cost involved with generating a product Absorption costing is most often in the official financial reports for external reporting purposes (2)

1.3 RESEARCH STRUCTURE:

Throughout this project, I provided five chapters as follow:

Chapter 1: Introduction

Chapter 2: Literature review

Chapter 3: Research Methodology

Chapter 4: Company analysis

Chapter 5: Conclusion

The chapters are ordered from the most basically view and knowledge to more details and deep research All of the idea I provided in each chapter will be linked to the others in order to create the effective way for reading and understanding for users about my working

CHAPTER 2 LITERATURE

REVIEW

2.1 - Objectives of cost accounting in a company

There is a direct relationship among information need of management, cost accounting objectives, and techniques and tools used for analyses in cost accounting Cost accounting has three main important objectives:

1 To determine product costs

2 To facilitate planning and control of regular business activities

3 To supply information for short-term and long-term decisions

2.1.1 Product costing

The objective of determining the cost of products is of prime importance in cost accounting The total product cost and cost per unit of product are important in making inventory valuation, deciding price of the product, and managerial decision-making Product costing covers the entire cycle of accumulating manufacturing and other costs and subsequently assigning them to work in progress and finished goods

2.1.2 Planning and Control

Another important objective of cost accounting is the creation of useful cost data and information for the purposes of planning and control by management The different alternative plans are evaluated in terms of respective cost and associated benefits

The management control over business operations aims to establish balance between actual and budgeted performances A properly designed cost accounting system includes the following steps in the control process:

- Comparing actual business performances with budgets and standards

- Analyzing the variance between budget and standards and actual by causes, and management responsibility so that corrective action may be taken

- Providing managers with data and reports about their individual performance

of subordinates.(3)

2.1.3 Information for Decisions

Cost accounting also plays a key role to provide data and special analyses for short-term and long –term decisions of a non-recurring nature Appropriate cost information must be accumulated to make a wide variety of short-term and long-term decisions According to Henke and Spoede (4), the following are the objectives of cost information developed in cost accounting:

- As a basis for valuing manufactured inventories and cost of goods sold in externally presented financial reports

- In controlling operations through the evaluation of operating results and the placement of responsibilities for the uses of organizational resources on the shoulders of specifically identifiable persons within the organization

- In planning operations through the establishment of cost and budgetary goalds

- In making day-to-day operating decisions (a part of controlling decisions)

2.1.4 - The role of cost accountant:

A cost accountant observes and analyzes the costs associated with doing business These costs can be tangible or intangible and cover everything from the cost of the office lease to inventory and labor expenditures A person in this position

is responsible for determining which costs can be reduced or eliminated and how to implement the savings without compromising the quality of daily operations or customer service

The analysis process of a cost accountant is fairly constant regardless of the industry in which he works The cost accounting software used can be generic, industry specific or created in-house for the specific company The software program normally consists of a database of costs, both fixed and variable It usually includes basic features to track changes and project fluctuations in expenditures and assets

Armed with these software parameters, a cost accountant delves into details

on material, manufacturing and labor costs He includes analyses of costs versus profitability in all areas of operation The finer points of his research may include utility costs, real property and equipment values, tax issues and variations in profit margins Reports reflecting his findings are generally supplied to management

Cost accountants may find standard systems for analysis insufficient, as their capabilities are often limited In this case, the accountant may create his own database and create checks and balances tailored to the research at hand He is most effective in his job when the data accumulation and analysis system is streamlined to

meet his diagnostic needs Customized software systems also facilitate the creation

of reports for management that pinpoint critical areas of concern

Accurate costing information is vital to the stability and growth of any company A good cost accountant must have a clearly defined view of the company

as a whole, as well as the ability to recognize and address minute details that affect profit and loss This involves applying highly-developed skills in margin analysis and project costing A software system tailored to meet specific company needs helps him provide the most precise and helpful information to management.(5)

2.2 - Relationship between manufacturing overhead and product cost

Basically, manufacturing cost and product cost represent for cash out-flow of a manufacturing process cycle Manufacturing cost in a period is the basis unit to calculate the price of products, tasks, or jobs which had done in that period Manufacturing cost has directly influence to the cost of the product that a company producing There are some differences between manufacturing cost and cost of product, as follow:

a Manufacturing overhead is directly connected with the period that cost occurs For more detail, when we mention of a manufacturing cost, also we must give a specific period of manufacturing activity, otherwise the information of manufacturing cost will useless for manager Product cost, on the other hand, is not really directly connected to producing period, but it is connected to a specific amount of manufacturing cost for a number of finished product units

b Manufacturing overhead in a period may include items such as indirect

material, indirect labor, maintenance and repairs on production equipment (which may be paid from previous period but the services only reality occur

in the current period) and heat and light, property taxes, depreciation, and insurance on manufacturing facilities However, product cost only be considered with costs assigned during the time a number of products started

to be produce till the time they are finished goods

c Manufacturing overhead is not only related to finished product but also related to un-finished product and fail product at the end of financial period

On the other hand, product cost is only related to the cost of un-finished product brought forward from the previous period and the cost of finished product in current financial period, it means that product cost is not corvered the cost of fail units or un-finished units at the end of a period

The relationship between manufacturing overhead and product cost would be represented through the bellow equation:

Tf = C1uf + Mo – C2uf

In which:

Tf: total price of finished product

Mo: Manufacturing overhead

C1uf: Cost of unfinished product brought forward

C2uf: Cost of unfinished product at the end of a period

To differentiate between product cost and manufacturing overhead, the accountant can work effectively and more accurate in calculating the cost of goods

sold as well as price of the product Due to that, the report can be submitted on time

to managers with full and accurate information

2.3 - Price calculation methods

2.3.1 Absorption costing method:

Another name for absorption costing is full costing In this system, all three elements of manufacturing costs (direct labor, direct material, and factory overhead are absorbed and charged to the product In this manner, all the manufacturing costs are totally absorbed and figure as product expense, and none of them is taken as a period cost

Absorption costing is the most conventional approach to manufacturing cost accounting, and the cost of goods sold that appears in the income statement of almost any major corporate manufacturing concern uses this method The full absorption approach enables us to know that inventory values on the balance sheet include an element of factory overhead that will not be reflected as an expense in the income statement until the product is sold.(6)

According to Dr Michael Steven Luehlfing (School of Accountancy, College

of Business), he stated that: a company‟s traditional cost accounting system is often articulated with its general ledger system to support compliance with financial reporting requirements In essence, this linkage is grounded in cost allocation Typically, costs are allocated for either valuation purposes (i.e., financial statements for external uses) or decision-making purposes (i.e., internal uses) or both However,

in certain instances costs also are allocated for cost-reimbursement purposes (e.g., hospitals and defense contractors) The traditional approach to cost-allocation

department; allocate nonproduction department costs to production departments; and allocate the resulting (revised) production department costs to various products, services, or customers Costs derived from this traditional allocation approach suffer from several defects that can result in distorted costs for decision-making purposes For example, the traditional approach allocates the cost of idle capacity to products Accordingly, such products are charged for resources that they did not use Seeking

to remedy such distortions, many companies have adopted a different cost-allocation approach called activity-based costing (ABC)

To calculate product cost under absorption costing method, we have the formula: Total Product Cost = DM + DL + FMO + VMO

In which:

- DM: Direct materials

- DL: Direct Labour

- FMO: Fixed Manufacturing Overhead

- VMO: Variable Manufacturing Overhead

2.3.2 Activity based costing method (ABC)

In contrast to traditional cost-accounting systems, ABC systems first accumulate overhead costs for each organizational activity, and then assign the costs

of the activities to the products, services, or customers (cost objects) causing that activity As one might expect, the most critical aspect of ABC is activity analysis Activity analysis is the processes of identifying appropriate output measures of activities and resources (cost drivers) and their effects on the costs of making a product or providing a service According to Roztocki (1999), the relationship between costs, activities and product could be demonstrated by the figure bellow:

Figure1 Activity based costing

Activity based costing provides many positive aspects and benefits,

especially in the manufacturing sector The capability of providing more accurate

product cost information is the keystone of ABC (Anderson, 1999), Charles T

Horngren, Gary L Sundem, and William O Stratton suggest that many companies,

in both manufacturing and nonmanufacturing industries, are adopting ABC systems

for a variety of reasons:

1 Margin accuracy for individual products and services, as well as customer classifications, is becoming increasingly difficult to achieve given that direct labor is rapidly being replaced with automated equipment Accordingly, a company‟s shared costs (i.e., indirect costs) are becoming the most significant portion of total cost

2 Since the rapid pace of technological change continues to reduce product life cycles, companies do not have time to make price or cost adjustments once costing errors are detected

3 Companies with inaccurate cost measurements tend to lose bids due to costed products, incur hidden losses due to under-costed products, and fail to detect activities that are not cost-effective

over-4 Since computer technology costs are decreasing, the price of developing and

operating ABC systems also has decreased.(7)

2.3.3 Variable costing method

In accounting, the costs that vary with production volume or business activity are called variable costs Richard A Brealey, Stewart C Myers and Alan J Marcus defined that: “Variable costs are the costs that change as the level of output change” For example, variable cost raise when production output increases and go down when the company slows production Variable costs may also be called unit-level costs Variable costs are in contrast to fixed costs, which remain relatively constant regardless of the company‟s level of production or business activity If company‟s fixed costs and variable costs add up together, we have the total cost of

production The formula for calculating total variable cost is:

Total Variable Cost = Total Quantity of Output × Variable Cost Per Unit of Output

In term of accounting, costs can be described as either fixed costs or variable costs Variable costs are inventoriable costs – they are allocated to units of production and recorded in inventory accounts, such as cost of goods sold Fixed costs, on the other hand, are all costs that are not inventoriable costs Fixed costs include various indirect costs and fixed manufacturing overhead costs, it almost useless for managers in decision-making process for company manufacture activities

as it occurs constantly whenever the production cycle is in charge or not When making production decisions, managers will often consider only the variable costs related with the decision Since fixed costs will be incurred regardless of the outcome

of the decision, those costs are not relevant to the decision Only costs that will or will not be incurred as a direct result of the decision are considered And these relevant costs are the variable costs.(8)

There are some advantages that make variable cost be recommended for any company to adopt it rather than other method like absorption costing method:

1 The data that are required for cost volume profit (CVP) analysis can be taken directly from a variable costing format income statement These data are not available on a conventional income statement based on absorption costing

2 Under variable costing, the profit for a period is not affected by changes in inventories Other things remaining the same (i.e selling prices, costs, sales mix, etc.), profits move in the same direction as sales when variable costing is

3 Managers often assume that unit product costs are variable costs This is a problem under absorption costing, since unit product costs are a combination

of both fixed and variable costs Under variable costing, unit product costs do not contain fixed costs

4 The impact of fixed costs on profits is emphasized under the variable costing and contribution approach The total amount of fixed costs appears explicitly

on the income statement Under absorption, the fixed costs are mingled together with the variable costs and are buried in cost of goods sold and in ending inventories

5 Variable costing data make it easier to estimate the profitability of products, customers, and other segments of the business With absorption costing, profitability is obscured by arbitrary allocations of fixed costs

6 Variable costing ties in with cost control methods such as standard costs and flexible budgets

7 Variable costing net operating income is closer to net cash flow than absorption costing net operating income This is particularly important for companies having cash flow problems.(9)

2.4 Cost accounting in decision making process:

Managers consider decision making process is the most difficult and important work for their company in today business Decision making includes process to select best alternative out of different alternative for solving business problems Different cost accounting techniques can be used by accountant to determine any cost appear in day-to-day transactions or manufactures, and then make

it the best tool of decision making in business Cost accounting constitutes the central