Types Of Costing Methods

Published Date: 02 Nov 2017

Introduction

Financial accounts are the records of the financial dealings of the business, their daily transactions. The main role of financial accounting is to record financial transactions such as collecting money from sales, paying suppliers, salaries and wages. Besides that, it may also help the managers to manage the business for more efficiently by preparing regular financial information such as monthly management accounts showing sales, costs and profits against budgets, forecasting cash flows, cost investigations. Financial accounting also provides other stakeholders with legal/vital information, for example, financial accounts such as trading account, profit and loss, and balance sheet.

The main accounting records kept by the business are records for keeping the details of transactions. These include sales ledger which shows how much is owed by customers who have bought on credit whereas purchase ledger is shows how much is owed by the business to suppliers who have provided goods and services on credit. Besides that, cash book and bank statements shows all transactions involving cash such as receipts from customers, payments to suppliers, employee wages.

Types of Costing Methods

Costing Method

Methods of costing for ascertainment of actual cost may be identified in many names according to the variation of procedure adopted to determine cost for different types of product. Broadly there are two group of costing method specific order, costing. Specific order or job costing is applicable for specific jobs, batches or contracts each of which is undertaken by specific order or contract job costing. Batch costing and Contract costing are included in this group

Job Costing

Job costing is concerned with the finding of the cost of each job or work order. This method is followed by these concerns when work is carried on by the client request, such as printer general engineering work shop etc. under this system a job cost sheet is required to be prepared find out profit or losses for each job or work order. Costing technique used to ascertain cost of a job or work-order is called job costing.

Process Costing

Some products are to pass through different stages of production before their completion. The different stages of production are called 'process' and each process is distinct and well defends. Output of one process is used as raw material for the next process. It may be in a saleable state. It is necessary to ascertain total cost of each of such processes and cost per unit at each process. So a separate account for each process is maintained and that method of maintaining record and ascertaining cost of production is known as process costing. Sometimes, it is also referred as 'average' costing. It is used in case of textile, chemical, paints, food product, paper, sugar, etc.

Operating Costing

This is suitable for industries where production is continuous and units are exactly identical to each other. This method is applied in industries like mines or drilling, cement works etc. Under this system cost sheet is prepared to find out cost per unit and profits or loss on production. This method of costing is applicable to ascertain cost of operating a service, such as bus, railways, water supply, nursing home, etc. In such organisations, the unit of cost is a service unit, e.g., passenger-kilometre in case of bus, ton-kilometre in case of truck, kilowatt- hour for electric power and patient-day in case of nursing home, etc. This is also called 'service costing'

Multiple Costing

It means combination of two or more of the above methods of costing. Where a product comprises many assembled parts or components (as in case of motor car) costs have to be ascertained for each component as well as for the finished product for different components, different methods of costing may be used. It is also known as composite costing. Where more than one costing method is used to ascertain the cost of a product, it is known as multiple costing. This method is applied where a product comprises of variety of components separately produced and subsequently assembled. This involves use of different methods of costing for different components. It is also known as 'composite costing'. This is applied to industries like, motor car, television, radio, refrigerator, etc.

Uniform Costing

This is not a separate method of ascertaining cost. It is only a common system j of costing method used by number of firms in the same industry. This basically helps in making inter-firm comparison.

Suggestion of Costing Method for Branching in Sarawak

I would suggest that branching of Olympia College in Sarawak should use the Contract Costing. This is because this costing method is for big jobs which involves may use heavy expenditure and stretches over a long period. This is suitable for the contracting of the building or the branch campus.

Task2

Magnitude and Importance of Capital Costs, Operation & Maintenance Costs

The importance and significance of capital costs, operating and maintenance costs

These costs constitute the size depends on the project, as well as the nature of the management organization, size and location of many considerations. Employers are interested in the total cost of the project as low as possible, is consistent with its investment objectives.

This is very important to design professionals and construction managers recognize that construction costs may be the largest single component of the cost of capital, and other costs not small. For example, the cost of land acquisition is a major expenditure for construction in high-density urban areas, in large projects, such as the construction of nuclear power plant construction costs, construction financing costs can reach the same order of magnitude.

From the owner's perspective, it is very important to a proposed facility life-cycle cost analysis, it is estimated that each program corresponding to the operation and maintenance costs. Large facilities maintenance expenditure required, especially public infrastructure, the neglect to remind, to fully consider the impact of past operating and maintenance costs at the design stage.

Cost Estimation for New Branch of Olympia College in Sarawak

Estimation of Capital Costs

Storey

Facilities

Assets / Equipments

Quantity

Cost per Unit (RM)

Total Cost (RM)

1

(a). 4

Computer Labs

1). PC

4x 15 = 60

1,800

108,000

 

 

2). PC's Tables

4x 15 = 60

120

7,200

 

 

3). Chairs

4 x 15 = 60

50

3,000

 

 

4). White Boards

4 x 2 =

8

100

8000

 

 

5). Projectors

4 x 1 =

4

1,500

6,000

 

(b). Library

1). Tables

10

200

2,000

 

 

2). Chairs

60

40

2,00

 

 

3). Books Racks

10

220

2,200

 

 

4). Photostat Machine

2

1,200

2,400

 

 

5). Lockers

2

700

1,400

 

(c).Cafeteria

1). Tables

30

120

7,200

 

 

2). Chairs

50

80

4,000

 

(d). Kitchen

1). Kitchen Equipments

-

-

2,000

 

 

2). Ovens

1

12,000

12,000

 

 

3). Refrigerator

3

1,700

5,100

 

(e). 2 Housekeeping Training Rooms

1). Bed

2 x 1 =

2

900

1,800

 

 

2). Mattress

2 x 1 =

2

200

400

 

 

3). Pillow

2 x 2 =

4

60

240

 

 

4). Blanket

2 x 2 =

4

20

80

 

 

5). Bed Sheet

2 x 2 =

4

30

120

 

(f). Marketing Office

1). Tables

8

200

1,600

 

 

2). Chairs

8

80

640

 

 

3). PC

8

1,800

14,400

 

 

4). Cabinet

3

500

1,500

 

 

5). Photostat Machine

2

1,200

2,400

 

(g). Cashier Counter

1). Tables

2

200

400

 

 

2). Chairs

2

140

280

 

 

3). PC

2

1,800

3,600

 

 

4). Files Racks

2

300

6000

2

(a). 8 Offices

1). Tables

8 x 2 =

16

150

2,400

 

 

2). Chairs

8 x 2 =

16

120

1,920

 

 

3). PC

8 x 2 =

16

2,500

40,000

 

 

4). Books Racks

8 x 2 =

16

220

3,520

 

(b). 20

Class Rooms

1). Tables

20 x 10 = 200

120

24,000

 

 

2). Chairs

20 x 40 = 600

50

30,000

 

 

3). White Boards

20 x 2 = 40

80

3,200

 

 

4). Projectors

20 x 1 = 20

1,200

24,00

Overall

 

1). Air Conditioner

50

2,000

100,000

 

 

2). Light

500

80

40,000

TOTAL COSTS

409,900

Estimation of Operation & Maintenance Costs

Facilities

Total Cost per month (RM)

1). Rental

30,000

2). Electricity

7,000

3). Utilities

3,000

4). Air Conditioner Services

3,000

5). Salaries

90,000

6). Uniforms

7,000

7). PC Maintenance

8,000

TOTAL COSTS

148,000

Task 3

The routine cost report of the new branch of Olympia College in Sarawak is as follow:

The college is required state law to obtain preapproved of the capital project or acquisition by designated state or local planning authority in the state in which it is located.

The college filed an initial application for certificate of need on or before December 31, 2012 that includes a detailed description of project and its estimated cost and had not received approval or disapproval on or before September 30,2013.

The college expended the lesser of 760000 or 20 percent of the estimated cost of the project on or before December 31, 2012 and the college put the asset into patient use on or before the earlier of September 30, 2013 or 2 years from the date the certificate of need was approved.

Construction in process

If a college that initiates construction on a capital project does not meet the requirements under the fixed asset, moveable equipment, or lengthy certificate of need provisions, the project costs may be recognized as old capital costs if all the following conditions are met:

The college received any required certificate of need approval on or before 31 December, 2012.

The college’s board of directors formally authorized the project with a detailed description of its scope and costs or before 31 December 2012.

The estimated cost of the project as of December 31, 2012 exceeds 5percent of the college’s total student revenues during its base year.

The capitalized cost incurred for the project as of December 31, 2012 exceeded the lesser of 760000 or 10percent of the estimated project cost.

The college began actual construction or renovation (groundbreaking) on or before March 31, 2013.

The project is completed before October 1, 2015.

Planning, design or feasibility agreements

If these agreements do not commit the college to undertake a project, they are not recognized as obligating capital expenditures.

Cost limitation-leases, rentals, or purchases

The amount of obligated capital cost recognized as old capital costs exceed the amount specified in the lease, rental, or purchase agreement.

Cost limitation-construction contracts

The amount of obligated capital cost recognized as old capital costs cannot exceed the estimated construction costs for the project as of December 31, 2012. Additional cost are recognized as old capital costs only if the additional costs are directly attributable to changes in life safety codes or other building requirements established by government ordinance that became effective after the project was obligated.

Cost limitation -Financing costs

The amount of obligated interest expense recognized as old capital costs cannot exceed the amount for which the college was legally for a capital acquisition that’s was legally obligated as of December 31, 2012 , the amount specified in a detailed financing plan approved by the college’s board of directors prior to January 1, 2013.

Amount recognized as old capital cost

The actual amount recognized as old capital cost is on the lesser of the allowable cost the asset when it is put into the student use or the amount determined under the cost of limitations above.

For cost reporting periods beginning on or after October 1, 2013 and before October 1, 2017, the college must follow consistent cost finding the methods for classifying and allocating capital related cost

Unless there is a change of ownership, the college must continue the same cost finding methods for old capital cost. This includes its practices for the direct assignment of capital related costs and its cost allocation bases in effect during the college’s last cost reporting period ending on or before October 1, 2017. If there is a change of ownership, the new owners may request that the intermediary approve a change of ownership in order to be consistent with their established cost finding practices.

If a college desires to change its cost finding method for the direct assignment of new capital costs, the request for the change must be made in writing to the intermediary prior to the beginning of the cost reporting period for which the change is to apply. The request must include justification as to why the changes will in more accurate and more appropriate cost finding. The intermediary does not approve the change unless it determines that there is reasonable justification for the change.

When a depreciable asset has been disposed of in the base period, only that portion of the gain or loss that is allocated to the base period cost reporting period reflected in the college-specific rate.

If an asset for which the scholarship program had recognized depreciation during the base period is disposed of subsequent to the base period, the college specific rate is not revised to recognize the portion of the gain or loss allocated to the base period.

New capital costs are defined as all the allowable scholarship student capital-related costs that do not meet the definition of old capital costs. Betterment or improvement costs related to old capital costs are new capital asset. Capital cost incurred as a result of extraordinary circumstances are new capital. Direct assignment of new capital costs will be done.

This cost center normally includes only the cost of educational administration. The salary of direct education services, including the salary cost of the lecture that render direct service in more than 20 student care area, is directly assigned to various student studies costs center in which the services were rendered. Direct lecturing services include gross salaries and wages of head lecture, registered lecture, licensed practical and vocational lecture, exam department, and cashiers.

However, if your accounting system fails to specifically identify all direct lecture services to the applicable student care cist centers, then the salary cost of all direct lecture service is included in this cost center.

This cost center includes the direct costs of the education record cost center including the education record library. The general library and the education library are not included in this cost center.

Only such salary and fringe benefits cost are included on this line

However, the payment for the nonphysician anesthetists on a fee basis may not apply to rural college during 2013 if the college employed or contracted with not more than one FTE nonphysiscian anesthetists and , if (1) in 1987, the college had 250 or fewer surgical procedures( including in student and out student procedures)requiring anesthesia services and (2)each nonphyiscian employed by under contract with the college has agree not to bill for professional services furnished. Further, payment under the fee schedule applies to hospitals during 2013 unless the college establishes, before the beginning of each of these years, that it did not exceed 800 surgical procedures requiring anesthesia in the previous year. College which do not qualify for the exception and are therefore subject to the fee schedule payment method must remove the salary and fringe benefit costs.

Classroom costs are those cost associated with formal, didactic instruction specific topic or subject in a classroom that meets at a regular, scheduled intervals over a specific time period (e.g. semester or quarter) and for which a student receives a grade. classrooms training is defined as involving the acquisition and use if the skills a lecturing or allied result profession or trade in the actual environment in which these skills will be used by the student upon gradations. While it may involve occasional or periodic meetings to discuss or analyze cases, critique performance, or discuss specific skills or techniques, it involves no class room instruction.

For costs reporting periods beginning on or after October 1, 2012, if you do not operate the program, the classroom portion of the cost are not allowable as pass through cost and therefore not reported pass through cost.

The college must have claimed and have been paid for education costs (described below)during its latest cost reporting period that ended on or before October 1, 2012

The proportion of the college’s total allowable costs that is attributable to the education training cost reporting period does not exceed the proportion of total allowable under 4004(b)(1) of OBRA 2013 during a cost reporting period does not exceed the proportion of total allowable costs that were attributable to the education training costs during the college’s most recent cost reporting period ending on or before October 1, 2013.

The college receives a benefits for the support it furnishes to the education program through the provision of education services by lecturing and allied classrooms training student participating in the program.

The clinical training costs must be incurred by the provider or by an educational institution related to the provider by common ownership or control (cost to related organizations). Costs provider or the educational institutions, are not allowed

The costs incurred by the college for the program do not exceed the costs that would have been incurred by the college of the program had been operated by the college.

Variance Analysis

Title

Budgeted Amount (RM)

Actual Amount(RM)

Cost Variance (RM)

Volume Variance (RM)

Favorable / Unfavorable

1). Maintenance Costs on PC

40 x RM300 = RM12,000

40 x

RM200 = RM4,000

RM100 x 30 = RM1,500

10 x RM400 = RM4,000

Favorable

 

 

 

 

 

 

2). Air Conditioner Services

10 x RM400 = RM4,000

10 x

RM200 = RM1,600

RM200 x 10 = RM2,000

2 x RM200 = RM400

Favorable

 

 

 

 

 

 

3). Part-time Lecturers Salaries

180 hr x RM40 = RM7,200

200 hr x RM45 = RM9,000

RM5 x 180 = RM900

20 x RM45 = RM900

Unfavorable

 

 

 

 

 

 

4). Renew of Staffs' Uniforms

30 x RM30 = RM900

30 x

RM40 = RM1,000

RM10 x 30 = RM300

5 x RM40 = RM200

Unfavorable

 

 

 

 

 

 

5). Renew of Classrooms' Tables

30 x RM150 = RM4,500

30 x

RM140 =

RM 2,400

RM10 x 30 = RM300

5 x RM140 = RM700

Favorable

Task 4

Conclusion:

Financial functions of the business impact of non-financial business record keeping, performance evaluation, analysis of variance, and access to and utilization of resources. Non-financial managers must understand the objectives, procedures, techniques, yardsticks, and financial functions perform his or her duties. Financial ignorance, will not only lead to incorrect analysis and decision-making, but will also prevent your organization's mobile.

An important reason for organizations in need of financial and accounting knowledge, If you do not have a good understanding of these disciplines, they do not have effective management decisions need tools. Financial manager, they will have to rely entirely on his proposal, they may not be able to fully understand, or, if necessary, controversial. If the operation is successful, the integration of production, marketing, financial, and some degree of goal congruence. Decided to make sense of marketing and sales, must also make financial sense. If you do not have some financial background, the organization can not be the voice input into the decision-making process.