Cost Accounting Techniques

Cost Accounting Techniques

Start-up Company

Galaxy Link Company will be dealing with manufacturing mobile phone devices and mobile phone parts with the latest technological features. I have previous experience working in a mobile phone production firm, and I have thus gained adequate knowledge regarding how such companies operate. Since customers are diverse needs and preferences, my company will be offering mobile phones and mobile components of diverse nature, including different prices, models, colors, and several other aspects.

Executive Management

Executive management comprises of high ranked workers who work together in managing a firm. These employees usually oversee the company’s daily operations to ensure efficiency as well as product satisfaction. My executive team would consist of the chief executive officer, technology specialist, finance officer, marketing manager, purchasing manager, and chief people officer. Each of the individuals will have specialized skills and knowledge regarding their respective fields of operations to ensure that the company runs effectively. Considering that my company has the capability of offering diversified products, some of them can be very costly for the business to afford or are less useful to the firm. Describing the concepts of cost accounting as well as its significance to the business to the management team will inform them on how they can apply it in their respective departments. For instance, they will be capable of deciding the activities that are important for the business and the ones that are insignificant.

Business Memo

Heading

To: The Executive Management of Galaxy Link Company

From:

Date:

Subject: Necessity of Cost Accounting with a Company

Introduction

The purpose of this memo involves informing the executive management team of Galaxy Link about the essence of cost accounting for the company. You might recognize that to run a firm successfully, knowing how to control your expenses is very important. For this intention, it is significant for managers to keep records of all the business operating costs. Cost accounting is a technique whereby all the costs incurred by a business are recorded in an organized manner. It is important to a firm for several purposes, including helping in profit analysis, assisting managers in formulating future strategies, making budgeting easy, and helping in the identification of breakeven point, and lastly, assist in minimizing overhead costs.

Helps in Profit Analysis

Cost accounting usually considers every cost that a company incurs. Consequently, this helps the business owner or manager to recognize the costs that contribute to profit-making aspects and the ones that are not. It assists the entrepreneur in realizing if the firm is capable of earning more than its total expenses incurred. In case the company spends more than it earns, it informs the management that they should perhaps restructure their business strategies.

Helps in Formulating Future Strategies

Preplanning business strategies is vital for every company. Without clear information regarding the firm’s financial state, the business strategy is imperfect (Cohen & Kaimenaki, 2011). When the owner is informed about the costs, he/she definitely recognizes where the profit margin is deficient. Additionally, eliminating the extra costs incurred in business becomes easier, and the owner is able to make advanced business finance strategies (Cohen & Kaimenaki, 2011). Again, cost accounting enables the business owner to notice increasing costs in a timely manner and take appropriate actions. For example, if raw materials prices increase annually, it enables the management to determine future strategies for controlling the increasing costs.

Makes Budgeting Easy

Companies normally utilize budgets to create a plan for how they intend to spend their money. It helps in the projection of company revenues and expenses for a certain period. Cost accounting simplifies budgeting process in that the statements of previous years assist in forecasting the future business costs (Zimmerman & Yahya-Zadeh, 2011). In case the expenses are increasing for the previous year, a manager can make an appropriate estimation of the rise in expenses for the current year. If the firm notices that there is an anticipated increase in costs in the following year, they are capable of making suitable arrangements for finances to cater to the increasing costs.

Assists the Firm in Identification of Break-Even Point

Break-even point is commonly understood as the number of units that a firm requires to manufacture and sell to cover its total expenses. Companies normally conduct breakeven analysis with the purpose of identifying the breakeven point. Cost accounting helps an entrepreneur to realize the total expenses related to business expenses, including both fixed and variable costs (Lanen, Anderson, & Maher, 2013). Only when managers keep a record of all the business costs, they can be capable of calculating and ascertaining their breakeven point.

Cost Accounting Techniques and their Application in Galaxy Link Management Functions

Numerous cost accounting techniques can be utilized to achieve various management functions. However, before digging deeper into the details, it is important first to understand cost accounting techniques. The commonly utilized methods include job costing, traditional costing, activity-based costing, and multiple costing.

Job Costing

Job costing refers to the process of recording the expenses of a manufacturing job instead of the process. It establishes manufacturing costs systematically by dividing them into direct labor, direct materials, and overhead cost and approximating them at their real value. It enables an accountant or the project manager to keep a record of the cost of every task and maintain crucial data that is more significant to the operations of a business (Bennouna, Meredith, & Marchant, 2010). Generally, it helps in tracking the costs of creating a new product. Some projects, such as building, require diverse operations. Therefore, the project manager uses this method to track the costs of each activity in order to utilize these details for analysis as well as tax needs.

The job costing method is very useful to Galaxy Link Company. As explained earlier, the firm will be dealing with the production of modern mobile phones as well as mobile phone parts, including batteries, circuit boards, speakers, and earphones. Creating a phone requires different operations such as printing circuit board, a loading circuit board with appropriate software, and several other operations. Through job costing, it would be easier for the company to determine the final price of their mobile phones. It leads to enhanced profitability and project estimation. Through it, the manager is capable of making timely financial planning as well as advanced management decisions.

For example, by the use of job costing, it is possible for the manager to establish products that take less or more time to manufacture. The manager makes sure the company profit by adding a certain margin on top of the total costs incurred in producing a commodity. In the modern days, companies are extensively using this technique in controlling the use of equipment, labor hours, and raw materials through allocating the cost of each client order separately. The management of Galaxy Link can also utilize it for the same purpose.

Traditional Costing

Traditional costing refers to the technique of allocating factory overheads to the company’s products based on the quantity of production resources utilized. Under this approach, overhead is normally applied based on the number of machine-hours used or the direct labor hours consumed. The great challenge with this method is that the factory overhead might be significantly higher as compared to the basis of allocation (Jasinski, Meredith, & Kirwan, 2015). Consequently, a small alteration in the quantity of resources utilized in making a particular product triggers a gigantic change in the quantity of overhead applied. The issue is commonly evidenced in automated production settings, where the factory overhead is often huge, and direct labor is almost nonexistent.

For example, this method might establish that the factory overhead requires to be charged to commodities at a rate of $100 per direct labor hour. In case there is an insignificant alteration in the production process that amplifies direct labor by 2 hours, the commodity’s price increases by $200 of overhead. Such a huge transformation in applied overhead is absurd. This is because of the fact that there is not always a direct association between factory overheads and the quantity of production resources.

Traditional costing can be essential to the management of Galaxy Link Company. It can use it to determine the cost of making various products. The managers can use it to select the type of products that ought to yield significant results to the company. The greatest benefit of this technique is that it is easier to use as compared to other costing techniques such as activity-based-costing. Therefore, it will allow the managers of Galaxy Link to establish the price of their commodities without much complexity. Additionally, the method also helps them to establish the amount of labor needed to produce a certain amount of its products and thus, enabling managers to plan in a timely manner.

Activity-Based Costing

Activity-based costing (ABC) refers to a costing technique, which identifies activities in a firm and allocates the cost of every activity to all the commodities based on the actual consumption by each activity. The approach involves monitoring and tracing resource usage and costing the final output (Askarany, Yazdifar, & Askary, 2010). Although it is much complex than the traditional costing method, it offers more accurate results and, thus, preferred by most organizations.

ABC helps the managers of Galaxy Link to perform a leading function effectively. A manager is usually expected to lead other employees towards the attainment of organization goals. A profitable company’s major purpose involves making a profit. By use of ABC, the manager is capable of appropriately pricing the organization’s products and helps it to make more accurate pricing decisions. Consequently, the company is able to pay its workers well and offer them with various forms of motivation. Moreover, it enhances understanding of overheads as well as the cost drivers and makes expensive and insignificant activities more noticeable, thus enabling the managers to minimize or eliminate them. Lastly, a manager can use it to determine if the costs of activities rhyme with the industry standards. Figure 1 below shows an example of Activity-Based costing.

Figure 1: Activity-based Costing

Multiple Costing

Multiple costing refers to a situation whereby more than one method is utilized in determining the cost of a single product. The technique is appropriate for companies that produce components parts separately and assembles them to form a final product (Lanen, Anderson, & Maher, 2013). It can significantly help the management of Galaxy Link to price their mobile phone devices. This company produces different mobile parts and later joins them to form a final product. Through it, it is possible for the management to monitor the performance of each department. The units that persistently report an increase in their spending would perhaps be subjected to a higher degree of monitoring and supervision by the senior management. Figure 2 below shows an example of multiple costing methods.

Figure 2: Example of Multiple Costing

Conclusion

Cost accounting methods are very crucial to business success. They help the managers to effectively achieve diver’s management functions, including leading, organizing, supervising, and controlling. Considering these advantages, it is crucial for the management of Galaxy Link to familiarize themselves with these methods to enjoy these benefits.

References

Askarany, D., Yazdifar, H., & Askary, S. (2010). Supply chain management, activity-based costing, and organizational factors. International journal of production economics, 127(2), 238-248.

Bennouna, K., Meredith, G. G., & Marchant, T. (2010). Improved capital budgeting decision making: evidence from Canada. Management decision, 48(2), 225-247.

Cohen, S., & Kaimenaki, E. (2011). Cost accounting systems structure and information quality properties: an empirical analysis. Journal of applied accounting research, 12(1), 5-25.

Jasinski, D., Meredith, J., & Kirwan, K. (2015). A comprehensive review of full cost accounting methods and their applicability to the automotive industry. Journal of Cleaner Production, 108, 1123-1139.

Lanen, W., Anderson, S., & Maher, M. (2013). Fundamentals of cost accounting. McGraw-Hill Education.

Zimmerman, J. L., & Yahya-Zadeh, M. (2011). Accounting for decision making and control. Issues in Accounting Education, 26(1), 258-259.