Are Opening Stocks are in agreement with last closings?

Very good wording in your mail !!! You open the attachment sent on 8th Dec '13 and see with your keen vision and say whether it is having any OPENING-RECEIPT-ISSUE-CLOSING Balances of Materials or NOT. Usable Stock is meaningless word in Finance, our concern in both usable,non-usable. You refer to the previous month's report and check whether it matches with the current month's FORMAT or NOT. From this report, no inattentive & layman like me can say:

1. Are Opening Stocks are in agreement with last closings?
2. How much materials was sent from Sonata to Tiska (Receipts)
3. How much materials was used in Production from available Stocks?
4. How much materials was in Rejected, Unusable status etc.? 

If above information are missing in a stock movement report of a month, it will generate no sense for Costing. First assess and understand the impact, then practice lexicography like sent to an employee of Sonata Ltd, attentiveness, concern etc.

The proposal calculation: make or buy decision

Cost Object
As for the cost unit accounting, the cost will be here with the same spreadsheet shows as calculated. In the end, the cost will be deducted from the net sale and save obtained results of operations. The cost carrier time-statement is checked how accurately the previously established Overhead rates are present. The figures of the previous calculation are called NORMAL COST or pre-calculation. The latest figures are the actual costs or actual costing. The results from the comparison between normal costs - actual costs can be read as surplus / deficit in the column. In addition, in Cost Object era, the preliminary cost estimate for individual product groups is presented.



Notes about this example
1. If nothing else is on the task, then the costs Materials, Labor and Overhead (FM + FL) are taken from the actual costs for the normal cost. Reason: The aim of the comparison between actual and standard costs is to check how well the old overhead surcharge rates are still. For this purpose, sufficient to compare the overheads.
2. The sign in surplus / deficit arises when one enters into the calculator Normal cost minus actual costs. Are the old numbers of the normal cost is higher than the current actual costs, so our plan covered more than necessary. (= Overlap). And vice versa.
3. For each product is expected to normal overhead costs overhead rates.
4. The sum of the individual products corresponds to the normal costs overall.
5. There are changes in inventories of work in progress and finished goods. Both are listed separately. The calculation is the same for both. See, above.
6. The calculated cost is deducted from net sales. The result is the conversion result.

WARNING: If you subtract the top value from the lower value (net sales) as the sign of the sales income is just wrong. N-sale proceeds> cost = profit (logical)
7. From the result, the revenue surplus or deficit is added to or subtracted from the total and obtained results of operations.
8. The scheme and the calculation of the results must be trained by practicing several tasks.

Clarification of the calculated production overheads through the pre Machine hour rate

The main cost are caused by the use of machinery. Machines and have had related to the increasing rationalization is becoming increasingly important. With the calculation of the MSS machine costs are determined significantly more accurately, so the quality of the calculation is improved.

In the calculation of the machine hour rate will be multiplied by the time required for the specific task in machine time. This machine-dependent production overheads (FGK) are in production costs with added. For the remainder of the FGK simply RGK (residual overheads) made which are calculated as a percentage of the FL, as otherwise the FGK also.

The proposal calculation

Once you have determined the cost, you will not know at what price we should offer his product. Therefore, at the cost nor the gain you want to make added. Now you still expects the front into the things to which later may pull back the customer. These are the customer's account, the agent's commission and the customer discount. Because of these things the customer later (assuming 100% each) are peeled off again arises in the forward calculation a problem with the percentage basis. This is then more than 100 (in the hundreds). The schema can be seen that:

How to determine the unit cost of a product for accurate pricing

The unit cost calculation of a product (pricing procedure)

In the calculation, the cost unit cost for the entire operation can be determined. If we divide this cost by the number of units sold we obtain the cost per piece. Cost carrier is that which in operation ultimately "carry" all costs must - and this is ultimately for every single product; because all costs must be back "earned" by selling the products. (Cost carrier = the product).

Output figures for the calculation are the overheads sums for the cost centers as well as the direct costs of materials and labor. Direct costs are those costs that can be directly allocated to a product (1. The production material (FM) = exactly the material that is incorporated into the product. 2. The manufacturing wages (FL) = wages for the workers who directly create the product and assemble).


Problem with Changes in inventories:
Cost of production include all costs incurred for the production of the products. In the end, however, are only interested in the cost of products, which were actually sold. Therefore, at this point, the cumulative change must be considered. If we sell more than we produce, so are the HKE too low (the cost of products which have been simply removed from the warehouse missing until then). So the value of the products withdrawn from the warehouse must be added in this case. If we have been taken more out of the camp and sold as is produced as an inventory reduction, its value must be added. Accordingly reverse is true in the inventory at stimulating. Therefore, beware!

Inventory reduction should expect (add)
Inventory at stimulating preview (subtract) .

What is meant by the concept of organization design?

The following suggested response draws largely on the text material, with some more formal integration of the internal versus external assessment dimensions and more explicit statements about their joint importance.


Organization design is the process of assessing and selecting the structure and formal system of communication, division of labor, coordination, control, authority, and responsibility necessary to achieve an organization's goals. Organization design decisions often require the diagnosis of multiple factors both internal and external to the organization. Organization design represents the outcomes of an assessment and decision-making process that includes environmental factors, strategic choices, and technological factors. An effective organization design should do three things: 

 

(1) ease the flow of information and decision making in meeting the demands of customers, suppliers, and regulatory agencies; 

(2) clearly define the authority and responsibility for jobs, teams, departments, and divisions, and 

(3) create the desired balance of integration (coordination) among jobs, teams, departments, and divisions, with fast response to changes in the environment. 

 

To achieve these beneficial results, the external environment must be systematically assessed (including characteristics of the present and possible future environments and their demands on the organization). Organization design decisions often involve the diagnosis of multiple factors, including an organization's culture, power and political behaviors, and job design.

Difference between normal and abnormal loss

A normal loss of units falls within a tolerance level expected during production. Management creates a range of tolerance of spoiled units specified by the accepted quality level, as mentioned in the beginning of this chapter. If a company had set its quality goal as 98 percent of goods produced, the company would have been expecting a normal loss of 2 percent. Any loss in excess of the AQL is an abnormal loss. Thus, the difference between normal and abnormal loss is merely one of degree and is determined by management.

A variety of methods can be used to account for units lost during production.

Selection of the most appropriate method depends on two factors: 

 

(1) the cause of the decrease and 

(2) management expectations regarding lost units. 

 

Understanding why units decreased during production requires detailed knowledge of the manufacturing process. Management’s expectations are important to determine the acceptable loss quantities from defects, spoilage, or shrinkage as well as the revenue and cost considerations of defective and spoiled units.

Some companies may estimate the normal loss to be quite high because the lowest cost material, labor, or overhead support is chosen.

What are the two methods of costing cost flows under process costing

There are two methods of costing cost flows under process costing. The two methods of accounting for cost flows in process costing are 

(1) weighted average method and 

(2) First In First Out (FIFO) Method. 

 

These methods relate to the manner in which cost flows are assumed to occur in the production process. In a very general way, these process costing approaches could be related to the cost flow methods used in financial accounting.

In a small and retail business firm, the weighted average method is followed to find out an average cost per unit of an inventory. This cost is calculated by dividing the total cost of goods available by total units available sale. Total cost and total units are found by adding purchases to beginning inventory. Costs and units of the current period are not distinguished in any way from those on hand at the end of the prior period.

In contrast, in the FIFO method of accounting for merchandise inventory which separates goods by when they were purchased and at what cost. The costs of beginning inventory are the first costs sent to Cost of Goods Sold; units remaining in the ending inventory are assigned costs based on the most recent purchase prices.


Use of these methods of costing the production of a manufacturing company is similar to their use by a retailer. The weighted average method calculates a single average cost per unit of the combined beginning inventory and current period production. The FIFO method separates beginning inventory and current period production and their costs so that a current period cost per unit can be calculated. The denominator used in the cost formula to determine unit cost differs depending on which of the two methods is used.

The bond indenture may contain a provision stating that the corporation may pay up a bond before its maturity at a specified price. This is called an early retirement of the bond. If the price paid is greater than the book value of the bond, the difference is a loss. If it is less than the book value, the difference is a gain. 

Neither losses nor gains are to be considered extraordinary. The book value of a bond is equal to the balance in the bonds payable account minus any discount, plus any premium. It is important to make sure that the discount or premium account has been amortized right up to the retirement date.

The journal entry for a retirement closes the bonds payable account and the related discount or premium, credits cash, and recognizes the gain or loss.



On January 1, 19X1 Knowledgiate Corporation issued a $100,000 bond (5-year life) at 103. After 2 years it retired the bond at 104 (as specified in the indenture). At this point, the bond accounting appear as follows:

The book value is thus $101,800 ($100,000 + $1,800). Since the retirement price is $104,000 (1.04 × $100,000), the difference of $2,200 is a loss. 

 

The journal entry is:

Bonds Payable           100,000
Bond Premium               1,800
Loss on Retirement       2,200
Cash                                          104,000

If there is an unamortized bond issue cost relating to the bond, it should be written off at this point, thus enlarging the loss, or in a gain situation, reducing the gain.

How to calculate manufacturing cycle efficiency (MCE)

Dividing value-added processing time by total cycle time provides a measure of efficiency referred to as manufacturing cycle efficiency (MCE). (A service company would compute service cycle efficiency by dividing actual service time by total cycle time.) If a company’s production time were 3 hours and its total cycle time were 24 hours, its manufacturing cycle efficiency would be 12.5 (3 24) percent.

 

MCE = (Value-added manufacturing time , Manufacturing cycle time)

Although the ultimate goal of 100 percent efficiency can never be achieved, typically, value is added to the product only 10 percent of the time from receipt of the parts until shipment to the customer. Ninety percent of the cycle time is waste. A product is much like a magnet. The longer the cycle time, the more the product attracts and creates cost.

A just-in-time manufacturing process seeks to achieve substantially higher efficiency by producing components and goods at the precise time they are needed by either the next production station or the consumer. Thus, a significant amount of idle time (especially in storage) is eliminated. Raising MCE can also be achieved by installing and using automated technology, such as flexible manufacturing systems.

ACCRUALS OF BOND INTEREST

Up to this point all the situations that we have discussed dealt with an interest payment date of December 31. If the payment date is other than December 31, an adjustment entry must be made on December 31 to accrue the interest from the last payment date and also to amortize the discount or premium as well.

On May 1, 19X1 Berger Corporation issues a $10,000, 10%, 4-year bond at 96. The bond pays interest semiannually on November 1 and May 1. The entries are:

May 1, 19X1         

Cash                 9,600                  

Bond Discount   400
Bonds Payable             10,000

Nov. 1, 19X1 

Interest Expense   500
Cash                           500

Interest Expense   50
Bond Discount      50
400 ÷ 4 years × 1/2 year.

Dec. 31, 19X1 

Interest Expense    166.67
Interest Payable            166.67
10,000 × 10% × 2/12 (To accrue 2 months of interest.)

This entry will be reversed on January 1, 19X2, if the company makes reversing entries.

Dec. 31, 19X1 

Interest Expense   16.67
Bond Discount           16.67
400 ÷ 4 × 2/12.

Why responsibility accounting system is necessary?

In addition to financial statement valuations, the reporting elements of the cost management system must address internal needs of a responsibility accounting system. This system provides information to top management about the performance of an organizational subunit and its manager.

For each subunit, the responsibility accounting system separately tracks costs and, if appropriate, revenues. Performance reports are useful only to the extent that the measured performance of a given manager or subunit can be compared to a meaningful baseline. The normal baseline is a measure of expected performance. Expected performance can be denoted in financial terms, such as budgetary figures, or in nonfinancial terms, such as throughput, customer satisfaction measures, lead time, capacity utilization, and research and development activities. 

 

By comparing expected and actual performance, top managers are able to determine which managers and subunits performed according to expectations and which exceeded or failed to meet expectations. Using this information that has been processed and formulated by the cost management system, top managers link decisions about managerial rewards to performance. 

Marginal costing or absorption costing-which method is to use?

Marginal costing is more useful for decision-making purposes, but absorption costing is needed for financial reporting purposes to comply with accounting standards.

Reported profit in any accounting period is likely to differ according to the costing method used.

With marginal costing, contribution varies in straight proportion to the volume of units sold. Profits will increase as sales volume increases, by the amount of additional contribution earned. Since fixed cost does not alter, marginal costing gives an accurate picture of how a firm's cash flows and profits are affected by changes in sales volumes.

With absorption costing, there is no strong relationship between profit and sales volume, and as sales volume rises the total profit will rise by the sum of the gross profit per unit plus the amount of overhead absorbed per unit. This is a mystifying and unsatisfactory method of monitoring profitability.

If sales volumes are the same from period to period, marginal costing reports the same profit each period (if no change in sales prices or costs). In contrast, using absorption costing, profits can vary with the volume of production, even when the volume of sales is constant. Using absorption costing there is the probability of manipulating profit, simply by changing output and inventory levels.

Difference between Marginal cost and Marginal costing

Marginal cost is the cost of one additional unit of a product/service which could be escaped if that unit were not produced/provided.


Marginal costing is an alternative to absorption costing. Only variable costs (marginal costs) are charged as a cost of sales. Fixed costs are treated as period costs and are charged in full against the profit of the period in which they are incurred.

• In marginal costing environment, closing inventories are valued at marginal (variable) production cost

whereas, in absorption costing environment, inventories are valued at their full production cost which includes absorbed fixed and variable/marginal overhead.

• If the opening and closing inventory levels differ, the profit reported for the accounting period under the two methods of cost accumulation will therefore be different.

• In the long run, total profit for an establishment will be the same whichever costing method is used because, in the long run, total costs will be the same by either method of accounting. Different accounting conventions merely affect the profit of individual periods.
 
Marginal costing is more useful for decision-making purposes, but absorption costing is needed for financial reporting purposes to comply with accounting standards.  

Advantages of Uniform Costing

 The advantages accruing from the use of uniform costing system are as follows :-

1.  The management of each firm will be saved from the exercise of developing and introducing a costing system of its own.

2.  A costing system devised by mutual consultation and after considering the difficulties and circumstances prevailing in different firms is readily adopted and successfully implemented.

3.  It facilitates comparison of cost figures of various firms to enable the firms to identify their weak and strong points besides controlling costs.

4.  Optimum achievement of efficiency is attempted by all the firms by utilising the experience of other concerns in the industry.

5.  Standing in the industry of each firm will be known by making a comparison of its cost data with others.

6.  Services of cost consultants or experts may be available jointly to each firm in the industry by sharing their experiences and expenses.

7.  Research and development benefits of bigger firms may be made available to smaller firms.

8.  It helps in the reduction of labour turnover, as a uniform wage system is the precondition of a uniform costing system.

9.  It helps Trade Associations in negotiating with the Government for any assistance or concession in the matters of taxation, exports, subsidies, duties and prices determination etc.

What are methods in Pricing at Cost?

(a)  Actual manufacturing cost:
In this method goods or services are transferred at their actual cost of production. It is useful for those units where the responsibility of profit performance is centralised. Under this method, it is difficult to measure the performance of each profit centre. 

(b)  Standard cost:
Under this method all transfers of goods and services are made at their standard cost. Any difference between actual and standard cost viz., variances are usually absorbed by the supplying unit. In some cases, variances are transferred to the user unit as well. This will result in the inventory being carried at identical standard cost by both the supplying and receiving units. Here also the profit performance responsibility is centralised and thus it cannot be measured for individual units involved. 

(c)  Full cost:
Full cost means cost of production plus expenses like selling and distribution, administration, research and development cost etc. In this method, the supplying unit is not allowed to make any profit on transfers to other units. But it is free to earn profit on outside sale. One good thing about this method is that the supplying unit is allowed to recover the full cost of the goods/services transferred. 

(d)  Full cost plus mark up:
Under this method the supplying unit transfers goods and services at full cost plus some mark-up. The markup added to full cost is either expressed as a percentage of full cost or of capital employed. Selling expenses here are recovered by the supplying unit without incurring them, especially when the goods/services are transferred internally. Due to this defect the use of full cost plus method is not appreciated by the internal receiving units. 

To overcome this defect either the use of standard cost plus or actual cost plus are preferred. Use of either of the preceding method facilitates the task of measuring profit performance and efficiency of the units involved.

Various types of Distributors discounts

 Distributors discounts can be classified under the following three categories:
(i)  Different net prices for different distributor levels: Net prices are commonly used as the device for quoting differential prices to distributors. A list of such prices is given to authorised dealers by manufacturers to facilitate their task of billing. 

(ii)  A uniform list price modified by a structure of discounts, each rate so determined is applied to a different level of distributor : This method is commonly used as it is easy to deal with its use in diverse trade channels. By merely varying the discounts it facilitates cyclical and seasonal adjustments in prices also. Its use helps in keeping actual prices a secret not only among distributors but also among competitors and customers. This method gives to manufacturers greater control over the realised margin of different categories of distributors. 

(iii)  A single discount combined with differing supplementary discounts to different levels of distributors: Supplementary discount gives clear cut picture about the trade channel structure or the suggested resale prices. These discounts reflect distributors cost at different stages and competition between different kinds of distributors. These discounts are often very elaborate and are in use due to tradition in the industry. 

•  Pre-requisites for determining Distributors’ Discounts:  The economic function of distributors discounts is to induce different categories of distributors to perform nicely, their respective marketing functions. As such, to build up a discount structure on sound economic lines, it is essential to know about : 

  (i)  The services to be performed by the distributors at different levels.
  (ii)  Knowledge about distributors’ operating costs.
  (iii)  Discount structure adopted by competitors.
  (iv)  Effect of discounts on distributor’s population.
  (v)  Costs of selling to different channels.
  (vi)  Availability of opportunities for market segmenta

Actions to Reduce Product Costs

• Develop new production processes
• Capture learning curve and experience effects
• Increase capacity utilization
• Use focused factory arrangement
— reduces coordination costs
• Design for manufacturability
— reduces assembly time
— reduces training costs
— reduces warranty costs
— reduces required number of spare parts
• Design for logistical support
• Design for reliability
• Design for maintainability
• Adopt advanced manufacturing technologies
— reduces inventory levels
— reduces required production floor space
— reduces defects, rework and quality costs

SOURCE: Gerald I. Susman, “Product Life Cycle Management,” Journal of Cost  Management

What are the requisites of inter-firm comparison system?

Inter-Firm Comparison  is a technique of evaluating the performance, efficiency, costs and profits of firms in an industry. It consists of voluntary exchange of infor- mation/data concerning costs, prices, profits, productivity and overall efficiency among firms engaged in similar type of operations for the purpose of bringing improvement in efficiency and indicating the weaknesses.

Requisites of inter-firm comparison system

i. Centre for Inter-Comparison
ii. Membership
iii. Nature of information to be collected
iv. Method of Collection and presentation of information

What is uniform costing?

Uniform Costing: It is not a distinct method of costing when several undertakings start using the same costing principles or practices, they are said to be following uniform costing. Different concerns in an industry should adopt a common method of costing and apply uniformly the same principles and techniques for better cost comparison and common good and helps in mutual cost control and cost reduction. Hence, it is recommended that a uniform method of costing should be adopted by the member units of an industry.

Objectives of Uniform Costing

i. Facilitates Comparison
ii. Eliminates Unhealthy Competition
iii. Improves Efficiency
iv. Provides Relevant Data
v. Ensures Standardisation
vi. Reduces Cost

What are the requisites for the installation of a uniform costing system ?

Requisites for the installation of uniform costing: Essential requisites for the installation of uniform costing are as under:
(i) The firm’s in the industry should be willing to share / furnish relevant data or information.
(ii) A spirit of cooperation and mutual trust should prevail among the participating firms.
(iii) Mutual exchange of ideas, methods used, special achievement made, research and know how etc. should be frequent.
(iv) Bigger firms should take the lead towards sharing their experience and know how with the smaller firm to enable the latter to improve their performance.
(v) In case of accounting methods, principles, procedure and production method uniformity must be established.

 Uniformity must be established with regard to several points before the introduction of uniform costing in an industry. In fact, uniformity should be with regard to following points:
(a)  Size of the various units covered by uniform costing.
(b) Production methods.
(c)  Accounting methods, principles and procedures used. 

Potential for maximization of income through use of transfer pricing

(a) Marketable Transfer Pricing Procedure
(i) When division are not captives of internal divisions and the divisions are free to do business both internally and externally and when there are reasonably competitive external markets for the transferred products, then the most suitable transfer price would be, the market price, as it generally leads to optimal decisions.
(ii) In case, the external market for the transferred good is not reasonable competitive, following two situations may arise in this case.
(a) If there is idle capacity: Under this situation opportunity cost will be zero hence minimum transfer price should be equal to the additional outlay costs incurred upto the point of transfer (sometimes approximated by variable costs).
(b) If there is no idle capacity: Under this situation opportunity cost should be added to outlay costs for determining minimum transfer price.

(b) The potential for maximization of income by a multinational through the use of transfer pricing mechanism is based on the successful implementation of the following steps:

(i) Transfer pricing may be set relatively higher for affiliates in relatively high-tax countries that purchase inputs from affiliates located in relatively low-tax countries.
(ii) Transfer prices to affiliates in countries which are subject to import duties for goods or services purchase may be set low so as to avoid host country taxes.
(iii) Transfer prices to an affiliate in a country that is encountering relatively high inflation may be set relatively high to avoid some of the adverse effects of local currency devaluation that are related to the high inflation.
(iv) Transfer prices may be set high for goods and services purchased by an affiliate operating in a country that has imposed restriction on the repatriation of income to foreign companies.
(v) Transfer prices may be set low for an affiliate that is trying to establish a competitive advantage over a local company either to break into a market or to establish a higher share of the company’s business.