A Systematic Approach To Accumulating Costs Accounting Essay


Perfect Wood works Ltd the industry, supplier and installer of mill made joinery such as quality forests, Door, Staircase. The huge bulk of the work done by the concern is purely to order and made to accommodate the specific demand of the client. The company monthly turns over & A ; lb ; 5billion, it has 500 employees state broad and produces 10 merchandises per twenty-four hours. Besides with their portion capital and portion holders are running positively in the competitory market. An mean market portion is & A ; lb ; 45 and has a good repute in the portion market. Company has announced gross of & A ; lb ; 10billion for the one-fourth which ended in July 2010. There had been growing of 6 % over gross 2b for the same period in the anterior twelvemonth. The Company has achieved their mark and is running successfully because of their proper cost direction. As a direction comptroller, I briefly supply the cost information for budgeting and prediction intents in the direction of concern.

Now we will look at the company cost direction briefly.

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Full of Costing

The entire sum sacrificed to accomplish a peculiar object. It includes all sums sacrificed. So, if the aim was to provide a client with a merchandise or service, all cost associating to the production of the merchandise or proviso of the service would be included as portion of the full cost. To supply full cost information there should be a systematic attack to roll uping costs and so, delegating these costs to peculiar units of merchandise or services.

Use of full costs

Measuring comparative


Uses of

Full moon costs


Output exerting control


Accessing public presentation

Elementss of cost

The cost elements are Materials, Labor and Expenses which are contributed in a production. Harmonizing to these elements cost can be divided in to two chief classs:

1. Direct Cost

2. Indirect Cost

Direct cost

A cost that is straight related to Product or service.The direct cost is placing the specific cost units. The consequence of the cost can be measured in regard of each peculiar unit of end product. This cost is known as premier cost.

Ex-husband: Harmonizing to perfect wood shapers the direct cost is as follows:

Direct stuff – Wood for tabular arraies.

Direct Labor – Wagess for production line employees.

Direct Expenses – Royalties Payable of the interior decorator of a merchandise.

Indirect cost

A cost is non straight related to the merchandise or service related to all the other costs. It is non straight measured in regard of each peculiar unit of end product. This cost is known as operating expenses.

Ex-husband: Harmonizing to Perfect wood shapers indirect cost as follows:

Indirect materiel – Grease, Cleaning stuffs.

Indirect labour – wages for supervisors

Indirect disbursals – Rent, Telephone, Lighting, Heating

Entire cost of a unit is entire of direct cost and Indirect cost. Entire Cost = Prime cost+ operating expenses

Nature ( Cost and the behaviour of the cost )

Cost represents the resources that have to be sacrificed to accomplish a concern aim. The cost incurred by a concern may be classified in assorted ways and an of import manner is how the cost behaves in relation to alterations in volume of activity. This is cost valuable harmonizing to the volume.

Fixed cost

Harmonizing to Atrill, P.and Mclaney, E. ( 2009 ) When alterations occurs the volume of the activity alterations but cost will stay same. This can be considered as short term in concern. This cost is clip based non volume activity based.

& A ; lb ;

Volume of the Activity

Ex-husband: Perfect wood shapers Rent, Insurance, Cleaning cost, staff wage.

The peculiar cost is non changed by the volume of activity. Even though fixed cost can be variable under rising prices, merely the cost gets high non the end product.

Variable cost

This cost is different with the volume of the activity.

& A ; lb ;

Volume of the activity

Ex-husband: Perfect wood Makers direct stuff such as forests, direct labour rewards for production employees. This cost alterations harmonizing to the volume of the activity.

Measure fixed cost

As the volume of the activity increases from zero the fixed cost is unaffected, at a peculiar point the volume of the activity can non be changed without an extra infinite. The extra infinite will do a measure in the fixed cost.

& A ; lb ;

Volume of the activity

Ex-husband: Perfectives Wood shapers Water Bills for every month.

Semi Fixed Cost

In some instances cost has an component of both fixed and variable cost. This is known as Semi fixed cost.

Ex-husband: Perfectives wood shapers Telephone measures with fixed monthly lease and charges per unit.

Function of cost

Cost can be classified by these maps:

1. Production

2. Selling and distribution

3. Administration

4. Finance

5. Research and Development.

Ex-husband: Perfectives wood shapers developing plans cost for staff.

Cost Relevance and controllability

Cost categorization helps to be after, control and to do determination in concern. All cost units have cost centres harmonizing to assorted sections.

Ex-husband: Perfectives wood shapers Assembly section, completing section, Training section, Administration section. Harmonizing to these sections cost codification can change and be Centre place the different cost for each section and they plan and command the cost in every section through this company, and take a determination for effectual cost direction.

1.2 Job Costing

Harmonizing to Atrill, P. and Mclaney, E. ( 2009 ) Is used to depict the manner in which we identify the full cost per unit of end product ( occupation ) where the unit of end product differs. To be a peculiar unit of end product foremost should place the direct of the occupation. Basically the occupation done is as per the demand of the client. This relates one unique at a clip. The chief intent is to set up the net income or loss on each completed occupation.

Full cost of the unit

Fair portion of the indirect costs

operating expense

Direct cost of the unit

Ex-husband: Perfectives wood shapers table production cost per alone clip.

Transport vehicle fix

The Batch Costing

The production of many types of goods and services involve bring forthing a batch of indistinguishable or about indistinguishable units of end product, but each batch is distantly different from other batches. After completion of production, divided the entire cost by figure of units produced.

Ex-husband: Perfect wood shapers table cost for peculiar production = & A ; lb ; 10000

Numbers of units produced = 100

Batch bing for Table = & A ; lb ; 100

Contract cost

This cost fundamentally includes the occupation cost and the batch cost. If the cost is taken more than one Accounting period it is known as contract cost. This includes coursers for a peculiar contract.

Ex-husband: Perfectives wood shapers contract suiting cost = & A ; lb ; 500 for new edifices ( which take more than one Accounting period )

Procedure bing

Appropriate where the merchandise follows a series of consecutive, often automatic procedures.

Ex-husband: Perfectives wood shapers Painting cost for the merchandise. Average of peculiar picture cost usage it as input cost of the following picture procedure.

Service cost

This merchandise can non be seen, or touched it is a service non a touchable merchandise. The merchandise and the construct should be at the same clip.

Ex-husband: Perfectives wood shapers developing plans cost for staff.

1.3 Costing Techniques

To be a merchandise there are two chief techniques available:

1. Absorption method

This is a full cost method. It includes variable cost and fixed cost of a peculiar merchandise. Under this method all cost of a production must be taken into consideration that brings the merchandise, or services at it ‘s existent location or status.

2. Fringy method

This bing method includes merely the variable cost of a merchandise. The fixed cost is treated as a period cost. This will stay the same even when the activity alterations in a peculiar period.

Ex-husband: Perfectives wood shapers Table production bing under fringy technique:

Numbers of units produced ( table ) -10000

Numbers of units sold -8000

Selling monetary value per unit – & A ; lb ; 25

Variable cost – Direct material- & A ; lb ; 3, Direct Labor- & A ; lb ; 5, Variable overhead- & A ; lb ; 2= & A ; lb ; 10

Fixed Product Cost – & A ; lb ; 50000 ( Which is a period cost will stay same )

Harmonizing to fringy costing:

Gross saless -8000units x & A ; lb ; 25 = 200000

Variable cost -8000 x & A ; lb ; 10 = ( 80000 )

Contribution = 120000

Fixed Cost = ( 50000 )

Net income & A ; lb ; 70000

Harmonizing to above fringy bing the figure of units sold was & A ; lb ; 8000 and the merchandising monetary value is & A ; lb ; 25 for each. Therefore the entire gross revenues are & amp ; lb ; 200000. The variable cost for each unit is & A ; lb ; 10 ( which includes direct stuff + direct labour + variable operating expense ) x units 8000 = & A ; lb ; 80000. Entire fixed cost given is & A ; lb ; 50000. Out of the entire gross revenues volume by cut downing the entire variable cost + sum fixed cost the fringy costing which is & A ; lb ; 70000 is calculated above.


The cost informations aggregation for perfects wood shapers to place the entire cost of a peculiar merchandise is as follows:

TPC =Material cost+ Labor Cost + Outgos

The gross revenues section can place the client demands, through that they decide the production units of a peculiar merchandise. Ex-husband: Table demands: 1000 units harmonizing to this information, the gross revenues section inform the buying section to buy the stuff to place the stuff cost. Then, the production section gives the production informations ( 1000 units ) to the HRM section to place the labour cost, and gives the information to the finance section to place the other disbursals.

Perfectives Wood shapers Entire Product Cost for 1000 units harmonizing to above section is & A ; lb ; 10000.

TPC = Total stuff cost + Total Labor Cost + Total Outgos

= & A ; lb ; 2 per unit ten 1000 units + & A ; lb ; 6 per labour hr x 1000units + & A ; lb ; 2 per ten 1000units

& A ; lb ; 10000 = & A ; lb ; 2000 & A ; lb ; 6000 + & A ; lb ; 2000

Harmonizing to the above illustration, the purchase section identified stuff cost for each unit as & A ; lb ; 2 ten 1000 units = & A ; lb ; 2000. The HRM section analyzed how many labourers are needed for the production and calculated how many hours are needed for each merchandise. Harmonizing to that Total labour cost is & A ; lb ; 6000 as shown above. Financial section calculated all the other outgos ( Administrative disbursals ) as shown above & A ; lb ; 2000. After all the sections informations aggregation was analyzed the entire cost is & A ; lb ; 10000 for a peculiar tabular array production.


Perfectives wood shaper ‘s informations aggregation diagram.

Gross saless Department

Production section HRM Department Finance Department

Ex-husband: Perfectives wood shaper ‘s Overhead analysis as follows:

Machine Value – & A ; lb ; 50000

A – & A ; lb ; 25000

B – & A ; lb ; 15000

C – & A ; lb ; 10000

Depreciation Value- & A ; lb ; 12000

Wages – & A ; lb ; 15000

Entire Employees worked 15 in each section 5 of them.

Insurance – & A ; lb ; 900

Perfect Wood shapers ‘ Over head Analysis sheet

Over Heads

Based on operational country






Number of employees





Depreciation machine value

Value of the machine






Value of machine





Rent and Ratess






Entire Overheads






1. Salaries – Entire Amount of Salary

Entire Numbers of Employees

& A ; lb ; 15000 = & A ; lb ; 1000per employee


Harmonizing to 5 employees in each section 5×1000= & A ; lb ; 5000 as shown above.

2. Dipriciation value: 12000 x 100 = 24 %


A – 25000 x 24 = & A ; lb ; 6000


B – 15000 x 24 = & A ; lb ; 3600


C- 10000 ten 24 = & A ; lb ; 2400


3. Insurance: 900 x 100 = 1.8 %


A -25000 x 1.8 % = & A ; lb ; 450

B – 15000 ten 1.8 % = & A ; lb ; 225

C – 10000 ten 1.8 % = & A ; lb ; 150

4. Rent A – 7210 x300 = & A ; lb ; 3090


B- 7210 x 150 = & A ; lb ; 1545


C- 7210 x 250 = & A ; lb ; 2575



Although The Company is turning, in some productions they fail to accomplish the budget.

Ex-husband: Dressing table production cost

Budgeted cost Actual Cost

TPC =DM + DL + Expenditures TPC = DM + DL +Expenditures

& A ; lb ; 100 = & A ; lb ; 25 + & A ; lb ; 50 + & A ; lb ; 25 & A ; lb ; 120 = & A ; lb ; 30 + & A ; lb ; 60 + & A ; lb ; 30

Production Units = 1000 Total production = 1000

Entire cost = & A ; lb ; 10000 Sum cost = & A ; lb ; 12000

Harmonizing to the above illustration the budgeted cost for each unit is & A ; lb ; 100 but existent cost is & A ; lb ; 120. This is due to the undermentioned grounds:

3. The existent stuff cost is & A ; lb ; 30 but the budgeted one is & A ; lb ; 25. An excess & A ; lb ; 5 is spent for stuff, due to rising prices of a peculiar month and increased monetary value in stuffs. It is hapless direction from buying section directors. Alternatively they may seek to avoid the above supernumerary cost by majority buying the stuffs.

2. Actual labour cost is & A ; lb ; 60 but budgeted one is & A ; lb ; 50, because the company has recruited extremely skilled workers who are charged more for their work. But on the other manus due to extremely skilled staff they used the stuff more efficaciously to avoid wastage. But still HRM section can actuate staff by utilizing a preparation plan to work efficaciously to avoid excess hours to cut down the cost. On the other manus HRM section should see about discretion cost to avoid excess disbursals.

3. Financial section cost is high compared to the budgeted cost as is shown above ( Expenditures ) . This is due to administrative cost being high because of more staff, transit, and raised transportation cost due to rising prices. But still it is the peculiar section director ‘s duty to cut down the cost apart from rising prices.

Over all it is each section directors duty to keep the cost within each section ‘s budget to collaborate the chief budget of the organisation.





The money allocated for the peculiar month and maintaining path on outgo and income of all fiscal activity is known as budget.

Aim of the budget

The accounting system of the organisation provides information on what has happened in the yesteryear and aid directors to maintain path of whether or non their run intoing their current budgets. Besides director needs information to supply outlook for the hereafter.

Purpose of budget

The determination make every twenty-four hours in a concern affect the profitableness of the concern. Make consequence determinations and organize the determination and action of assorted sections a concern demand to hold budgeting.

In budgeting Planing it needs the followers:


In organisation director in every section justify the resources they need to accomplish their ends. Communicate between director and the higher-ups helps a house their common committedness to company end. In add-on different section and units must be pass oning with each other the budget procedure to organize their programs and effects.


Different unit in the company must besides organize the many different undertakings to execute.

Ex-husband: The figure of merchandise to be marketed must be co-ordinate with the buying and fabrication sections to guarantee good usage available.


A budget is finally the program for the operation of an organisation for a period of clip. Old Planed and procedure are questioned every bit good as new program procedure.


Once the budget is finalized it is the program for the operation of the organisation. Actual grosss and outgos are monitored invariably for fluctuation and to find whether the organisation in mark.

Behavioral facets of budgeting

To keep supportive and concerted relationship with the staff. In direction theory engagement in determination devising such as budget scene is utile seen as conveying advantage of organisation. It is allowed information gathered from many beginnings, increasing the opportunity that all factors have been considered.

Engagement allows:

Time Consuming

Requires appropriate cognition, accomplishment and expectant

May affect selfish motivations

To keep supportive and concerted staff

Engagement in the budgeting procedure tends to ensue increased productiveness and satisfaction.


Different method of fixing a Budget

A concern will fix more than one budget for a peculiar period. Each budget relates to specific facet of concern. The sale budget is prepared foremost and other budget will follow:

Production budget

Use budget

Purchase budget

Benefit to the concern fixing regular hard currency budget.

1. Budget tends to advance frontward thought and the possible designation of short term jobs. Because it shows deficit of production capacity can be identified.

2. Budget can assist organize assorted subdivision of concern. Activities of the assorted sections and the subdivision of the concern are linked because of different type of budget.

3. Can actuate directors to better public presentation holding all information can actuate staff, director of their public presentation.

4. It is possible to command current public presentation with old public presentation.

Budget can supply a system of mandate for directors to pass up to peculiar bound.


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