COsting Report

7/28/2019 COsting Report

http://slidepdf.com/reader/full/costing-report 1/23

1. INTRODUCTION

Costing is a process of computing cost of production or running a business, by

allocating expenditure to various stages of production or to different operations of a firm.

Cost is different from business to business and the way of dividing the cost also different,

such as Production and nonproduction, Direct and Indirect, Relevant and Irrelevant etc.

Identifying the cost of production is important to businesses in different ways. Such as to

decide the selling price or the mark up, to identify the profitable product, to inventory

valuation etc. cost is the factor which affect the profit directly. If a company fails to

identify their costs, then they will not survive in the competition.

Today business and industry needs costing systems to meet their individual

requirements such as decisions regarding buy or make, whether to accept a special order

or not, to plan and control the cost. But it’s not possible for a single costing system. They

have to use different methods according to their nature of the products. There are five

methods which use to relate the cost to the end product. In theoretically they are Job

costing, Batch costing, Process costing, Contract costing and service costing. Batch and

process are the most frequent methods use in world. Accounting treatment for these

methods are differs from each other.

In Management Accounting we learn these areas in a theoretical manner. But in

real world these Methods are not use in the same manner .Because some of these areas

are not applicable in practical scenarios. Objective of this report is to identify the

differences in theory and practical use in businesses. We selected some companies to find

out the costing methods which they use in their businesses, how they recognize the cost,

classification which they use to divide the costs among products.

The Main thing we realized is companies use theory as a base and they develop

their own way of recognizing costs into their end product or service. This means that the

practical application consists with lot of changes. These changes happen because of the

change in environment, competition and accounting practices.

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2. THEORETICAL BACKGROUND

It is necessary to understand the difference between the costing methods and

techniques. Costing methods are those which help a firm to compute the cost of

production or services offered by it. On the other hand, costing techniques are thosewhich help a firm to present the data in a particular manner so as to facilitate the decision

making as well as cost control and cost reduction. Costing methods and techniques are

explained below.

Job Costing

This costing method is used in firms which work on the basis of job work. There

are some manufacturing units which undertake job work and are called as job order units.The main feature of these organizations is that they produce according to the

requirements and specifications of the consumers. Each job may be different from the

other one. Production is only on specific order and there is no pre demand production.

Because of this situation, it is necessary to compute the cost of each job and hence job

costing system is used. In this system, each job is treated separately and a job cost sheet is

prepared to find out the cost of the job. The job cost sheet helps to compute the cost of the

job in a phased manner and finally arrives at the total cost of production. Firms providing

printing press, hardware, ship building, heavy machinery, foundry, general engineering

works, machine tools, interior decoration, repairs and etc use job costing.

Key features-

• It is used when work is undertaken as per customer’s special requirement.

• Cost expected to be incurred on the job are estimated and on the basis of estimate

a price is quoted to the customer.

• Actual costs of material, labour, overhead are accumulated and on the completion

of the job these are compared with the quoted price and thus the profit or loss on it

are determined.

• In this case all the overheads are first allocated to cost centers and then absorbed

into the jobs on some suitable basis like labour hour rate, labour cost rate etc.

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Batch Costing

This method of costing is used in those firms where production is made on

continuous basis. Each unit coming out is uniform in all respects and production is made

prior to the demand, in anticipation of demand. One batch of production consists of the

units produced from the time machinery is set to the time when it will be shut down for

maintenance. For example, if production commences on 1st January 2012 and the

machine is shut down for maintenance on 1st February 2012, the number of units

produced in this period will be the size of one batch. The total cost incurred during this

period will be divided by the number of units produced and unit cost will be worked out.

Firms producing consumer goods like television, air-conditioners, washing machines and

etc use batch costing.

Key features

• It is a refinement of job costing.

• Here the unit of measurement is batch comprising of lots of similar units.

• Separate cost sheet are maintained for each batch of products by assigning a

unique batch number.

• Cost per unit in a batch =Total cost of batch/No of units in the batch.

Process Costing

Some of the products like sugar, chemicals and etc involve continuous production

process and hence process costing method is used to work out the cost of production. The

meaning of continuous process is that the input introduced in the process I travels through

continuous process before finished product is produced. The output of process I becomes

input of process II and the output of process II becomes input of the process III. If there is

no additional process, the output of process III will be the finished product. In process

costing, cost per process is worked out and per unit cost is worked out by dividing the

total cost by the number of units. Industries like sugar, edible oil, chemicals are examples

of continuous production process and use process costing.

Key features

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• The process of producing the product has a continuous flow and products are

homogenous

• Costs are compiled on time basis –for process or department.

• Product loses their individual identity as they are manufactured in a continuous

flow.

• Unit cost of process is the average cost for the period.

• Costs are calculated at the end of the cost period.

• Unit cost of process =Total cost for the period /Output during the period

• Process of production is standardized and quite stable.

• Control is comparatively easier.

Contract Costing

This method of costing is used in construction industry to work out the cost of

contract undertaken. For example, cost of constructing a bridge, commercial complex,

residential complex, highways and etc is worked out by use of this method of costing.

Contract costing is actually similar to job costing, the only difference being that in

contract costing, one construction job may take several months or even years before they

are complete while in job costing, each job may be of a short duration. In contract

costing, as each contract may take a long period for completion, the question of

computing of profit is to be solved with the help of a well defined and accepted method.

Key features

• In contract costing all the direct expenses are allocated to the contract. It may be

noted that a large amount of costs is direct cost in contract accounting and a small

amount of indirect cost comprising of head office expenses and central

warehousing expenses are absorbed as a percentage of labour cost or material

cost.

Service Costing

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Service costing is that part of operation costing which is used in all organization

that provides services instead of producing of goods. For calculating the price of each

service, it is very necessary to collect all the expenses relating to that service. We make a

cost sheet in which we show all the cost relating to specific service. These costs are

calculated on the time basis. Service costing method is used in hospitals, power

generating units, transportation sector, hotels, education, communication and etc. A cost

sheet is prepared to compute the total cost and it is divided by cost units for working out

the per unit cost.

Key features

• Cost of direct materials consumed will be relatively small.

• Overheads will comprise the most significant portion of any costs of which,

labour costs are in high proportion.

• Intangibility of output.

• Can be used for both internal and external services.

•

Low level of direct costs as a proportion of total costs since for most services it isdifficult to identify many attributable direct costs.

• Costing is done through composite cost unit calculation.

Ex-

Service Cost unit

Transport company passenger-kilometer

Education student-subject

Hospital patient-night

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3. RESEARCH OBJECTIVES

Researchers’ main objectives were to identify how the costing methods’

applicability in the practical industry scenarios and identify the differences between

theoretical study areas and the practical implementation. To be more familiar on these

study area researchers gathered information under following areas.

The usage of costing methods

Sri Lankan companies’ costing methods

How they measure cost of their outputs

Their cost structures

Variance reporting

How they make corrections

Methods of collecting and relating costs

Cost per unit calculation

Problems faced by the companies when identifying costs

External environment’s impact on cost

Purpose of costing to their viewpoint

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4. RESEARCH METHODOLOGY

As per the assignment we have given, we were supposed to visit more than five

quoted companies in order to find out whether theories of costing practically using in

firms.

First of all we have selected around ten companies to pay visits and obtain

information. By making prior appointments with managements accountants of each of

these companies, we have gathered relevant details.

All the respondents were interviewed by using structured questions. All the

answers provided by the respondents of each of these companies were compared.

The comparison was finally leading us to identify the gap between theory and

practical application of costing models in management accounting.

By considering the gap between the theoretical and practical application we have

given our own recommendations to overcome those problems.

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5. COMPANY PROFILES

Keells Food Products PLC

Status: Listed

Legal Form: Public Limited Company

Operational Status: Operational

Headquarters: 130, Glennie Street, Colombo 2; Colombo

Keells Food Products PLC, together with its subsidiaries, engages in the

manufacture and sale of processed meats and crumbed products, as well as the sale of raw

meats primarily in Sri Lanka. The company offers sausages, meatballs, and cold cuts

under the brand name of Keells; and Chinese rolls, formed meats, French fries, nuggets,

burgers, fish fingers, and kieves under the Halal brand name. It exports its products to

India, the United Arab Emirates, and Maldives. The company was founded in 1982.

Companies with similar main activities,

Ceylon Cold Stores PLC

HVA Foods PLC

Convenience Foods (Lanka) PLC

ACL Cables PLC

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Status: Listed



Headquarters: No. 60, Rodney Street, Colombo 08; Colombo

ACL Cables PLC engages in the manufacture and sale of cables and conductors

primarily in Sri Lanka, as well as internationally. Its products include house and building

wires for wiring of houses/commercial building, and distribution of electricity within

factories; flexible cords and cables; armored and unarmored power cables for distribution

of electricity within cities, factories, and buildings; control and earth wires with flexible

conductors; and switch gear cables.


Sierra Cables PLC

Regnis (Lanka) PLC

Laxapana Batteries PLC

United Motors Lanka PLC

Status: Listed



Headquarters: 100, Hyde Park Corner, Colombo 02; Colombo

United Motors Lanka PLC distributes vehicles and related spares, as well as

provides after sales services in Sri Lanka. The company engages in marketing sports

utility vehicles, cabs, tractors, vans, cars, trucks, buses, special vehicles, and tires. It also

distributes vehicle parts and accessories, such as oil filter, air filter, and brake pad. In

addition, United Motors Lanka engages in marketing lubricants, including synthetic oils,

diesel motor oils, brake fluids, and grease, as well as tubes.


Colonial Motors PLC

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Diesel and Motor Engineering PLC

MTD Walkers PLC

Status: ListedLegal Form: Public Limited Company


Headquarters: 18, St.Michel`s Road, Colombo 03; Colombo

MTD Walkers PLC, through its subsidiaries, engages in general/mechanical, civil

engineering, and piling activities. The company constructs bored cast reinforced concrete

pile foundations and related earthworks for civil engineering structures, expressways/toll

roads, and buildings; mechanical engineering projects, including power generation,

petroleum, cement, water management, and irrigation structures; and roads and highways,

as well as offers engineering services.


Lankem Developments PLC

Lion Brewery Ceylon PLC

Status: Listed



Headquarters: 61, Janadhipathi Mawatha, Colombo1; Colombo

Lion Brewery (Ceylon) PLC engages in brewing, bottling, and selling beers in Sri

Lanka. Lion Brewery also exports its products primarily to the United Kingdom, Canada,

France, Japan, and Seychelles. It also has investments in brewing business in India. The

company was founded in 1996 and is based in Biyagama, Sri Lanka. Lion Brewery

(Ceylon) PLC is a subsidiary of Carson Cumberbatch PLC.


Ceylon Beverage Holdings PLC

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Sri Lanka Telecom PLC

Status: Listed


Operational Status: OperationalHeadquarters: Telecom Headquarters, Lotus Road, Colombo 01 ; Colombo

Sri Lanka Telecom PLC, together with its subsidiaries, provides

telecommunication services to multinational corporations, large and small corporate,

retail, and domestic customers in Sri Lanka and internationally. It offers domestic and

international fixed and mobile telephone services. The company also provides Internet

services, data services, domestic and international leased circuits, broadband, satellite

uplink, maritime transmission, Internet protocol television service, directory publishing.


Dialog Axiata PLC

Tritel Services PVT LTD

Hayleys Business Solutions (Pvt) LtdStatus: Not Listed

Legal Form: Private Limited Company


Headquarters: Hayley Building, P.O.Box 70, NO 400, Deans Road, Colombo 10.;

Colombo

Hayley’s business solution international (pvt) Ltd (HBSI) now also offer PBO

(business process outsourcing) services and offshore third party clients. Their insights,

experience and capabilities in F&A and PBO services and state-of-the-art technology

solution, enables them to assist client companies develop transformational business

models that deliver superior business outcomes. They understand that the success of their

clients lies in their ability to deliver high quality and consistent service aligned with

benchmarked standards. They capture value through increased efficiency and effective

performance measurement, reducing operating costs and focusing on continuous

improvement and innovation. Their services are scalable and sustainable, and their

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approach is driven by transparency and partnerships. The main focus of our services

includes F&A services.

Swedish Trading Audio Visual (Pvt) LtdStatus: Not Listed

Legal Form: Private Limited Company


Headquarters: Red Cross building, 106, Dharmapala Mawatha, Colombo 07

Swedish Trading Audio Visual (Pvt) Ltd., is a specialist in the broad range of equipment

related to Pro-Audio, Visual, Lights, Sounds, Integrated Control, as well as Event

Management and Equipment Rentals. Established since 1996, Swedish Trading has been

serving the needs of governmental, commercial and educational sectors in the

country. Representing more than 30 manufacturers of high quality state-of-the-art

products, we pride ourselves on delivering to most excellent services and solutions to our

customers. Our mission is to provide the highest quality and leading edge technology,

which is available today. We accomplish this by keeping a contest pulse on the rapidly

changing technologies that are shaping the future of the Audio and Video industry.

Swedish Trading provides clients with the highest level of customer services and support

in the industry today. Our special attention to detail, when products are supplied and

services provided insures that you will receive the maximum return on your investment.

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6. ANALYSIS

6.1 Job Costing

Swedish Trading Audio Visual (PVT) LTD

Swedish trading as an Audio visual equipment import company and service

provider has been able to stabilize a reasonable market share in Audio visual equipment

suppliers market. As an organization they have conducted major projects, events etc.

Audio visual equipment trading considered as their main output in market. As an Audio

visual equipment import company, according to the information they mostly tend to use

Job costing and process costing as cost measuring methods. Model number is the main

cost tracing mechanism.

They use Job costing as a cost measuring method due to following reasons

• Always takes special orders from customers so it is easy to follow as a job

• Being a service provider simultaneously with Audio visual equipment

As an organization following elements are essential in cost structure…. Price(free of freight, duty, insurance)

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Freight

Insurance

Custom Duty

Clearing agent fee

Surcharges(if occurs)

Salaries and Wages

This organization depends a lot on foreign exchange rate due to importing products

from Malaysia, china and lots of other countries. For instance recent rapid Depreciation in

foreign exchange rate affected them a lot.

Generally to prevent mistakes occurs in cost measuring they do double check in data

entry process and specially programmed software to error discoveries. Then as an

organization to take corrective measures to minimize the gap between budgeted cost and

actual cost .just like cost accountant recommending corrective measures to director board.

According to the organization they always try to achieve a profit which could recover all

the relevant overheads in a particular time period.

6.2 Batch Costing

Keells Food Products PLC

According to their product portfolio they use different methods when it comes to

costing methods. However researchers only considered Keells Sausages for ease of the

analyzing. Apparently their costing method is process costing but actually their costing

method is batch costing. Lesson learnt here was even though there is a production process

it won’t use process costing all the time.

This has a semi automated production process and the processes were divided in

to cutting, mixing, filling, cooking and packing. Production taken place continuously

except in case of machinery shutting down for maintenances. Output of one process

becomes an input of another process. This is a characteristic where we can see in a

process costing company. Researchers asked why the company does not use process

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costing; according to the company the reason is their production per single time is always

50 kilograms. Not a single product. So the cost is calculated as a batch.

Company identifies and assigns cost in completing of the production of a specific

batch. The costs are recognized as variable and fixed cost separately and decide the cost.

Cost per unit is calculated by dividing costs of batch divided by the number of units in a

batch. A batch of similar products is treated as a single unit for the ease of ascertaining

the cost.

When the 50kg in a batch are produced the operations of sausages are over until

getting information of sales demand in the market. The point to strike is that the batch is

produced by looking at the sales demand.

Researchers were unable to get information about direct materials such as

ingredients due to their company policy. The company said that they buy meat which

means they don’t kill the animals for the process. But researcher found out that they kill

pigs using electricity.

According to the finance manager company anticipates 5% of variations while

inputs are converted in to outputs. Those variations happen due to cooking losses and drip

losses. They always expect that 5% variances and they do not take actions to control

them. 5% is always reported and it is identified by their experience. They are 100% sure

that the variance won’t go beyond 5%.

According to Keells Food Product’s Finance manager they use costing methods to

effectively identify cost in order to develop their pricing system.

Lion Brewery Ceylon PLC

The Lion Brewery is the largest beer manufacture in Sri Lanka. According to them

they produce five different brands. They use batch costing to relate their cost to end

products. But in their method includes some of the features in process costing.

They use mass production process when producing beer. That means same

products in larger quantities. In that case they use full budgeted costing to identify their

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cost during the period of production until they finish and measure the actual cost. After

achieving actual result they make variance analysis to find out whether their cost is match

to budgeted cost or not.

According to finance manager main idea of calculating cost is to determine the

selling price of the end product. And also it can use as a controlling mechanism. There are

five stages in their production process. Those are brewing, fermenting, conditioning,

filtering and finishing. In each stage they identify the cost such as cost of chemicals,

electricity, depreciation etc. Output of one process becomes an input of another process.

In theoretically it’s a feature of a process costing. They use production and nonproduction

basis to categories their cost. But for semi variable costs such as electricity they sure fixed

variable basis. Reason is fixed part of the electricity is very low comparing to production

energy consumption. In managers view point understanding fixed cost also important.

End production may be different from the budget. Because of inefficiency or the

unavoidable circumstances .In that case they imports beer to fill the demand in market.

Variances are uncontrollable and because of that when calculating markup they add some

percentage to recover the variance amount. They use ERP system to support tasks during

the process.

According to manager their cost per unit is based on the per dozen of bottles. In

other words 12 bottles of 250mililiters. Cost per unit base differs from country to country.

In Sri Lanka strong brew holds the larger demand comparing to other products. They

imported all the raw materials which requires to production, Such as malt, hops and other

chemicals. So the exchange rate is very important to them. Price of materials depends

with the exchange rate.

During our research we found out some of the similarities between theoretical and

practical usage. I.e. standard costing method, elements that they use in process and way of

calculating per unit cost is same as theoretical explanations.

Their ultimate objective is to determine the best possible profit margin to their products.

United Motors Lanka PLC

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United Motors is a leader of Sri Lanka’s automotive industry. It’s the Sole

Distributor for brand new Mitsubishi vehicles in the island. Other than that they distribute

products such as Perodua, TVS, JMC, and Yokohama etc. However we only considered

the Mitsubishi brand. Actually they don’t have a production process. It’s all about selling

and distribution.

According to finance manger objective of using costing methods is to identify the

total cost and determine the selling price of the vehicles. They are using absorption

costing as a cost accounting system. Which means they consider about variable costs as

well as fixed cost? Sometimes they faced problem which is volatility of cost components

when identifying cost. United motors using batch costing system because they import

vehicles as a batch.

According to manager their cost structure consists with cost of the vehicles,

clearing and transport charges, holdings cost and other overhead. This shows that they are

using direct and indirect method to classify the cost. They identify each cost at that stage

using clearance notes such as custom declaration. In other words it’s their cost tracing

method. Identifying cost of each stage is not a simple task. Its go through number of

layers before being finalized. If there is a error it will correct at the time that recognized.

Determining price is a very important to a company like United Motors, because price of

a single product is very high. Therefore it should be match with their competitor’s price.

When they are adjusting the variance they use two methods and it depends with the

market. If the competition is high they don’t absorb that to their selling price. Which

helps them to keep the price as it is. But sometimes keeping the variance losses is not

favorable to them and they will charge it through markup.

Exchange rate and government policies have substantial impact on the costs.

Which means rate is determining the capacity of the exports. According to finance

manager determined the right cost and relate it to the product is very important to

compete in the market.

6.3 Process Costing

ACL Cables PLC

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ACL Cables is the largest manufacture of cables in Sri Lanka. They imported raw

materials and produce cables in their factories. According to finance manager purpose of

costing is to relate production cost and determine the accurate selling price. In their view

point cost and profit margin is very important to them.

In manufacturing cables they use different cost methods to identify the cost of

production. According to manger they use process costing in their normal process. This

means input introduced in the process one travels through continuous process before

finish the product. In that case production is standardized and quite stable. But for special

orders they use job costing. Because it’s different from ordinary process and will not

continue again and again.

They use product and nonproduction method to classify the cost. But according to

manager they only consider variable cost, specially raw materials prices. Because it’s the

main factors which effect on cost of production. They import materials from different

countries such as copper from Egypt, Aluminum from Saudi Arabia. Because of that

reason exchange rate fluctuations are directly effected on their production process. To

maintain and run the accounting system smoothly they use ERP and SAP. But one

disadvantage of these systems is they cannot determine changes in price using these

methods.

Manufacturing cables is a process which includes different stages according to

finance manager cost is realized at the every stage and automatically recode in accounts.

To identify the cost of each stage they use job cards and ERP system. According to

finance manager cost per unit determine by length of the cable and they use different cost

units for different products.

Fixed cost and variance is important when absorbing cost to the product. They

can’t control the price variance because they are depends on imports. But they always

measure their performance to identify whether there is inefficiency in the process. To

cover the fixed cost and variance they add some percentage to markup. The percentage

depends with the situations. If there is material price reduce in foreign market they give

discounts to maintain the competition.

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6.4 Contract Costing

MTD Walkers PLC

Mainly companies use two approaches to cost accounting system. They are

•

Forwarding approach

• Back warding approach

MTD Walkers is using back warding approach to their cost accounting system

.MTD walkers main task is construction .This is totally different from product based or

Service based company. Product or Service based Company usually collect overall cost

and finally include the mark up and set the end price. Especially in construction sector

they start their contact base in agreement. All cost is including in the agreement.

Project cost is already in the agreement and they can’t change that. If the company

wants to gain more profits, they should try to control and decrease the cost of the contract.

But they can’t change quality, quantity of materials and equipments .because the client

have an agreement copy .contract must be finished in according to the agreement. They

said ‘we are trying to control overhead cost, otherwise our profit margin will go down”

Their costing method is contract costing. After the agreement company start the work.

They will get an advance .Company is calling that the “mobile payment”. Usually they

get 10%-15% from the full amount (contract value).MTD walkers sign bonds with bank s

and it is based on performance. If walkers can’t finish work on the specific quality they

have to pay back the client .MTD walkers specialized for buildings. Their cost unit is

pillars. All costing gathered to a pillar and ultimately get the cost in quantity of pillars.

They use manual and IT systems for keeping the cost. They use blue lotus system

to keeping cost in IT system. This system provides a site wise cost. If they want to know

current cost of the contract, they can easily get it under controlled by system. What they

have to do is to feed the exact figures to their system.

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When they purchase a machine to the site, they include machinery cost by doing

depreciation. When machines life time is over they can replace that machine. By their

previous experience they assume 12%-15% will enough for a contract as overhead.

6.5 Service Costing

Hayleys Business Solutions International (PVT) LTD

This is one of the subsidiaries under Hayleys Group. Hayleys Business Solutions

International is totally based on business process outsourcing. It means that they provide

their services as a BPO institute. They provide their service by preparing accounts for

their major companies under Hayleys group. That amount is approximately 60

companies.

This Hayleys Business Solutions International provide their services under three

categories. Namely,

Financial services

Executive payrolls

Nonexecutive payrolls

Actually all the companies and organizations ultimate purpose of doing costing is to get

the competitive price to their solutions. To collect their cost, they use all bills that they

have received. Basically they collect their data entries working hours from the department

and relate to the end services. They use to do their accounting on these kinds of systems.

Mapics system

AS 400 system

They feed the figures and run system. By that they can have their cost.

They allocate their cost in to four major units. Namely

Hayleys agri

Hayleys plc

Hayleys agility

Hayleys HISL

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They make their profit & losses in to these 4 units. Other companies comes under these 4

major units.

They divide their cost into fixed & variable cost.

For e.g.:-

Fixed cost Variable cost

Rent For AS 400 system: 200 per hour

This cost divide in to 4 sectors are mentioned earlier and allocate the cost. Their cost unit

they introduce as FTE. As long term investment they have invested big amount of money

or for built their system. They relate that cost in to their final accounts as depreciation

year by year. They relate the existing cost to final unit at reasonable basis. By their

experience they allocate the cost in judgmental basis.

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7. CONCLUSION

7.1 Key Findings

7.2 Recommendations

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8. REFERENCES

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