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Cost & Management Accounting 1st Assignment (5538)Name M. Ismaeel IrfanRoll no: AD514231 MBA (IT) Semester III.

Qno1) Cost Accounting is used as an aid by the management forplanning and controlling of an on-going operations, for evaluation of alternatives and projects, pricing, etc.Discuss the statement with practical examples from Pakistanorganizations.

Management:Management is composed of three groups:

1- Operating Management(Consisting of supervisors)

2- Middle Management(Represented by Department heads, Division Managers andBranch Managers)

3- Executive Management(Consist of Presidents, executive vice Presidents, ExecutivesIn charge of Marketing, Purchasing, Engineering,Manufacturing, Finance, and accounting.

Management consists of many activities, including making decisions giving orders,establishing polices, providing work and rewards, and hiring people to carry out

polices, Management sets objectives to achieve by integrating its knowledge andskills with the abilities of the employees.

Planning and controlling may be the center piece of an organizations approachto the management. This was true in many organizations in the past. Alternatively,Planning and controlling may be pushed into the background and become almostinvisible to line workers unless a major problem of failure occurs. Even when the

planning and control function are not on the forefront of day to day activities,management still must perform the basic functions of planning organizing andcontrolling to be successful.

Cost Accounting Role for Management:-(Cost Accounting is used as an aid by the management for planning and controlling of an on-going operations, for evaluation of alternatives and projects, pricing, etc)

Cost accountings role in management accountingis to provide information for managers planning, controlling, decision-making, and

performance evaluation needs. This chapter discusses the role of accountants andaccounting information in developing a formal system of cost management.A cost management system is a subpart of a firms information and control systems.

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A management information system is a structure that organizes and communicatesdata to managers. Control systems exist to guide organizations in achievingtheir goals and objectives. They have four primary components: detectors,assessors, effectors, and a communications network.

A cost management system consists of a set of formal methods developed for planning and controlling an organizations cost-generating activities relative to itsgoals and objectives. This system serves multiple purposes: to develop productcosts, assess product/service profitability, improve understanding of how processesaffect costs, facilitate cost control, measure performance, and implementorganizational strategies.It is not feasible to simply adopt a generic, off-the-shelf cost managementsystem. As in the design of any control system, managers must be sensitive to theunique aspects of their organizations. Three factors that specifically should be takeninto account in designing a control system are the organizational form, structure,and culture; organizational mission and critical success factors; and the competitiveenvironment.A cost management systems design is based on elements from three groupsof management control tools. The selected elements of the system should be internallyconsistent and be consistent with the missions of the individual subunits.The three groups of control tools are motivational elements, informational elements,and reporting elements.

The motivational elements exist to provide managers the incentive to take theactions that are in the best interest of their subunits and the overall organization.Managers are motivated to do the right thing when the rewards they receive for their efforts are linked to the quality of decisions they make on behalf of theorganization and their specific subunits.The informational elements provide managers with relevant data. Accountants

play a primary role in information management and are charged with maintainingan information system that is useful in performance measurement of managers andsubunits and in making managerial decisions. To compete in the global environment,firms are developing new techniques to provide information relevant to assessingtheir competitive positions.

The reporting elements exist to provide information regarding managerial performance.For accounting, this is sometimes referred to as the scorekeeping role.A responsibility accounting system provides information to top management aboutthe performance of an organizational subunit and its manager.Gap analysis is the key to identifying differences (gaps) between the idealcost management system and the existing system. By prioritizing the order in


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which gaps are to be closed, managers can proceed in an orderly manner withupdating the cost management system. Because business processes are constantlyevolving, the cost management system must be continuously evaluated and updatedso that it provides the information and motivation that managers currentlyrequire.

EXAMPLE:- (Classic Shields Manufacturer Exporter of All kinds of Trophies,Souvenirs etc)

Classic Shields was formed in 1980, and engaged in the manufacturing of Allkinds of High Class Souvenirs. www.classicshields.com How Cost Accounting Helps their management to Control, and Plan their ongoingOperations and evaluation of alternatives, Price, projects, etc?Cost Accounting or Costing helps them to realize the exact cost incurred on a

particular product so they can determine the fair and best selling price.Cost Accounting also helps them to find out the cost of every material, labor and FOHused to manufacture one piece or the whole lot.With the help of cost Accounting they are able to forecast their future needs andrequirements. They are able to determine which material should be purchased, andhow much should be purchased.

Computer People 2000 Assignment Pg # 03Cost & Management Accounting 1st Assignment (5538)

Name M. Ismaeel IrfanRoll no: AD514231 MBA (IT) Semester III.

Q.5 a) What is process costing? Discuss its primary objectives indetail.b) Discuss in detail the difficulties encountered in process costing.Support your answer with practical examples.

Process Costing:-
http://www.classicshields.com/http://www.classicshields.com/

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Process costing is an averaging method used to assign costs to output inmanufacturing situations producing large quantities of homogeneous products. A

process costing system may use either the weighted average or FIFO method tocompute equivalent units of and assign costs to production. The difference betweenthe two methods lies solely in the treatment of the work performed in the prior periodon the beginning work in process inventory. Under the weighted average method,work performed in the prior period is combined with current period work and the totalcosts are averaged over all units. Using the FIFO method, work performed in the last

period on beginning work in process inventory is not commingled with current periodwork, nor are costs of beginning work in process added to current period costs toderive unit production cost. With FIFO, current period costs are divided by current

period production to generate a unit production cost related entirely to work actually performed in the current period.Six steps must be taken when deriving and assigning product cost under a processcosting system:1. Calculate the total number of physical units to account for.2. Calculate the physical units accounted for by tracing the physical flow of units.This step involves identifying the groups to which costs are to be assigned(transferred out of or remaining in ending inventory).3. Determine the number of equivalent units of production, either on the weightedaverage or FIFO basis, for each cost component. The cost components includetransferred-in (if multidepartmental), direct material, direct labor, and overhead. Incases of multiple materials having different degrees of completion, each material isconsidered a separate cost component. If overhead is applied on a direct labor basis or is incurred at the same rate as direct labor, labor and overhead can be combined as

one cost component and referred to as conversion.4. Determine the total cost to account for, which is the sum of beginning inventorycosts and all production costs incurred for the current period.5. Calculate the cost per equivalent unit of production for each cost component.6. Assign the costs to the units transferred and the units in ending work in processinventory. The method of cost assignment depends on whether weighted average or FIFO costing is used. The total of the costs assigned to units transferred and to unitsin ending work in process inventory must equal the total cost to account for.



The FIFO method of process costing can be combined with standard costs so that anormal production cost is assigned each period to equivalent units of output. Thistechnique allows managers to quickly recognize and investigate significant deviationsfrom normal production costs.CHAPTER SUMMARY

Hybrid costing systems allow companies to combine the characteristics of both joborder and process costing systems. Direct material or direct labor that is related to a

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particular batch of goods can be traced to those specific goods using job order costing.Cost components that are common to numerous batches of output are accounted for using process costing techniques.

Primary objectives:-

The primary objective in process costing is to determine the costs of materials,labor, and factory overhead (FOH) used to process units of production through eachdepartment, thereby determining the cost of a finished unit. The ultimate objective isto control costs.

For Example:-

If you were in charge of a refinery, how would you associate the cost of the barrels of crude oil with the gallons of finished gasoline? Logic would tell you to

develop a mathematical approach that would divide the total cost of all oil andallocate it in some proportion to all the gallons of gasoline. This is the essence of "process costing." Process costing is methodology used to allocate the total costs of

production to homogenous units produced via a continuous process that usuallyinvolves multiple steps or departments.

If you are comfortable with the cost flow concepts from the prior chapter, you arealready well on your way to understanding process costing. The reason is that thesame cost flow concepts and accounts will be evident. That is, material, labor, andfactory overhead will still occur and still be assigned to work in process. And,amounts assigned to work in process will in turn make their way to finished goods.

The debits/credits and financial statement outcomes are going to look the same.

The big difference between job costing and process costing arises in the work in process "units." Remember, under job costing we captured costs for each job (recallthe discussion about job cost sheets and subsidiary accounts for each job). Under

process costing, we will instead capture the costs for each process or department.Let's think about a steel production factory. The basic processes for producing steel

Computer People 2000 Assignment Pg # 08Cost & Management Accounting 1st Assignment (5538)

Name M. Ismaeel IrfanRoll no: AD514231 MBA (IT) Semester III.

are to (1) melt iron ore (along with perhaps processed coal/coke and limestone), then(2) skim the material while adding alloys to adjust for tensile strength and flexibility,and finally (3) oxygen blast and extrude the material into its finished form (I-Beams,sheet steel, coils, etc.).

Difficulties encountered in process costing:-
http://www.principlesofaccounting.com/chapter%2019.htm#job%20cost%20sheethttp://www.principlesofaccounting.com/chapter%2019.htm#SUBSIDIARY%20ACCOUNTShttp://www.principlesofaccounting.com/chapter%2019.htm#job%20cost%20sheethttp://www.principlesofaccounting.com/chapter%2019.htm#SUBSIDIARY%20ACCOUNTS

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Certain difficulties likely to be encountered in actual practice should be mentionedwith regard to process cost accounting procedures:

1. The determination of production quantities and their stage of completion presents problem. Every computation is influenced by these figures. Since the data

generally come to the cost department from operating personnel often workingunder circumstances that make a precise count difficult, a certain amount of double counts and unreliable estimates are bound to exist. Yet, the data submittedfrom the basis for the determination of inventory costs.

2. Materials cost computations frequently require careful analysis In the illustrationsmaterials are generally considered to the the cost of first department. In certainindustries, materials costs are not even entered on production reports. Whenmaterials prices are influenced by fluctuating market quotations, the materialscost may be recorded in a separate report designed to facilitate managementdecisions in relation to the materials market.

3. The discussion of lost units by shrinkage, spoilage, or evaporation indicates thatthe time when the loss occurs influences the final cost calculation. Differentassumptions concerning the loss would result in departmental unit costs, which, inturn effect inventory costs, the cost of units transferred, and the completed unitcost. Another consideration involves the possibility of treating cost attributable toavoidable loss as an expense of the current period.

4. Industries using process cost procedures are generally of the multiple producttype. Joint processing cost must be allocated the the products resulting from the

processes. Weighted unit averages or other bases are used to prorate the joint costto the several products. If units manufactured are used as a basis for costallocation, Additional clerical expenses are necessary if the labor hour or machinehour basis is used for charging overhead to work in process. Management mustdecide whether economy and low operational cost are compatible with increasedinformation based on additional cost computations and procedures.

It should be noted that some companies use both process costing and job order costing procedures for various purposes in different departments. This is particularly true when a parallel or selective cost flow format is required. Each system or method employed by acompany must be based on reliable production and performance data which, when combinedwith output, budget, or standard cost data, will provide the foundation for effective costcontrol and analysis.

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