Cost accounting and product’s price calculation for
Ba Dinh Printing Company – Ministry of Public
Security
By
TRAN TRIEU LONG
E0500067
BARCHELOR OF BUSINESS (ACCOUNTING)
HONS HELP UNIVERITY COLLEGE
OCTOBER, 2011
DECLARATION OF THE PROJECT’S
ORGINAL
I declare that this graduation project is based on my original work except for quotations and
citations, which has been referred and duly acknowledged. This project is also declared that
it has not been previously or concurrently submitted by any student at Help University or
other institutions. The word count is 9015 words.
TRAN TRIEU LONG
OCTOBER, 2011
i
ACKNOWLEDGEMENT
First of all, I would like to express my sincere appreciation to my supervisor, Ms. Nguyen
Van Anh, who guided me throughout this thesis. Her constant guidance, insightful
suggestions, and constructive ideas are the essential inputs and encouragement for me in
order to complete this thesis.
Secondly, I would like to acknowledge to manager and all of employees in Ba Dinh Printing
Company, and Worker Magazine who allowed and assisted me to collect all of necessary
information for me to get this thesis done. I could not be able to gather much information for
my research without their support.
Lastly, I would also like to extend my heartfelt gratitude to my family and friends for their
continuous support, encouragement and contribution
Without your supports, my thesis cannot be finished.
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TABLE OF CONTENT
DECLARATION OF ORGINALITY AND WORD COUNT
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ACKNOWLEDGEMENT
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TABLE OF CONTENT
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LIST OF FIGURES ............................................................................................................... v
LIST OF TABLES ................................................................................................................ v
ABSTRACT .......................................................................................................................... vi
CHAPTER 1: INTRODUCTION
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1.1 Topic Introduction
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1.2 Problem statement ....................................................................................................... 3
1.3 Research structure
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CHAPTER 2: LITERATURE REVIEW
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2.1 Objectives of cost accounting in a company ............................................................... 5
2.1.1product costing ....................................................................................................... 5
2.1.2 Planning and control ............................................................................................. 5
2.1.3 Information for decision........................................................................................ 6
2.1.4 The role of cost accountant .......................................................................................... 7
2.2 Relationship between manufacturing overhead and product cost ............................... 8
2.3 Price calculation methods ............................................................................................ 10
2.3.1 Absorption costing method ....................................................................................... 10
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2.3.2 Activity based costing method (ABC) ..................................................................... 11
Figure 1: Activity based costing .................................................................................... 12
2.3.3 Variable costing method ....................................................................................... 13
2.4 Cost accounting in decision making process .............................................................. 15
CHAPTER 3: RESEARCH AND METHODLOGY ............................................................ 18
3.1 Objective of the project ............................................................................................... 18
3.2 Method of the research ................................................................................................ 19
3.3 Data sources ................................................................................................................. 19
3.4 Research scope............................................................................................................. 20
CHAPTER 4: COMPANY ANALYSIS ............................................................................... 21
4.1 Company background .................................................................................................. 21
Table 1: Profit from 2008 to 2010 ......................................................................................... 23
4.2 Characteristic of Company business activity ........................................................... 24
Figure 2: Printing processes in Ba Dinh Printing Company ................................................. 25
4.3 Types of cost appear in product price calculation.................................................... 26

Direct and Indirect Product Costs ............................................................................. 27

Direct Materials ......................................................................................................... 27

Direct Labor .............................................................................................................. 28

Manufacturing overhead............................................................................................ 29
4.4 Cost accounting and product price calculation in Ba Dinh Printing Company .......... 30
4.4.1 Cost accounting for direct materials ..................................................................... 30
4.4.2 Cost accounting for direct labor ............................................................................ 31
Table 2: No.1 Printing Firm Pay-sheet ............................................................................. 32
4.4.3 Cost accounting for manufacturing overhead ....................................................... 32
Table 3: Manufacturing overhead account ....................................................................... 34
4.4.4 Product price calculation in the company ............................................................. 35
Table 4: Product's price bill ........................................................................................... 36
CHAPTER 5: CONCLUSION AND RECOMMENDATION ............................................. 37
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5.1 Conclusion
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5.2 Recommendation ......................................................................................................... 38
REFERENCE ........................................................................................................................ 39
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List of Table
Table 1: Profit from 2008 to 2010
Table 2: No.1 Printing Firm Pay-sheet
Table 3: Manufacturing overhead account
Table 4: Product's price bill
List of Figure:
Figure 1: Activity based costing
Figure 2: Printing processes in Ba Dinh Printing Company
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ABSTRACT
This paper is covered with the analysis of cost accounting methods and the impact of
the selected costing methods to the company business reality activities. The purpose of
this thesis is to analyze the use of cost accounting methods to the company as well as
the effectiveness of cost accounting system that the selected company adopted. The
three costing methods are mentioned in this thesis namely Absorption costing method,
Activity-Based costing method, and Variable costing method. Each method will leads
to different financial statement to company managers, and hence affect to the
manager‟s decision making. The research focuses to analyze the company‟s selected
costing method by providing the relevant costing statements, and from that I will
provide self opinions and also recommendations to hopefully enhance the effectiveness
of the company‟s cost accounting performance.
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CHAPTER 1. INTRODUCTION
This chapter provides an over view of cost accounting. Throughout this chapter is the
most basic knowledge of cost accounting and its role in the corporation control. The
link between cost accounting and manager‟s decision making as well as the product‟s
cost and price definition will be considered in order to help users to have an over
view of company‟s costing system and the importance of cost accounting which
directly affect to the company‟s financial.
1.1 TOPIC INTRODUCTION
The Institute of Cost and Management Accounting, London defines “Cost
accounting is the process of accounting from the point at which expenditure is
incurred or committed to the establishment of its ultimate relationship with cost
centers and cost units. In the widest usage, it embraces the preparation of statistical
data, application of cost control methods and the ascertainment of profitability of
activities carried out or planned”. Costing includes the techniques and processes of
ascertaining costs. The word technique refers to principles which are applied for
ascertaining costs of products, jobs, processes and services. The `process‟ refers to
day-to-day routine of determining costs within the method of costing adopted by a
business enterprise. Costing involves “the classifying, recording and appropriate
allocation of expenditure for the determination of costs of products or services; the
relation of these costs to sales value, and the ascertainment of profitability”. (1)
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In today market economy, competition is inevitable; it forces companies to
enhance their production as well as the quantity and quality of the products.
However, at high quality, the product‟s price must be acceptable to customer. This is
the reason why every company needs cost accounting to accurate measure and record
any costs and expenses appear at the right time, and from that information, managers
could produce ideas and make decision for future production development in order to
generate as much profit as possible for the company. Making things simple, we can
say that there are three points should be attempt by every corporation: product
quality and design, low down production costs and expenses, and low price for the
products and services.
All of the requirements above are considered to be covered by cost
accounting as itself objectives. Cost accounting covers classification, analysis, and
interpretation of cost. In other words, it is a system of accounting, which provides the
information about the ascertainment, and control of costs of products, or services. It
measures the operating efficiency of the enterprise. It is an internal aspect of the
organization. Cost Accounting is accounting for cost aimed at providing cost data,
statement and reports for the purpose of managerial decision making.
In this thesis, my research focuses on the cost accounting system of one of the
biggest company in Vietnam, Ba Dinh Printing Company, which is under the control
of Ministry of Public Security. As its name, the company activities are all related to
the printing industry. Company‟s products are normally the special documents or
reports for the government and also magazines or journals from the outside orders of
newspaper offices. The main research purpose about this company is to:
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-
Analyze the realistic performance of the company‟s cost accounting and the
accounting department, how they define the cost of production processes as
well as product‟s price.
-
Base on the analyzing of collected data; propose some ideas to upgrade the
process of cost accounting system in the company.
1.2 PROBLEM STATEMENT:
Through all of the objectives mentioned above, cost accounting is always
considered the centre stage of the accounting process. To make clear about the
important role of cost accounting, base on the knowledge I have learnt and the
advices from lecturers, I plan to do a deep research about cost accounting for a
selected company.
In this thesis, I discuss about:
-
Relationship between cost and price.
-
Objectives and method of cost accounting in generally.
-
The company method to determine production cost and price.
-
How to estimate the cost and price of uncompleted product at the end of
finance year.
There are several methods to calculate product‟s price and production cost, in
this thesis, I will consider three cost accounting methods, due to their application to
the accounting system of the selected company. The three methods that I mentioned
are absorption costing method, variable costing method and activity-based costing
(ABC) method. All of the three methods above are actually could be selected by the
company‟s managers to determine the product cost, base on the specific product that
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company provides to customers. Variable cost method normally is selected to
calculate price for simple products that are required to pass through few steps and
short period to be finished. On the other hand, ABC method is useful to determine
the cost of large product orders that required to run through complex processes and
manufacturing activities to be done. The last method is absorption costing, it is
different from the other costing methods because it takes into account fixed
manufacturing overhead (includes expenses such as factory rent, amortization, utilities).
In this traditional costing method, the aim is to soak up all the cost involved with
generating a product. Absorption costing is most often in the official financial reports for
external reporting purposes. (2)
1.3 RESEARCH STRUCTURE:
Throughout this project, I provided five chapters as follow:
Chapter 1: Introduction
Chapter 2: Literature review
Chapter 3: Research Methodology
Chapter 4: Company analysis
Chapter 5: Conclusion
The chapters are ordered from the most basically view and knowledge to
more details and deep research. All of the idea I provided in each chapter will be
linked to the others in order to create the effective way for reading and understanding
for users about my working.
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CHAPTER 2. LITERATURE
REVIEW
2.1 - Objectives of cost accounting in a company
There is a direct relationship among information need of management, cost
accounting objectives, and techniques and tools used for analyses in cost accounting.
Cost accounting has three main important objectives:
1. To determine product costs.
2. To facilitate planning and control of regular business activities.
3. To supply information for short-term and long-term decisions.
2.1.1 Product costing
The objective of determining the cost of products is of prime importance in
cost accounting. The total product cost and cost per unit of product are important in
making inventory valuation, deciding price of the product, and managerial decisionmaking. Product costing covers the entire cycle of accumulating manufacturing and
other costs and subsequently assigning them to work in progress and finished goods.
2.1.2 Planning and Control
Another important objective of cost accounting is the creation of useful cost
data and information for the purposes of planning and control by management. The
different alternative plans are evaluated in terms of respective cost and associated
benefits.
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The management control over business operations aims to establish balance between
actual and budgeted performances. A properly designed cost accounting system
includes the following steps in the control process:
-
Comparing actual business performances with budgets and standards
-
Analyzing the variance between budget and standards and actual by causes,
and management responsibility so that corrective action may be taken.
-
Providing managers with data and reports about their individual performance
of subordinates. (3)
2.1.3 Information for Decisions
Cost accounting also plays a key role to provide data and special analyses for
short-term and long –term decisions of a non-recurring nature. Appropriate cost
information must be accumulated to make a wide variety of short-term and long-term
decisions. According to Henke and Spoede (4), the following are the objectives of
cost information developed in cost accounting:
-
As a basis for valuing manufactured inventories and cost of goods sold in
externally presented financial reports.
-
In controlling operations through the evaluation of operating results and the
placement of responsibilities for the uses of organizational resources on the
shoulders of specifically identifiable persons within the organization.
-
In planning operations through the establishment of cost and budgetary
goalds.
-
In making day-to-day operating decisions (a part of controlling decisions).
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2.1.4 - The role of cost accountant:
A cost accountant observes and analyzes the costs associated with doing
business. These costs can be tangible or intangible and cover everything from the
cost of the office lease to inventory and labor expenditures. A person in this position
is responsible for determining which costs can be reduced or eliminated and how to
implement the savings without compromising the quality of daily operations or
customer service.
The analysis process of a cost accountant is fairly constant regardless of the
industry in which he works. The cost accounting software used can be generic,
industry specific or created in-house for the specific company. The software program
normally consists of a database of costs, both fixed and variable. It usually includes
basic features to track changes and project fluctuations in expenditures and assets.
Armed with these software parameters, a cost accountant delves into details
on material, manufacturing and labor costs. He includes analyses of costs versus
profitability in all areas of operation. The finer points of his research may include
utility costs, real property and equipment values, tax issues and variations in profit
margins. Reports reflecting his findings are generally supplied to management.
Cost accountants may find standard systems for analysis insufficient, as their
capabilities are often limited. In this case, the accountant may create his own
database and create checks and balances tailored to the research at hand. He is most
effective in his job when the data accumulation and analysis system is streamlined to
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meet his diagnostic needs. Customized software systems also facilitate the creation
of reports for management that pinpoint critical areas of concern.
Accurate costing information is vital to the stability and growth of any
company. A good cost accountant must have a clearly defined view of the company
as a whole, as well as the ability to recognize and address minute details that affect
profit and loss. This involves applying highly-developed skills in margin analysis
and project costing. A software system tailored to meet specific company needs helps
him provide the most precise and helpful information to management.(5)
2.2 - Relationship between manufacturing overhead and product cost
Basically, manufacturing cost and product cost represent for cash out-flow of a
manufacturing process cycle. Manufacturing cost in a period is the basis unit to
calculate the price of products, tasks, or jobs which had done in that period.
Manufacturing cost has directly influence to the cost of the product that a company
producing. There are some differences between manufacturing cost and cost of
product, as follow:
a. Manufacturing overhead is directly connected with the period that cost
occurs. For more detail, when we mention of a manufacturing cost, also we
must give a specific period of manufacturing activity, otherwise the
information of manufacturing cost will useless for manager. Product cost, on
the other hand, is not really directly connected to producing period, but it is
connected to a specific amount of manufacturing cost for a number of
finished product units.
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b. Manufacturing overhead in a period may include items such as indirect
material, indirect labor, maintenance and repairs on production equipment
(which may be paid from previous period but the services only reality occur
in the current period) and heat and light, property taxes, depreciation, and
insurance on manufacturing facilities. However, product cost only be
considered with costs assigned during the time a number of products started
to be produce till the time they are finished goods.
c. Manufacturing overhead is not only related to finished product but also
related to un-finished product and fail product at the end of financial period.
On the other hand, product cost is only related to the cost of un-finished
product brought forward from the previous period and the cost of finished
product in current financial period, it means that product cost is not corvered
the cost of fail units or un-finished units at the end of a period.
The relationship between manufacturing overhead and product cost would be
represented through the bellow equation:
Tf = C1uf + Mo – C2uf
In which:
Tf: total price of finished product
Mo: Manufacturing overhead
C1uf: Cost of unfinished product brought forward
C2uf: Cost of unfinished product at the end of a period
To differentiate between product cost and manufacturing overhead, the
accountant can work effectively and more accurate in calculating the cost of goods
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sold as well as price of the product. Due to that, the report can be submitted on time
to managers with full and accurate information.
2.3 - Price calculation methods
2.3.1 Absorption costing method:
Another name for absorption costing is full costing. In this system, all three
elements of manufacturing costs (direct labor, direct material, and factory overhead
are absorbed and charged to the product. In this manner, all the manufacturing costs
are totally absorbed and figure as product expense, and none of them is taken as a
period cost.
Absorption costing is the most conventional approach to manufacturing cost
accounting, and the cost of goods sold that appears in the income statement of almost
any major corporate manufacturing concern uses this method. The full absorption
approach enables us to know that inventory values on the balance sheet include an
element of factory overhead that will not be reflected as an expense in the income
statement until the product is sold.(6)
According to Dr. Michael Steven Luehlfing (School of Accountancy, College
of Business), he stated that: a company‟s traditional cost accounting system is often
articulated with its general ledger system to support compliance with financial
reporting requirements. In essence, this linkage is grounded in cost allocation.
Typically, costs are allocated for either valuation purposes (i.e., financial statements
for external uses) or decision-making purposes (i.e., internal uses) or both. However,
in certain instances costs also are allocated for cost-reimbursement purposes (e.g.,
hospitals and defense contractors). The traditional approach to cost-allocation
consists of three basic steps: accumulate costs within a production or nonproduction
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department; allocate nonproduction department costs to production departments; and
allocate the resulting (revised) production department costs to various products,
services, or customers. Costs derived from this traditional allocation approach suffer
from several defects that can result in distorted costs for decision-making purposes.
For example, the traditional approach allocates the cost of idle capacity to products.
Accordingly, such products are charged for resources that they did not use. Seeking
to remedy such distortions, many companies have adopted a different cost-allocation
approach called activity-based costing (ABC).
To calculate product cost under absorption costing method, we have the formula:
Total Product Cost = DM + DL + FMO + VMO
In which:
-
DM:
Direct materials
-
DL:
Direct Labour
-
FMO: Fixed Manufacturing Overhead
-
VMO: Variable Manufacturing Overhead.
2.3.2 Activity based costing method (ABC)
In contrast to traditional cost-accounting systems, ABC systems first
accumulate overhead costs for each organizational activity, and then assign the costs
of the activities to the products, services, or customers (cost objects) causing that
activity. As one might expect, the most critical aspect of ABC is activity analysis.
Activity analysis is the processes of identifying appropriate output measures of
activities and resources (cost drivers) and their effects on the costs of making a
product or providing a service. According to Roztocki (1999), the relationship
between costs, activities and product could be demonstrated by the figure bellow:
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Figure1. Activity based costing
Activity based costing provides many positive aspects and benefits,
especially in the manufacturing sector. The capability of providing more accurate
product cost information is the keystone of ABC (Anderson, 1999), Charles T.
Horngren, Gary L. Sundem, and William O. Stratton suggest that many companies,
in both manufacturing and nonmanufacturing industries, are adopting ABC systems
for a variety of reasons:
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1.
Margin accuracy for individual products and services, as well as customer
classifications, is becoming increasingly difficult to achieve given that direct
labor is rapidly being replaced with automated equipment. Accordingly, a
company‟s shared costs (i.e., indirect costs) are becoming the most significant
portion of total cost.
2.
Since the rapid pace of technological change continues to reduce product life
cycles, companies do not have time to make price or cost adjustments once
costing errors are detected.
3.
Companies with inaccurate cost measurements tend to lose bids due to overcosted products, incur hidden losses due to under-costed products, and fail to
detect activities that are not cost-effective.
4.
Since computer technology costs are decreasing, the price of developing and
operating ABC systems also has decreased.(7)
2.3.3 Variable costing method
In accounting, the costs that vary with production volume or business activity
are called variable costs. Richard A. Brealey, Stewart C. Myers and Alan J. Marcus
defined that: “Variable costs are the costs that change as the level of output change”.
For example, variable cost raise when production output increases and go down
when the company slows production. Variable costs may also be called unit-level
costs. Variable costs are in contrast to fixed costs, which remain relatively constant
regardless of the company‟s level of production or business activity. If company‟s
fixed costs and variable costs add up together, we have the total cost of
production. The formula for calculating total variable cost is:
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Total Variable Cost = Total Quantity of Output × Variable Cost Per Unit of Output
In term of accounting, costs can be described as either fixed costs or variable
costs. Variable costs are inventoriable costs – they are allocated to units of
production and recorded in inventory accounts, such as cost of goods sold. Fixed
costs, on the other hand, are all costs that are not inventoriable costs. Fixed costs
include various indirect costs and fixed manufacturing overhead costs, it almost
useless for managers in decision-making process for company manufacture activities
as it occurs constantly whenever the production cycle is in charge or not. When
making production decisions, managers will often consider only the variable costs
related with the decision. Since fixed costs will be incurred regardless of the outcome
of the decision, those costs are not relevant to the decision. Only costs that will or
will not be incurred as a direct result of the decision are considered. And these
relevant costs are the variable costs.(8)
There are some advantages that make variable cost be recommended for any
company to adopt it rather than other method like absorption costing method:
1. The data that are required for cost volume profit (CVP) analysis can be taken
directly from a variable costing format income statement. These data are not
available on a conventional income statement based on absorption costing.
2. Under variable costing, the profit for a period is not affected by changes in
inventories. Other things remaining the same (i.e. selling prices, costs, sales
mix, etc.), profits move in the same direction as sales when variable costing is
in use.
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3. Managers often assume that unit product costs are variable costs. This is a
problem under absorption costing, since unit product costs are a combination
of both fixed and variable costs. Under variable costing, unit product costs do
not contain fixed costs.
4. The impact of fixed costs on profits is emphasized under the variable costing
and contribution approach. The total amount of fixed costs appears explicitly
on the income statement. Under absorption, the fixed costs are mingled
together with the variable costs and are buried in cost of goods sold and in
ending inventories.
5. Variable costing data make it easier to estimate the profitability of products,
customers, and other segments of the business. With absorption costing,
profitability is obscured by arbitrary allocations of fixed costs.
6. Variable costing ties in with cost control methods such as standard costs and
flexible budgets.
7. Variable costing net operating income is closer to net cash flow than
absorption costing net operating income. This is particularly important for
companies having cash flow problems.(9)
2.4 Cost accounting in decision making process:
Managers consider decision making process is the most difficult and
important work for their company in today business. Decision making includes
process to select best alternative out of different alternative for solving business
problems. Different cost accounting techniques can be used by accountant to
determine any cost appear in day-to-day transactions or manufactures, and then make
it the best tool of decision making in business. Cost accounting constitutes the central
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tool for management decisions such as product pricing and is not regulated by law.
The primary purpose of cost accounting is to determine the production costs for
different products in order to set the selling price of the products. The main
stakeholders in cost accounting are various managers, such as executives and site,
product and production managers.
Product cost computation could be represented the costs that should be
generated for meeting stock valuation and profit measurement requirements. For
decision making, non-manufacturing costs should also be taken into account. In
addition, some of the costs that have been assigned to the products may not be
relevant for certain decisions. For example, in overhead analysis, property taxes,
depreciation of machinery and insurance of buildings and machines can be assigned
to cost centers, and thus included in the costs assigned to products, for both
traditional and ABC systems. If these costs are not affected by decision to
discontinue a product, they should not be assigned to products when undertaking
product discontinuation reviews. However, if cost information is used to determining
selling prices, such costs may need to be assigned to product to ensure that the
selling price of a customer‟s order covers a fair share of all organization costs.
Therefore, it is necessary to ensure that the costs incorporated in the overhead
analysis are suitably coded so that different overhead rates can be extracted for
different combination of costs. This will enable relevant cost information to be
extracted form the database for meeting different requirements.(10)
In the measurement process of product cost and selling price, according to M.
Y. Khan, and P. K. Jain, the management accounting system focuses on the
measurement of full costs. Full costs accounting measures the resources used in
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performing some activity. the full cost of producing goods or providing services is
the sum of the costs directly traced to the goods or services (called direct costs), plus
a fair share of costs incurred jointly in producing these and other goods or services
(called indirect costs). Full cost accounting measures not only the direct and indirect
costs of producing goods or providing services, but also the direct and indirect costs
of any other activity of interest to management, such as costs of performing a
research project or cost to operating an employee‟s cafeteria. Thus full cost
accounting is not restricted solely to measuring the costs of manufactured goods. To
illustrate full costing, assume that direct cost of manufacturing an item is $500,000
and the indirect cost associated with it is $100,000. If the profit requirement is 10
percent, then the full cost and the selling price of this item would be $600,000 and
$660,000 respectively. In many sale contracts, the buyer agrees to pay the seller the
cost of the goods produced or of the services rendered, plus a profit margin. Cost, in
this context, usually means full cost. Similarly, in deciding what price to charge for
its goods or/and services, a company often uses estimates of full costs plus a profit
margin as a guide.(11)
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Chapter 3. RESEARCH AND
METHODOLOGY
3.1 - Objective of the project
The purpose of literature study is to understand past performance and data
of the company. From the information collected, an analysis about the cost
accounting system will be conducted in order to know more about its construction
and how data be arranged in financial statements. In this thesis, research mainly
focus on the characteristic of business activities in the selected company to make
clear some key point bellow:

How is the management system organized in the company?

What is the characteristic of accounting department and how it
works?

What is the actual performance of cost accounting and product
cost calculation?

Beside the achievements, could the limited of company
performance be over come? And how?
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3.2 - Method of the research:
As the core requirement, methods of research could never be ignored; they
give the logical explanations as well as to make the given information become more
reliable. In this project paper, I selected qualitative method for my research. A
literature study will be done to gather data on the history. The project will be
conducted using a document research as well as individual interviews to gather
information. The data collected in my study would be both secondary and primary as
the result of my research methods: directly interview the company‟s accountants,
information achieved from external sources, and data obtained from the company‟s
accounting documents.
3.3 - Data resources:
Due to the sensitive level of company accounting research, it is not easy at all
to collect the internal resources. Therefore, internal data is limited and information
collected from external sources is importance in this paper. External sources are
considered the most reliable data as they produce the unprejudiced ideas about the
company and from that company‟s operation and actual profit could be obtained.
However, I do not expect the differences between the data received from external
sources and the data from internal sources (such as data got from interview
company‟s employees, and from the public website like articles or any news provide
information about the company). External data received is aim to collect new ideas
for upgrade and enhance the cost accounting management system of the selected
company.
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3.4 – Research scope:
As I mentioned above, internal data collection will be limited in this thesis.
However, information will be provided enough to serve all of my research purposes.
The selected methods also are limited due to the main application accounting system
applied in the company. In this thesis, I cover three cost accounting methods which
are absorption costing method, variable costing method and activity based costing
method. Furthermore, my analysis actually based on the ideas and opinions from
employees of the company (such as accountants and directors of other departments)
and also from the information of outside news and magazines, and from that I
produce my own ideas about the company. In addition, before this project, there is no
research project about my selected company had been done and post to public report,
therefore, I cannot guaranty that this thesis can bring any useful application to the
reality business. The main purpose of my thesis is analyzing the useful of selected
cost accounting methods, and form that do a research about accounting, cost and
product for selected company to understand the method applied by the company in
reality business.
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Chapter 4. COMPANY ANALYSIS
4.1 - Company background:
Ba Dinh printing company was established due to the merger of the two
enterprises which are also belong to Ministry of Public Security. In 1999, the
resolution number 819/1999/QĐ – BCA (X13) was announced, which allowed the
merger of two companies: XZ72 printing company and Ministry of Public Security
printing firm. The event was marked the creation of Ba Dinh Printing Company.
English Name:
Ba Dinh Printing Company
C.E.O:
Trần Thanh Duy
Address:
160 Thai Thinh Street, Đong Đa District
City/Province:
Ha Noi
Company type:
S.O.C
Telephone:
4-38533802, 38562331
Fax:
4-35143209
Main activity: Printing. Producing & trading in paper & materials, printing materials
& equipment.
Ba Dinh Printing Company is a public company, under the control of
Ministry of Public Security (MPS). 100% company capital is belong to MPS and the
company main mission is serving MPS plan as well as producing products (print and
issue documents) that are required by MPS; however, the company also open its
business to serve public demand. In the current year, among 1500 typical enterprises,
21
Ba Dinh Printing Company is at the first class of the top 5 that awarded emulating
flag of Ministry of Information & Communications. The company is now serving 23
newspapers, 25 journals and magazines, and hundreds of calendars, document forms
and curriculums of public police force.(12)
Due to the nature of business, the company has many temporary contracts and
orders, many labor temporary contracts, mass force play an important role in
company‟s production facilities. The company board directors often create favorable
conditions for public institutions engaged in cultural and sports movements
associated with other movements, creating the happiness and comfortable for
employees which could help to enhance the efficiency in production performances.
From the time Ba Dinh printing Company was found, it has received the good
care of investment from MPS and Government, so the business performances as well
as the revenue and profit of the company keep increasing with non-stop over years.
Here are some norms and company‟s production activity results in the three recent
years:
22
Table1: Profit from 2008 to 2010
(In millionVND)
No. Norms
2008
2009
2010
1
Goods and services
72,988.070
85,814.258
98,870.566
2
Deductions
-
-
-
3
Revenue
72,988.070
85,814.258
98,870.566
4
COGS
(67,045.659) (78,957.854) (90,567.885)
5
Profit
5,942.411
6,856.403
8,212.681
6
Financial activity revenue
59.644
88.792
97.875
7
Loans expenditure
-
-
-
8
Management expenditure
(1,743.058)
(2,142.614)
(2,725.688)
9
Net profit
4,258.997
4,802.581
5,584.888
10
Other revenue
4,542.13
5,784.915
6,630.567
11
Other expenditure
(340.544)
(1,049.307)
(1,106.876)
12
Profit before tax
4,201.585
4,735.609
5,523.691
13
Company tax expend (25%)
1,050.396
1,183.902
1,380.923
14
Profit after tax
3,151.189
3,551.706
4,142.768
(Source: information provided by Ms. Tran Thi Tuyet, chieff accountant of Ba Dinh
printing company)
23
4.2 - Characteristic of Company business activity:
Organization structure of production:
Company has 3 subsidiary enterprises:
-
No.1 printing firm
: 160 Thai Thinh – Dong Da – Ha Noi
-
No.2 printing firm
: 258 Nguyen Trai – 1 District – Ho Chi Minh City
-
XZ72 firm (papper supply): An Hoa – Tam Duong – Vinh Phuc
In today market, there is no chance to service for any company that slow in
updating new technologies, or pure in product quality and services. As to realize the
level of competitive market, because the main activity of the company is only
publications printing by order, so company‟s manager always attach special
importance to both new technology and quality of the product. Currently, the
company is operating with the technology of laser printing, offset printing, and
guillotine technology. The organization structure for each of subsidiary firm is as
follow:
-
No.1 printing firm: Including printing facility, books and documents storage,
and guillotine facility.
-
No2. Printing firm: Including printing facility and facilities of finished
products.
-
XZ72 firm: Including paper storage, guillotine facility, and facilities of
finished product.
Company business activities take place continuously following the
customer‟s orders in a certain period during a financial year. However, the
manufacturing processes of the company operate all the time due to the fix order
from MPS and Government. After receiving an order from customer, the order will
be passed through the subsidiary firms to process. The figure bellow will show the
24
basic steps of processing (print) materials (draft or original document) to a finished
product (completed newspaper or magazine):
Figure 2: Printing processes in Ba Dinh Printing Company
Original document (or draft)
Analyse document segment
Deliver to customer
Packing
Color separation
Segment divide for print
Product check
Print
25
Step s into details for the printing processes:
-
Analyse document segment: from the original document received, this staff
will design the printing pages following the content divided in the document,
selection of the font styles and sizes.
-
Color separation: all pictures from the document are recaptured into four
main colors (green, red, yellow, and black). This is because the picture will
be print in the different type of pager compare to the paper in original
document. The color separation technique will help to keep the picture‟s
quality after print or copy.
-
Segment divide for print: document will be separated into many parts due to
different font styles and sizes as well as color, and those parts will be
delivered to different types of print machine.
-
Print, checking product are the last steps that the document have to go
through before the finished copies are delivered to customer.
4.3 - Types of cost appear in product price
calculation:
In manufacturing, raw material is transformed with the help of labor and
machinery. In a merchandising firm, only one type of inventory is maintained, and
only few costs are added to the purchase price of goods to arrive at cost of goods
sold. In a manufacturing firm, many and different types of costs are incurred, and
three product costs go into manufacturing inventories: direct materials, direct labor,
and manufacturing overhead:
26
- Direct material: the cost of the raw materials and components used to create
a product
- Direct labor: that portion of labor which is assignable to a specific product
- Factory or manufacturing overhead: all costs other than direct materials and
direct labor; this includes fixed costs such as rent and depreciation, but also indirect
materials and indirect labor.
Direct and Indirect Product Costs
Only product costs are categorized as direct or indirect. The labels of direct
and indirect pertain to the relationship a product cost has with a product. If a cost is
easily identified as belonging to a particular product, we can consider it to be easily
traceable. A product cost that is easily traceable is a direct cost. Direct materials and
direct labor are considered direct product costs. They can be easily and directly
traced to products. Manufacturing overhead consists of only indirect product costs.
Indirect costs cannot be easily traced to specific products; however, they are part of
the cost of getting a product ready to sell. Since period costs have no relationship
with products, they are never labeled as direct or indirect.(13)
Direct Materials
Direct materials include materials that become part of, and can be easily traced to a
finished product. Direct materials are considered to be variable costs because the total cost of
direct materials increases as more units are produced. Materials are referred to as direct
materials once they are put into production, i.e., transferred into the factory for use in
producing products. Materials that have been acquired remain in the Raw Materials
Inventory account and as such, as designated as Raw Materials.
In determining the acquisition cost of materials that will be used in production, we
must include all costs necessary to get the materials ready to use in production. The
27
following costs are included invoice cost to buy materials less purchase (cash) discounts
taken, Plus sales taxes if assessed, and Plus freight-in (delivery costs to acquire
materials)(14). A couple of items should be noted. Cash discounts are allowed on the cost of
the materials purchased only. No cash discounts are allowed on sales taxes or freight-in.
Sales taxes are never assessed on freight-in. Shipping costs are added to materials costs only
for materials acquired, not for the costs of shipping to customers. Recalls that both
transportation-in and freight-in are common names of shipping costs related to acquiring
materials. Because companies typically keep materials on hand so they are available for
production, beginning and ending inventories must be considered in tracking materials costs.
The cost of acquiring materials (purchase cost) will likely differ from the cost of materials
used in manufacturing.
Direct Labor
Direct labor consists of labor costs that can be easily traced to a finished product.
This course assumes direct labor to be hourly wages. Most companies include the gross
hourly wages as part of their labor cost and the related fringe benefits. Gross hourly wages
represent the cost per hour that employees earn before payroll taxes are subtracted. Fringe
benefits, such as employer payroll taxes and health benefits for manufacturing employees are
usually considered part of direct labor(15). For example, assumer employees are paid $12
per hour and the employer‟s payroll taxes cost is 15 percent of wages. The employer
provides fringe benefits costing $3 per hour. Total direct labor per hour would be $12 plus
15% times $12 plus $3, for a total of $16.80 per hour. Direct labor is considered to be a
variable cost because the total cost of direct labor (hourly wages) increases as more units are
produced.
28
Manufacturing Overhead
Manufacturing overhead, sometimes referred to as factory overhead, includes all
indirect manufacturing costs. The same concept applies to manufacturing overhead as for
direct labor and direct materials; that is, if the cost is indirect and is part of the cost of getting
the products ready to sell, the cost is included. Manufacturing overhead consists of three
primary costs: indirect materials, indirect labor, and factory-related costs.
Indirect Labor: Indirect labor includes factory supervisor salaries, factory janitors‟
salaries or wages, factory maintenance workers salaries or wages, and other costs for factoryrelated workers who do not directly contribute to producing a particular product. Indirect
labor costs differ from direct labor in that indirect costs are not traceable to a particular
product.
Indirect Materials: Indirect materials include factory supplies such as
sandpaper to smooth rough edges, blades to cut materials, oil for the production
machines, paper towels for the factory workers‟ restrooms, and other factory-related
materials and supplies that do not directly become part of a product. Indirect material
costs differ from direct materials in that indirect costs are not traceable to a particular
product.
Factory-related Costs: Costs associated with occupancy of the factory are
considered manufacturing overhead costs. Like indirect materials and indirect labor,
factory-related costs are not easily traced or identified with particular products. Some
examples are factory rent, factory insurance, factory building and equipment
depreciation, factory utilities, and factory and equipment maintenance. These costs
would not be incurred if the company decided to buy the products instead of
manufacturing them. All manufacturing overhead costs are indirect costs.(16)
29
4.4 – Cost accounting and product price calculation in
Ba Dinh Printing Company:
4.4.1 – Cost accounting for direct materials:
The company defined two types of direct material costs, which are cost of
main materials, and other material‟s cost. In Ba Dinh printing company, materials are
often estimated for each contract or order from the customer. At the end of each
month, material accountant will gather all of the material Issue Documents, and
calculation of material‟s cost is based on each type of materials. After the job is
done, accountant will compare his/her record with the material‟s record of the
storekeeper to correct any error appear in order to get the final result to enter into
ledger.
The main direct material: Most of the direct material costs are counted for
this type of material. This is the material required in manufacture for the product to
be done or this is what makes up the product. For more details, the main materials for
printing processes are all types of paper used, inks, and zinc. About 70 percent of
total direct material costs are main material. Base on the cost of inventory and the
cost of new material imported in the month, the average cost of material will be
calculated as follow:
Cav = (I + Mi) / (Q1 + Q2)
Where:
- Cav: Average material cost.
- I:
Inventory cost.
- Mi: Cost of new material imported.
- Q1:
Quantity of material in inventory.
- Q2:
Quantity of new material imported.
30
Other cost of direct materials (sub-material): These types of direct materials
(such as glue, pin, film…) are also being calculated under average cost, however
because this type of material will be taken place into many cycles of product
manufacture, therefore its cost will be assigned for each specific product contract.
The formula applied is as follow:
CsA = (ERA / TR) x Cs
Where:
- CsA: Cost of sub-material for contract A
- ERA: Estimation revenue from the contract A
- TR: Total revenue for the month
- Cs: Cost of sub-material occurred in the month.
For example: In October 2010, the total revenue of the company is
VND3,260,213,860. Revenue from printing the “New world magazine” is
VND60,550,500. The cost of sub-material signed out from the inventory
within the month is VND104.089.670. Therefore, the cost of sub-material
used to print “New world magazine” would be:
C = (60,550,500 / 3,260,123,860) x 104,089,670 = VND1,933,211
4.4.2 – Cost accounting for direct labor:
Direct labor costs in the company included the employee‟s salary,
allowances, and insurance. At the end of each month, accounting department will
considered the payroll of all company‟s departments as well as the statement of
bonus payment due to the extra time working of employees, and/or effectiveness in
working and providing services. And from those data, accounting department will
determine the salary for each direct labor for the month. The company currently
31
paying salary for direct labor mainly base on the revenue collected from monthly
contract and the number of finished printing pages if the contract has not been
finished at the end of the month. The example of pay-sheet is given bellow:
Table 2: No.1 Printing Firm Pay-sheet
October 2010
Product „s name
No.
Quantity
Pages
VND per
Total price
page
1
Sport magazine
20,000
65
3.2
4,160,000
2
Worker magazine
9,235
36
3.5
1,163,610
3
Elder whisper magazine
25,000
75
3.5
6,562,500
4
English Magazine
20,000
84
3.1
5,208,00
Total
105,706,400
(Source: information provided by Ms.Nguyen Bich Lien, accountant of Ba Dinh Company)
4.4.3
– Cost accounting for manufacturing overhead
The manufacturing overhead costs are the expenses on factory activities. The
manufacturing overhead (or factory cost) in the company includes: depreciation of
building and machineries, the factory quality control department expenses, expenses
for tools of production, maintenance expenses, and other expenses (electricity and
gas for the factory). For the calculation of the factory cost or the money spent on
running the factory, the accountant has to calculate all the factory overheads and the
prime cost. The prime cost is the sum of the materials consumed by the factory,
direct wages and the direct expenses made by the factory owner. The formula for
32
prime cost has been given below:
Prime Cost = Materials consumed + direct wages + direct expenses
The factory cost, therefore, will be determined by using the formula bellow:
Factory
Cost
=
Prime
cost
+
sum
of
all
factory
overheads
The factory overhead are basically of two types - fixed overheads and
variable overheads. The fixed manufacturing overhead costs would be the rent
payments or the salaries of the workers. The fixed overhead costs do not change with
an increase or decrease in the levels of production. The production output or levels of
a company strictly depend on the demand for its products on the market. When the
demand is more, the factory would be utilizing its full capacity and produce
maximum goods. When the demand is less in the market, full capacity would not be
used to control costs. In this case, product quantity of Ba Dinh printing company is
strongly depend on the contracts signed with customer, no more no less product
quantity would be produced once contract is signed. Fixed costs are the expenses the
factory owner has to bear, irrespective of the profits and production made by the
factory. On the other hand, variable costs would be those which rise with the rise in
production levels. For example, raw materials costs will rise when the number of
goods being produced increase.
The manufacturing overhead costs or factory costs can further be used to
calculate the cost of production, total cost and total sales generated by the company.
The cost of production is determined by adding add the office and administration
33
expenses (such as manager's salary, salary of the director, stationery expenses for
office, and lighting expenses for office) to the factory cost. Further, by adding the
selling and distribution overheads to the cost of production, which mainly consist of
the marketing expenses, accountant will get the total cost for the enterprise(17).
The example to illustrate the manufacturing overhead account record in Ba Dinh
printing company:
Table 3: Manufacturing overhead account
From 01/10/2010 to 31/10/2010
Currency: VND
Debit
Salary expenses
40,970,208
Insurance expenses
12,495,913
Depreciation
179.050.680
Cost of indirect material
42.373.651
Other cost
16.111.194
Manufacturing overhead
Total
Credit
291.001.646
291.001.646
291.001.646
(Source: information provided by Ms. Tran Thi Tuyet, chieff accountant of Ba Dinh
printing company)
With direct labor cost and direct material cost, manufacturing overhead plays
a key role in the company as an importance tool for manager to make business
34
decision, as well as for accounting department to determine the total of production
cost. And only from that, the product‟s price would be defined in order to achieve the
company‟s revenue and profit requirements.
4.4.4
– Product price calculation in the company:
In Ba Dinh printing company, the manufacturing processes are running
continuously following the contract signed to customer, and the products are
normally not be store in the inventory but directly delivered to customer. Therefore,
due to the nature of business, the company defined the period of product price
calculation is 1 month. In addition, because of the production cycle is small and in
short period, so the product price would be calculated separately for each customer‟s
order. For the finished orders, the total price of the products is equal to the total cost
that be used to complete the order. Hence, the product‟s price is calculated following
the formula:
Price per unit = total price / number of unit finished
For example, price of the product for “Tribunal Magazine” on October 2010, the
company provided the bill as follow:
Product’s price bill
Name of product: Tribunal Magazine
Customer‟s name: Nguyen Viet Tuan
Volume: 20,000 copies
Total pages printed: 3,960,000
35
Table 4: Product’s price bill
Direct material
Direct labor cost
cost
Unfinished product
Manufacturing
Total
overhead
-
-
-
-
16,968,640
6,522,000
7,417,471
30,908,111
-
-
-
-
16,968,640
6,522,000
7,417,471
30,908,111
4,29
1,65
1,87
7,81
cost b/f
Production cost
Unfinished product
cost c/f
Total price
Price per product
unit (page)
(Source: data provided by Mr. Nguyen Viet Tuan, accountant of “Worker
Magazine”)
In Ba Dinh printing company, product price calculation is based on the cost
to produce a unit of product. The word “unit” in the calculation formula represents
for a standard complete printed page in a copy from original document of the
customer. For simple orders, which are required a short period to finish (for example
within a month) product price is directly full charge to the customer, sometime the
bill deliver to customer before the product finished. For the orders that required a
long period to be finished (more than a month), at the end of each month, company
will charge the customer base on the contract percentage finished or the finish
printed pages.
36
Chapter 5. CONCLUSION
5.1 – Conclusion
In fact Cost accounting system is designed to provide information for
managers and the information must be relevant for managers, in a particular
environment, to make decisions for their own company business, include strategic
decision making. Through all the information and research provided in this thesis, we
can understand the nature of cost accounting system applied in the selected company.
As I mentioned in chapter 2, there are 3 cost accounting methods I selected, which
are activity base costing method, variable costing and absorption costing method, to
analyze the use of each method for business cost accounting processes. Each method
will provide different statement of financial to managers, and hence leading to
different decisions. For Ba Dinh printing company, cost accounting system designed
is actually for production cost calculation under absorption costing method.
For the organizations that have simple business activities like Ba Dinh
printing company, absorption costing method can display its effectiveness in
processes of cost and product price calculations because costs and revenues are better
match with absorption costing method. Especially with a kind of business like Ba Dinh
printing company is doing, the quantity of the product produced and the quantity of product
consumed are most likely the same and fixed with contract signed, therefore, costs occur in
manufacturing process are fixed rather than variable. With absorption cost, all fixed cost and
variable cost are considered and it recognized the importance of the fixed cost. Due to that,
product price charged to customer will be based on overall costs used to produce the product,
37
and hence increase revenue as well as company profit. In addition, even though absorption
cost is not suitable for company decision as costs are not differentiated into fixed and
variable cost, this method still work well for the company since there is not much decision
required for the printing activities (such as there is no make or buy decision when only
“make” choice is available).
5.2 – Recommendation
After all, the company accounting system basically satisfies the requirement of
financial management as well as following the political standard, and the current
accounting standard of the country. However, the accounting department of the
company is running with only 1 accountant, with 3 firms are operating at the same
time, the volume of data flows every month is huge, so the question set for managers
is “Is the volume of current work too much for 1 accountant to handle? And should
the company form an accounting department with more accountants for more
working effective?” In addition, even though Ba Dinh Company is only serve in
printing industry, however because this is a company under government control
(Public company), the contracts signed to customer are almost fixed every year and
unlikely to be changed. The volume of job, therefore, is huge and in fact the
unfinished products at the deadline of the contract date cannot evade when a new
contract appear. Company managers must consider this event and enhance the
working effective to cut time in manufacturing process. The company would buy the
material from outside supplier instead of rely on the supply from its own firm which
is far away from the main factory. The cost of purchasing supply could be charge to
the customer, the product price increase but the time is saved. In publishing a
magazine or newspaper, time is always being preferred and put on the first place.
38
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2
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http://www.brighthub.com/office/finance/articles/86831.aspx
3
- Jawahar Lal and Seema Srivastava, Cost accounting 4th Edition, page 7,8)
4
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5
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http://www.accountingformanagement.com/advantages_of_variable_costing.htm
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10 - Colin Durry, Management and costing account, 7th Edition, page 62.
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39
12 - from: Public police‟s article on November 2010, available at:
http://www.baomoi.com/Cong-ty-In-Ba-Dinh-Vung-buoc-trong-co-che-thitruong/47/5275003.epi
13 - V. Rajasekaran, R. Lalitha, Cost Accounting
14 - Kenneth H. York, John A. Bauman, Cases and materials on remedies
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decision making
16 - Belverd E. Needles, Susan V. Crosson, Managerial Accounting, 2002
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http://www.buzzle.com/articles/manufacturing-overhead-costs.html
40