User:Econaccounting/sandbox

This introductory/lead section will be completed at the last stage.

Full cost of production in Accounting

Conventional costing

Full cost of the production can be measured in different methods in management accounting. In management accounting, product is one kinds of cost object. Cost object is mostly referred to product, service, customers, department, etc, anything that need to be measured separately. The full cost of the cost object can be divided into two major costs, direct cost and indirect cost. Direct cost is referred to direct material cost and direct labour cost incurred from the manufacturing, this cost can be directly traced with source documentation to the cost object. Indirect cost, is also called overhead, such as utilities, equipment depreciation; the measurement of this cost typically allocated proportionally based on the allocation rate set by the organisation. To determine the full cost of a product, following steps need to be followed:

1. We need to identify the cost object (product, service, etc.)

2. Allocation rate of indirect cost need to be determined

3. Based on the allocation rate, find out the amount of indirect cost of the cost object

4. Determine the full cost of cost object by summation of direct costs and related proportional of indirect cost

Absorption Costing

Absorption costing is one of the methods determine the full price of products. Tracking direct material and direct labour costs and assigning a relevant proportion of variable and fixed indirect costs to custom or distinct products and services. Managers can use this figure to determine the market price of the product and budgeting and forecasting the future performance of the organisation. Job costing is used if the product is customized products while the process costing is used if the product is massive volume.

• Job costing
  • In absorption costing system, Job costing is one of the basic accounting methods to allocate costs to a custom-made products, and also available to assign cost to batches of similar products by dividing total cost by the volume. This method is widely used by manufacturer of aircraft, motor vehicle, and custom design jewellers.
• Processing costing
  • Another basic accounting methods to allocate costs to massive volume of similar products, the production process for this kinds of products are mostly performed in a sequence of department, unlike the job costing which determine the cost by using division of total cost figure, process accounting firstly assigns cost to production department and then allocates the cost from departments to individual units as average costs for all units completed in a period. This method is commonly by the manufacturer of food, beverages and plastic products.

There are two types of cost under these two methods, inventoriable product cost and period cost.

• Inventoriable product costs includes the direct cost, indirect cost incurred in manufacturing process
• Period cost is a cost which is not included in the inventoriable product cost since this kind of cost is not contributed into the production of the cost, such as expense incurred by selling and administration; however, according to AASB 102 Inventories, this would not be considered when determining the cost of the product since period cost is non-manufacturing cost.

Activity based accounting (ABC)

Activity based costing is a modern accounting method which provide a more accurately allocation of costs to products or other cost objects. Unlike the conventional cost accounting system, ABC costing is focusing on activities for cost collection; activity in here means a type of task or function performed in an entity. For example, the activities in manufacturing firm include engineering, inspection, customer support and information system; with regards to service organisation, the activities could be marketing and information technology, client support.

Under this accounting method, the procedure of tracing direct material and direct labour cost is same as the conventional accounting method, the difference is the way that allocate the overhead cost. Each activity has their own cost pool, the overhead cost would firstly allocated to activity cost pools related to each activities in the organisation, then proportionally allocated to individual product using the corresponding cost driver.

Sustainability management accounting

Sustainability management accounting, there are five types of costs to determine the cost incurred by the production, which include conventional costs, hidden costs, contingent costs, image and relationship costs, and societal costs. However, all of these costs except the societal one are financial figures that significantly effect the reporting entity’s profit, we called the summation of these cost ‘Private cost’. The societal cost is mostly ignored when calculating the cost of production under management accounting since this is an externality which unlikely influence the organisation’s profit; but the cost is be considered when it has been realized and internalised under sustainability accounting system.

• Conventional cost, the most general term of cost in determining the cost generated by production department. To begin with, the cost of the direct raw materials for production, utilities, labour, supplies, structures, capital equipment and its related depreciation expense. These are the costs components in determining cost of production under Cost accounting.
• Hidden cost, these are the costs not included in the determination of production cost. These comprise of upfront environmental costs, initial design costs of environmentally preferable products, regulatory costs and future decommissioning or remediation costs.
• Contingent cost, as the name suggested, this cost is a probabilistic terms, this cost will only be charged if the entity violate the environmental requirements or regulation; for example, fine, clean-up costs, lawsuits relating to unsound products or service provision.
• Image and relationship costs, although the determination of the cost is complicated and rarely be separately identified within the accounting system, they have an effect on the value of some intangible asset of the organisation, such as goodwill.
• Societal costs, in sustainable accounting, it has been referred as externalities, these costs typically ignored by most of the reporting entities, the cost can be charged due to the consequence of their production on the environment, and it could be also because of the adverse health effect by organisation-generated emissions.