BB210 Introductory Management Accounting

1.Describe which costs should be included in product cost of your selected manufacturing company.
2. At what level of detail should the company track direct product costs Discuss.
3. Evaluate how your selected company should organise indirect product costs.
4. Comment on how your selected company should allocate indirect costs to products. 

The current research essay intends to select a manufacturing organisation from the Australian Securities Exchange (ASX). Therefore, the organisation that has been selected to fit the purpose of this essay is Adelaide Brighton Cement. It is one of the leading manufacturers of cement, lime and pre-packaged dry blended products, which is engineered particularly for meeting the needs of its customers. The broader facilities of operational base ensure supply to the customers and they enable for the strategic balance of production capacity for meeting demand throughout the nation. As a result, it helps the organisation in offering a supply package, which is supported flexibly with storage, transportation and supply logistics over Asia and Australia (Adelaidebrighton.com.au, 2017).

The organisation is involved in operating within the lime and cement division of Adelaide Brighton Limited, which has above 1,600 staffs with operations in each Australian state. It has been established in 1882 and it is listed on $&P/ASX 100 company with the primary activities like clinker production, lime and cement products and concrete masonry products. Therefore, the current research essay takes into account the costs to be included in the product cost of the organisation. In addition, the second section of the essay covers the degree of detail that the company could use to track direct product costs. Furthermore, it also focuses on the way that Adelaide Brighton Cement could use to organise indirect product costs. The final section of the essay sheds light on the way of apportioning indirect cost to the products of Adelaide Brighton Cement.

1. Costs to be included in the product cost of Adelaide Brighton Cement:

Adelaide Brighton Cement could include the following costs in its product cost:

In the words of Balakrishnan, Labro & Soderstrom (2014), the materials that become a significant portion of the finished products and they could be traced easily. For instance, the organisation requires limestone for producing cement. In addition, it constitutes of a significant portion of the overall manufacturing cost. Therefore, Adelaide Brighton  Cement could deliver the manufactured cement to those organisations involved in the construction sector.

The cost of labour, which could be traced both conveniently and physically to a finished product unit, could be termed as direct labour (Becker et al., 2015). For instance, direct cost of labour includes labour price of the machine operators and painters in manufacturing organisation like Adelaide Brighton Cement.  Hence, this constitutes of a significant part of the overall manufacturing cost of the organisation.

The manufacturing costs, which do not include direct materials and direct labour, are classified as cost of manufacturing overhead (Chenhall & Moers, 2015). Therefore, the major manufacturing overhead costs include indirect labour, indirect materials, supervisor’s salary, heat, lighting and factory insurance cost. However, the organisation could not trace easily to the individual units of the finished goods.

The non-manufacturing costs of Adelaide Brighton Cement would mainly include administrative costs along with marketing and selling costs. In case of Adelaide Brighton Cement, the marketing and selling costs include order-taking costs, advertising costs and salaries of sales personnel. On the other hand, the administrative costs comprise of executives’ salaries, costs of accounting and costs of general administration.

Hence, Adelaide Brighton Cement needs to consider the above-stated costs in its production process of cement and lime for improving its overall production process and the business performance.

2. Level of detail to be used by the company for tracking direct product costs:

In order to keep a detailed record of the cost of direct materials, Adelaide Brighton Limited needs to assign personnel for keeping a detailed record of the materials released to each job. In addition, there needs to be a system in order to check out the direct material cost. Therefore, the form that could be used for documenting this process is materials requisition (De Zoysa, Bhati & De Zoysa, 2014). Such form would reveal the type of material leaving the stock of available raw materials and those placed into production to Adelaide Brighton Cement. Hence, it provides effective documentation for safeguarding and tracking the inventory of Adelaide Brighton Cement.

A rational initiation point for job costing is to track the direct labour to particular jobs. The management accountants and their fellow staffs of Adelaide Brighton Limited are required to prepare a time report through documentation of the time incurred on each job along with the time incurred on tasks, which could not be traced for a particular job. Such time sheet would help the organisation in developing the basis for payroll along with enabling cost apportionment to particular jobs (Drury, 2013). 

As indicated by Farhan (2013), the tracking of manufacturing cost is extremely tricky. Hence, Adelaide Brighton could use the predetermined rate of overhead for achieving the same. For instance, it is assumed that the management of the selected organisation has consulted with the accountant. In combination, careful consideration could be made about the production overhead estimated during the year. This would comprise the cost of time, vehicle cost, insurance, rent, utilities, taxes, indirect labour asset depreciation and indirect materials. The overall sum is anticipated as $150,000. It is further assumed that Adelaide Brighton Cement has hired four additional workers, who would work 7,500 direct labour hours over the year. By contrasting these two numbers, the overhead would be $20 ($150,000/7,500) per direct labour hour. Hence, with the help of this method, Adelaide Brighton Cement could ascertain the manufacturing cost.

The organisation needs to apportion non-manufacturing costs internally to its products to provide the management with valuable information, which is crucial for decision-making (Fullerton, Kennedy & Widener, 2014). Therefore, Adelaide Brighton Cement needs to undertake four steps. Firstly, it should identify the activities causing the non-manufacturing costs. Secondly, the cost of such activities needs to be gauged, while the next step would be to identify the customers and products needing these activities (Kaplan & Atkinson, 2015). Lastly, the products and customers would be assigned with the activity cost. Hence, the organisation could adopt activity-based costing to track the non-manufacturing costs.

3. Way of organising indirect product costs:

As commented by Kotas (2014), the organising of business expenditures as either direct or indirect goes beyond just product pricing, instead, it affects the tax payments. In case of Adelaide Brighton Cement, the utilities required to power the equipment and inventory required for managing the office are tax deductible. In addition, the cost of sales might even qualify for deductions in some occasions. Thus, it could be tempting to miscategorise direct costs as indirect; however, this might cause trouble for the organisation, if it is audited.

For grants of the government or other kinds of external funding, it is of utmost significance to identify both direct and indirect costs (McLean, McGovern & Davie, 2015). These programs could have strong policies for expenditures qualifying for direct against indirect costs and they apportion particular funding amounts for addressing both the aspects of conducting the business operations. Hence, Adelaide Brighton Cement could justify the cost handling as appropriate based on the funding source; however, in majority of the cases, it is expected to categorise funding diligently.

The manufacturing organisations incur certain types of cost like travel, postage, communication, printing, consultants and computers (Mohanty, 2014). For organising these costs into direct or indirect cost, Adelaide Brighton Cement needs to consider the maximum utilisation for every resource. After identifying the indirect product cost, the organisation could use the ratio of indirect costs, also adjudged as the overhead rate. This would help in ensuring accountability and ascertaining the way of organising administration costs between products. The rate of indirect product cost is the ratio of overall indirect costs to the applicable direct costs (Salako & Yusuf, 2016). The greater the ratio for a specific product department, the greater would be the portion of indirect product costs of that department of Adelaide Brighton Cement.

4. Way of allocating indirect cost to products:

As stated by Schuster (2015), the indirect costs are those costs, which are shared across various product departments. They consider the expenditures, which are not associated directly with the operation of any specific department. In case of Adelaide Brighton Cement, the indirect costs comprise of staff salaries and benefits, infrastructure costs, advocacy expenditures and marketing cost. For apportioning the indirect costs, the organisation needs to identify the driver associated with each item of cost and allocate costs to products with the help of the driver of cost (Suomala, Lyly-Yrjänäinen & Lukka, 2014).

The cost drivers are the measurable influential dynamics, which would enable Adelaide Brighton Cement in ascertaining the association between indirect cost and each area of program and this might vary for various items of cost. For instance, it is assumed that the cost item is the salary of the HR manager of Adelaide Brighton Cement. The question here would be to distribute the time of the HR manager to each product department. The cost driver would be the staffs working on each department and if the number is high, the HR manager needs to devote working on that specific department. The method of allocation would be to convert the staffs working in each department into a portion of the overall time of the HR manager like 50% on lime manufacturing department and 50% on cement manufacturing department.

Under the method of allocation, Adelaide Brighton Cement needs to distribute each item of cost across the product departments based on the projected percentages. The above example has been considered here as well and the identical process is repeated for each cost item until the organisation has apportioned the overall indirect costs into the appropriate product departments (Fisher & Krumwiede, 2012).

Conclusion:

From the above discussion, it has been found that Adelaide Brighton Cement could deliver the manufactured cement to those organisations involved in the construction sector. The major costs to be included in its overall product cost comprise of direct materials, direct labour, manufacturing costs and non-manufacturing costs. In order to keep a detailed record of the cost of direct materials, Adelaide Brighton Limited needs to assign personnel for keeping a detailed record of the materials released to each job. In addition, there needs to be a system in order to check out the direct material cost. Moreover, the management accountants and their fellow staffs of Adelaide Brighton Limited are required to prepare a time report through documentation of the time incurred on each job along with the time incurred on tasks, which could not be traced for a particular job.

The tracking of manufacturing cost is extremely tricky. Hence, Adelaide Brighton could use the predetermined rate of overhead for achieving the same. The organisation needs to apportion non-manufacturing costs internally to its products to provide the management with valuable information, which is crucial for decision-making. Adelaide Brighton Cement needs to consider the maximum utilisation for every resource. After identifying the indirect product cost, the organisation could use the ratio of indirect costs, also adjudged as the overhead rate. This would help in ensuring accountability and ascertaining the way of organising administration costs between products. Finally, for apportioning the indirect costs, the organisation needs to identify the driver associated with each item of cost and allocate costs to products with the help of the driver of cost.

References:

Adelaidebrighton.com.au. (2017). Adelaide Brighton Cement. Adelaide Brighton Cement. Retrieved 27 May 2017, from http://www.adelaidebrighton.com.au/

Balakrishnan, R., Labro, E., & Soderstrom, N. S. (2014). Cost structure and sticky costs. Journal of management accounting research, 26(2), 91-116.

Becker, S. D., Wald, A., Gessner, C., & Gleich, R. (2015). The Role of Perceived Attributes for the Diffusion of Innovations in Cost Accounting: The Case of Activity-Based Costing. Comptabilité-Contrôle-Audit, 21(1), 105-137.

Chenhall, R. H., & Moers, F. (2015). The role of innovation in the evolution of management accounting and its integration into management control. Accounting, Organizations and Society, 47, 1-13.

De Zoysa, A., Bhati, S., & De Zoysa, M. (2014). A survey of cost and management accounting practices in Sri Lanka.

Drury, C. M. (2013). Management and cost accounting. Springer.

Farhan, M. A. (2013). Cost & Management Accounting.

Fisher, J. G., & Krumwiede, K. (2012). Product costing systems: Finding the right approach. Journal of Corporate Accounting & Finance, 23(3), p. 44.

Fullerton, R. R., Kennedy, F. A., & Widener, S. K. (2014). Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7), 414-428.

Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.

Kotas, R. (2014). Management accounting for hotels and restaurants. Routledge.

McLean, T., McGovern, T., & Davie, S. (2015). Management accounting, engineering and the management of company growth: Clarke Chapman, 1864–1914. The British Accounting Review, 47(2), 177-190.

Mohanty, S. C. (2014). Relevance and Utility of Cost and Management Accounting in the Present Socio-Economic Scenario. The MA Journal, 49(1), 12-17.

Salako, M. A., & Yusuf, S. A. (2016). Cost Accounting: A Pivotal Factor of Entrepreneurial Success.

Schuster, P., 2015. Cost and Management Accounting. In Transfer Prices and Management Accounting (pp. 1-4). Springer International Publishing.

Suomala, P., Lyly-Yrjänäinen, J., & Lukka, K. (2014). Battlefield around interventions: A reflective analysis of conducting interventionist research in management accounting. Management Accounting Research, 25(4), 304-314.