cost accounting and product's price calculation for ba ding printing company - ministry of public security

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





i
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





ii
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 decision-
making. 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

= C
1uf
+ Mo – C
2uf
In which:
Tf: total price of finished product
Mo: Manufacturing overhead
C
1uf
: Cost of unfinished product brought forward
C
2uf
: 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


10
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 over-
costed 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