cost accounting (unitech)

8/9/2019 Cost Accounting (UNITECH)

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Unitech International Limited Cost Accounting Information System

Institute Of Business & Information Technology Page 1

CONTENTS

INTRODUCTION .................................................................................. 2

COST ACCOUNTING INFORMATION SYSTEM OF UNITECH .... 2

1. INPUT MEASURMENT BASIS ....................................................... 3

3. COST ACCUMULATION METHOD ............................................... 4

4. COST FLOW ASSUMPTION ........................................................... 5

5. RECORDING INTERVAL CAPABILITY ........................................ 6


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INTRODUCTION:

The company that we have chosen is a manufacturing firm named Unitech International

(Pvt.) Ltd. Unitech International (Pvt.) Ltd is a well reputed privately owned firm. it is

situated in Lahore at Plot No. 9, Holiday Park Musharaffabad, Raiwind Road ,Lahore.Thedirector of the company is Syed Muddabir Hussain and Managing Director is Ali Shaiba

Jafri.

The company has three major partners in total. The goal is to maximize profit for the share

holders.

The company takes order/tender from different dairy firms eg milkpak, haleeb etc and

manufactures Chillers(large size refrigerators) for the stoarage of milk. Raw material is

brought to the factor where trained workers convert it into the final product. companys

mission is to gain maximum share in the market by providing quality products at reasonable

price.

COST ACCOUNTING INFORMATION SYSTEM of

Unitech International

As Cost accounting system is based on following basic components:

1. INPUT MEASUREMENT BASIS2. INVENTORY VALUATION METHOD3. COST ACCUMULATION METHOD4. COST FLOW ASSUMPTION5. RECORDING INTERVAL CAPABILTY

Based on 5 years of experience, regarding Cost Accounting System A.E.L is using

following methods and procedures to provide fine Costing Information System:


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1. INPUT MEASURMENT BASIS:When order is placed by customer the management review the order and start purchasing the

exact amount of materials which will use in the production, and actual cost of material is

recorded. So pure historical costing is done for material while standard costs are used for

labor and factory over heads incurred in the whole process of finalizing the product.

2. INVENTORY VALUATION METHOD:

Activity Based Costing:

Activity-based costing (ABC) is a costing model that identifies activities in an organization

and assigns the cost of each activity resource to all products and services according to the

actual consumption by each: it assigns more indirect costs (overhead) into direct costs.

(ABC) assigns manufacturing overhead costs to products in a more logical manner than the

traditional approach of simply allocating costs on the basis of machine hours. Activity based

costing first assigns costs to the activities that are the real cause of the overhead. It then

assigns the cost of those activities only to the products that are actually demanding the

activities.

History:

The concepts of ABC were developed in the manufacturing sector of the United States during

the 1970s and 1980s.Activity-based costing was first clearly defined in 1987 by Robert S.

Kaplan and W. Bruns.

Importance:

Activity based costing has grown in importance in recent decades because (1) manufacturing

overhead costs have increased significantly, (2) the manufacturing overhead costs no longer

correlate with the productive machine hours or direct labor hours, (3) the diversity of

products and the diversity in customers' demands have grown, and (4) some products are

produced in large batches, while others are produced in small batches.

UNITECH PRIVATE LIMITED:

UNITECH is a private manufacturing company and it is using activity based-costing.

Reasons for using (ABC):

y Determine accurately the actual costs of production and of the costs of relatedservices

y It helps to identify inefficient product, department and activity.


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y It helps to allocate more resources on profitable product, department and activityy It helps to control the cost at individual level and on departmental levely It helps to find unnecessary costsy It predominantly support strategic decisions such as pricing, outsourcing and

identification and measurement of process improvement initiatives

y a tool for understanding product and customer cost and profitabilityy It precisely estimate the cost of its individual products and services for the purposes

of identifying and eliminating those which are unprofitable and lowering the prices of

those which are overpriced.

Activity-Based Costing Procedures:

In Unitech, The process looks like this:

y All activities that use resources are identifiedy Cost pools are set up for each of the activities identifiedy Overhead costs are assigned to the cost pools based on a cost drivery A cost driver is an activity that has a proven cause and effect relationship with the

costs associated with the cost pool

y Cost drivers can be based off of resources or activitiesy Only if a cost driver cannot be recognized will a cost be assigned on an allocate basisy Related cost pools are assigned an overhead rate based on cost driversy Cost pools are used to assign costs; the basis depends on the company and industryy Costs can then be assigned to units, batches, or productsy These pools can be combined to look at facility, division, or other levels of cost

categories

y Costs can then be evaluated to see where and how costs are occurring, from that pointmanagement can discern what costs are controllable and how they arise.

3. COST ACCUMULATION METHOD:

Unitech International (Pvt.) Ltd uses job order costing for accumulation of costs.

In Unitech International (Pvt.) Ltd job order costing is done in following order:

y Each job is assigned to one bin token.y Each Job bin card is pre numberedy Job Cost Sheet is divided into different sections i-e pipe section, wires section, nuts and

bolts, switches section.


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y Actual material cost is accumulated.y Percentage of actual cost of material is added in following;

Direct labor 8%

Overhead Expenses 6%

Financial expenses 0.8%

Delivery loading and unloading& 0.8%

Advantages:

y The management team has ready access to all the costs incurred for each job beingcompleted. This allows the team to examine each cost incurred, finding out why it

happened, and determine how it can be controlled better in the futureand how we

increase the profit. For example, if a job record contains any special alteration so extra

costs is incurred, which a manager can then use to mark out back to the specific

reason why the amend was needed. Similarly, overhead allocations based on machine

usage make known problems with excess use, which might be the result of lengthy

machine setups or break downs as well as longer than expected machine cycle times.

y It makes ongoing results for each job. One is that the accounting staff can monitor jobaccounts to see if costs are being posted to the wrong accounts and corrects them right

away, rather than waiting until the job closes and having to frantically review records

to see why the results are different from expectations.

y Monitor the costs incurred for longer jobs and have enough time to make changesbefore they close, based on the costing information revealed by the job costing

system.

y Changes in the cost of a job can result in negotiations with profitable customers whoare paying for all the costs incurred, so that they are fully aware of cost overruns well

in advance and are prepared to pay the additional amounts.

4. COST FLOW ASSUMPTION:

Unitech International (Pvt.) Ltd maintains their inventory on activity based. They maintain

complete inventory because they purchase material exactly needed for only one order. there is

no excess material so they do not have ending inventorybut sometime there is ending

inventory its in rare case. Inventory for raw material such as steel, covers and other raw

material is priced on the basis of FIFO basis method.

Process:


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When order is placed, they accumulate cost of raw material such as steel, covers on FIFO

basis according to previous prices on which raw material was purchased.

If excess material is required for ongoing production, then they price it according to new

prices.

Unitech International (Pvt.) Ltd assumes FIFO method because of following reasons:

y The main advantage of FIFO method is that it is simple to understand and easy to operate.y Under this method, materials are issued at the purchase price; so the cost of jobs or work

orders is correctly ascertained so far as cost of materials is concerned. Thus, the method

recovers the cost price of the materials.

y This method is useful when prices are falling.y It is a logical method because it takes into consideration the normal procedure of utilizing

first those materials which are received first. Materials are issued in order of purchases, so

materials received first are utilized first.

y Closing stock of materials will be valued at the market price as the closing stock underthis method would consist of recent purchase of materials.

y This method is also useful when transactions are not too many and prices of materials arefairly steady.

5. RECORDING INTERVAL CAPABILITY:Unitech International (Pvt.) Ltd maintains perpetual inventory system and keep their store

updated 24/7.

Process:

A perpetual inventory system reflects real time inventory data. For this system to operate, the

movement of inventory must be recorded and tracked each time the inventory is made or

moved.

In Unitech International (Pvt.) Ltd;

y They keep the track of inventory in order to set purchasing materials and quantities.y They calculate how many new items that are required for order to be completed.y They constantly monitor inventory level to be certain that they are not over exceeding

required inventory or below it.

y They regularly monitor fragile or date perceptive inventory and replace it with newinventory.


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Advantages:

y In perpetual cost of goods sold is determined in every sale.y Perpetual method is double entry system.y Only required quantity of material will be purchased.y A detailed & reliable check on the store is obtained.y Planning of the production can be done as the management is continuously inforward

about the store position.

y If you want to increase or reduce inventory in the perpetual system some otheraccount like loss/gain must be debited/credited.

y In perpetual system the inventory is closely watched.y It avoids physical verification of each and every item of store.y

Investment in purchasing raw materials will be minimized.y A proper system of material control will save the organization from losses like

wastage and obsolescence.

y In the perpetual system stock loss/gain is immediately noticed and not at the end ofyear when the physical count of the inventory is taken.

y It ensures availability of material as & when required.y There will be continuity in the flow of production.

cost accounting (unitech)

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