COST ACCOUNTING

Cost Accounting

Cost Accounting

Introduction

Sekonda Plc manufactures four products Alpha, Beta, Gama and Delta. Its management is currently compiling the production plan for Jan-2013, and the accountant has prepared the following statement to assist in deciding what products to manufacture:

Products

Alpha

Beta

Gama

Delta

Expected demand per month (units)

3,000

2,000

1,600

1,200

£

£

£

£

Direct material per unit

8

7.5

9

8

Direct labour (paid £ 6 per hour) per unit

2

4

7

10

Prime cost per unit

10

11.5

16

18

Factory overheads:

Variable-Machine running costs (£12 per machine hour) per unit

3

6

12

14

Fixed - 50% of prime cost per unit

5

5.75

8

9

Factory cost per unit

18

23.25

36

41

Administration overhead per unit

3

3

3

3

Total cost per unit

21

26.25

39

44

Selling price per unit

19

26

45

52

Net profit / (loss) per unit

-2

-0.25

6

8

Management is unwilling to increase the hours worked by its labour force in Jan-2013 beyond 6,000 per month. There is sufficient machine capacity to run the machines for 5,000 hours per month. The accountant has apportioned administration and fixed factory overheads on labour hour basis that he described as the most equitable bearing in mind the nature of those four products and the facilities required for their manufacture. Whatever the volume or mix of production, administration overheads for the month are expected to be £23,400 and fixed factory overheads £50,100 per month. After considering all these matters, the accountant recommends that, in order to maximise profits, only Gama and Delta should be produced in Jan-2013.

Discuss the accountant's statement as a basis for the decision on what to produce by the company.

When we talk about the basis on which accountant's statement help in decision making, the role of budgets and forecasting plays a major role. The cost allocation done by accountants in this regard help in the overall process of decision making and helps the management to opt for the most profitable alternative available in the given scenario.

Financial forecasting is the quantification of objectives or projects developed by the company management. It is an essential management tool in all critical stages of the business life: creation, recovery, development and opening of capital. Forecasting is the assumptions used to develop figures on developments and projects of the company. It helps to better prepare and anticipate upcoming deadlines. Faced with sudden crises or downturns in the global economy and international business must progress in a volatile environment. How to anticipate the future in such conditions? Can we reduce uncertainty? Some doubt the interest of financial forecasts, However, they have many advantages for the management of the company:

based on scenarios and assumptions, projections provide the leader elements to reflect on the present situation of the company and its future;

management planning is also a "state of mind", and encourages the manager to constantly seek the best possible allocation of resources (people, equipment and finances) to maximize its chances of success;

Financial forecasts should be reviewed periodically and must be checked discrepancies between forecasts and realizations. Before its initial shape, the designer is required to prepare documents looking to better understand the proposed activity and its viability:

what will be the future costs?

what is the turnover?

what will be the result?

To answer these questions, the designer must conduct a thorough investigation on the products they manufacture or on account of services ...