Opportunity Cost – is the profit that is lost when we choose or select an alternative over another. It can also imply into different things like in time management. If you read books for 8 hours straight rather than doing your assignment on that particular time the opportunity cost will be 8 hours. We all know that managers are the one who did big decisions in the company. The opportunity cost will set as a reminder that we need to examine all reasonable alternatives every where before doing a great decision. For example you want to invest PHP 500,000 that can generate 3%. If you find alternative to make that capital gain 6%, then the opportunity cost will be 3%
Sunk Cost – The ultimate goal of a business is to make a profit, with these we create lots of expenses. Having lots of revenue for an entire time we can have an unavoidable expense or cost that we cannot retrieve. This cost is cold sunk cost. For example, your company gather lots of income on this year. You want to buy a new car for your employees. You have your choices, the car A which is Toyota Innova which can be seated by 8 people, and Car B which is Toyota Hi-ace which can be seated 15 people, You decide to buy Toyota Innova. In the mean time you realized that you needed a Hi-ace rather than Innova. The cost that you spent on buying Innova will never been retrieve, that cost is cold Sunk Cost
Variable Cost – this is the type of cost that is varies with the level of output. It has this 4 characteristics.
- The variability of cost is proportion to the output or the amount of product produce. Means that the amount of produced product is proportion to the amount of cost. For example the variable cost of the product is 100, and then it can produce 20 products that are worth 5 pesos. Its up to you on how you prices those products.
- The cost per unit is constant, sometimes changing within relevant range. Means that the pricing of this product does not change. It may take some changes but in a reasonable range only.
- Can be assign easily to the operating department. You can tell them what you want and then they follow your orders as simply as possible. Like on how many should be produce on this entire time.
- Controllable by operating supervisor. It is easily to be controlled. Because the amount is constant therefore, the output should vary on the decisions made by the operating supervisor. Depends on the amount of materials should be use. And the amount of expected product to produce.
- Therefore variable cost is the cost that is changing depends on the quantity of goods or service that the business is changes.
Differentiate product cost from period cost
The period cost is the amount of cost that is used to sell the product or refer as operating expense, such as advertising expense, salaries, and delivery expenses. While the product cost are the amount of cost spend to create the product, like buying raw materials, inventories if merchandising. Period cost can be calculated for an entire accounting period while the product cost is considered an asset before the item sold, if the item sold it will be change into expense immediately. For example a selling a Nike shoes. The period cost will be all the sponsorship, advertising expense of the company. While the product cost of this product is the total amount that the company spend to produce the product.
Standard Costing- it is the type of costing that, it has perceived cost before the product is produce. The product has its norm cost before the manufacturing process of the product. to know the how much profit can be gathered in this kind of costing, we will use the variance analysis. It is computed by getting the difference between the standard cost and the actual cost of the product. This standard costing can be applied on job order costing or in product costing.
2. Design Cost and Management Accounting System
Job order cost accounting system - It is a system for assigning and collecting manufacturing costs of an individual unit of output also called as work order costing or job costing. This costing is used when the company produce lots of items and it is different from each other and each has its own cost. When a company’s output consists of continuos flow of the same and low costs products. The process of costing system will become more appropriate. This process is applicable to clothing factories and industries, food companies, air craft manufacturing company. This kind of system is more applicable on manufacturing businesses.
Process Cost Accounting system- It is a method of assigning direct materials, direct labour, and factory overhead expenses to specific processes, departments, or cost objects to provide effort on valuing finished goods inventory. This system is design to allocate costs to process and not job. These means that the cost of the entire event happens on that time will be record as the process cost, because that activity is done in accordance to complete the said process. This type of accounting system is used to measure all the cost of the entire department where the processing of the product is done. It is applied to heterogenous products.
Job Cost sheet
It is a type of document used by manufacturing industry to summarize all the cost accumulated on every job order. This sheet contains all the expenses of the company on that specific job order. It contains all the necessary information about the job order. The name of the customer address and all the personal information needed. As well as their order and its price, the name of the responsible people must be put in the letter, the one who process and check it must sign the sheet. The Job Cost sheet is used to summarize all the cost gathered for the job order. To be easily record it into its designated accounting system.
There were 2 documents associated with Job order- The Materials requisition slip and warehouse Issue slip, Material requisition slip is used to request the said materials to the warehouse man. Without this letter they will not have the right to get the needed materials. The warehouse man is not authorized to provide the needed materials without the said letter. Warehouse Issue slip is the letter that is provided by the warehousemen. It is to simply report that they release the needed materials and give it to the factory personnel. These letters should be connected to its other. It is serves as basis for the inventory checking.
Production Report- It is a report that summarizes the production and cost of the activity within a department for a reporting period. It is simply the formal summary of all the steps performed to assigned costs to unit Transferred out and units in ending work-in-process inventory. These will serves as basis on monitoring the cost of production by this it can serves as the basis on the decision making held by the upper management. You can decide whether increase or decrease the number of production base on facts and not intuitions only. In this report you can see whether the production team is doing good or not.
Equivalent units- It is the amount of resources that are required to complete one unit of a product for example; it is the amount of work done by the manufacturers on units of outputs they have completed at the end of the accounting period. It is very important to compute he equivalent unit, because not all the physical units are completed the same time. It must be calculated in order to allocate manufacturing cost to both completed units and units in the inventory.
3. Costing System: Marginal contrasted with Absorption
Variable Costing Income Statement- Variable costing income statement is a way of subtracting all the variable expenses from its revenue to create a separately contribution margin, from which all the fixed expenses are reduced to get the net profit or loss for certain period. It is very useful when you want to determine the proportion of your expenses; it varies directly with the revenue. A large portion of a company’s production costs are constant and provides only a small portion of its selling administrative expenses are variable, the contribution margin will be significantly higher than the gross margin. This type of income statement should be created separately for us to give importance to the expenses that we cannot see in the actual income statements like the credit card fees and direct materials expense. If you utilize this factor you can increase your direct materials expense and increase your sales as well. The company should monitor this kind of factors maybe it can increase their income in near future.
Absorption Costing Income Statement- Absorption costing income statement also called as traditional income statement uses absorption costing to create income statement. Absorption costing is taking action into all the variable product cost and absorb all the fixed overhead into the cost of the product. This income statement looks at costs by dividing cost into product and period cost. It allocates the overhead costs into the product whether it is sold or not. Expenses on absorption costing are low.
Contribution Margin- Contribution margin is computed as the selling price per unit, less that the variable cost per unit. This process is use to measure how much does the particular product contributes to the profit of the company. For example, you tend to sell slippers by 200 pesos while the variable cost of the product is 120 pesos. You must divide the remaining 80 pesos on the general profit of your company; you will see how every piece of your product generates your income.
Conversion of financial statement under financial accounting to financial statements under
managerial accounting- The Financial statement under financial accounting show as the flow of the money in every business transaction. While the financial statement of the managerial accounting is just separated into 2 parts the variable costing approach and the absorption costing approach this 2 is really reliable as well. Its just I am not that master in managerial accounting approach but in my perspective providing a financial statement of managerial accounting from financial accounting will really help in filtering information that is needed for decision making. Financial statement of financial accounting is really broad it shows all the process happens in the entire business. Changing it into managerial aspect will less the time and effort of the management accountant. By this all the data will be analyse easily and precisely
Importance of separating the Semi-Variable Cost.
- Semi-Variable cost is also known as semi fixed cost or mixed cost. It is a type of cost that is composed of both fixed and variable components. This cost is fixed for a set level of production or consumption and become variable after this production level is exceeded. It is important to separate the Semi-Variable cost for the purpose of planning and controlling the amount of cost in near future. You can easily see the combination of the cost in both fixed and variable component;. You can easily assume that this product is soon being your variable cost. You can easily control it by removing or add a certain amount of it. And you can plan and prepare ahead of time what your next move. Separating this kind of cost will make you aware on what’s your next move in your business.
