Accounting: BHP Billiton (Research Paper Sample)

Accounting
Author
Institution
Abstract
Accountancy is the professional measurement, processing and communication of the financial information about economic entities. The entities engaged in the provision of services use similar procedures to recognize record and communicate their financial information similar to Production firms (Hoggett, 2012).
Warren and Reeve (2005), assert that in accounting for merchandising firms product revenues are obtained from sales and gross profit from deducting the cost of the purchases from the overall sales. Operational costs are later deducted to arrive at the profit before tax. The deduction of tax from the profit before tax provides the net profits made by the entity for the given period.
Bragg (2001) asserts that manufacturing entities are special entities. The specialty emanates from tracing the costs and revenues from various products. Unlike merchandising firms that obtain profits by deducting costs from revenues, manufacturing firms encounter remains in various resources that require recording. First, the raw materials may not be fully utilized by the end of a period. Secondly, there may be products still in the process of development referred to as work in progress. Finally, there are finished products that may not end up on the market. It is necessary to match the revenues obtained and the costs incurred in the production of goods. to generate the profit and loss.
Introduction
The essay provides guidelines on the accounting procedures for BHP Billiton with head offices in Australia and Thailand. It has locations in Australia, Africa, and South Asia. It is a leading global resources company and a manufacturing firm listed on the Australian stock exchange. It is the world’s largest manufacturer and exporter of metallurgical and domestic thermal coal, copper, silver lead, iron, and uranium. It is also a world leader in oil and petroleum exploration (BHP Billiton, 2015).
The choice for the company was intentional to discuss the accounting methods as applied by one of the world largest manufacturing entities. The choice came up after the Forbes Magazine listed the organization as the number one out of forty largest companies in Australia. According to Forbes, the company makes an average sale of 40 million USD and profits of 13 million USD. The asset value of the company is 58 million USD while the market value is 220 million USD. The company owns an unrivaled portfolio that guarantees its growth and continued satisfaction of the customers (Pierse, 2007).
Second, the choice was led by the observation of the diverse nature of the company’s interests. The diverse products are an indication that the firm calls for appropriate accounting to manage the various associated costs centers (BHP Billiton, 2015).
Third, the choice was driven by the various awards given to the company consequent to its superior performance in the health community, safety, and the environment sectors. Awards indicate superior performance. Given the scope of the company, it was worth the choice for discussion (BHP Billiton, 2015).
Description of products Cost
The products costs for BHP Billiton should include the most obvious source of the cost that is the materials, labor and the overheads. Materials and labor are direct costs. They refer to costs that are directly traceable and related to the production of a specific product such as coal, iron ore, uranium and silver (BHP Billiton, 2015).
The company’s direct costs include the production materials and services. First, the materials include explosives, fuel, catalysts, power and consumables. Explosives are materials used mining processes to access the product by tearing the ground. The company requires fuel for the different machinery used in the mining sites. Catalyst materials are required to initiate and control the rate at which chemical processes take place. For example in the mining of iron, a catalyst is required to lower the boiling points and enhance the extraction process. Power is for moving objects and provision of heat and light. Materials include the cost of wasted materials in the production process. The company also traces the cost of services such as drilling. Billiton’s direct labor includes the payroll costs of site engineers, mining contractors and other personnel involved in extraction processes. The cost of transporting materials from the mining site to the factory forms part of direct costs attributable to materials (Sherman, & Sperry, 2003). .
Indirect costs are the cost of associated materials or labor necessary for production. The costs are hard to measure for each product manufactured. They include the incidental labor inform of equipment maintenance and supervision. There are costs associated with the depreciation of the mining and manufacturing equipment. The depreciation of the mine property acquisition costs and associated developmental costs together with mine maintenance costs. Besides there is waste removal cost not capitalized to differed stripping, when the stripping ratio is above the expected life of the mine (Warren, & Reeve, 2005).
Level of details on direct product costs
The direct production costs for Billiton includes direct labor and direct materials required in details. First, there is need to differentiate the costs as they get associated with the various products like iron ore, silver, uranium petroleum and oil. The process requires great attention as the processes may take a long period. Besides, some may happen consecutively for different products. The process involves initiating an early cost tracking process to capture initial direct costs such as the acquired materials like explosives, fuel, power, and catalysts (Warren, & Reeve, 2005).
Direct costs require recording to the level of identifying joint and by-products. In the mining industry, the production of more than one metal is a common occurrence from one process. The resultant products are joint and by-products. For example, lead materials can produce both lead and silver products. In contrast, Petroleum products often produce separate by-products with a relative significant sales value. The products identify as joint to a given production level referred to the split -off point. The International Accounting Standards II requires consistency in the cost allocation processes. The consistency rule applies whenever the conversion costs for a product are not identifiable to a given production level (Bragg, 2005).
Various practices require different details of direct costs to value joint and by-products. Most of details of direct costs guide decisions on their point of application- the split-off point or the initial processes of mining. In valuing joint products, the split off basis varies. Direct costs relate to joint products from the split-off point depending on their contribution to revenue. Both the net realizable value at the split-off point and the volume of production methods are applied. The general rule calls for the use of direct costs at the lower of cost and the net realizable value. Whichever the method initially used, it should be consistently applied (Drury, 2012).
By-products are valued based on their net realizable value due to their insignificant nature. The details of direct costs should not affect the consistent application of the methods for comparability. Costs captured to the split-off point are then separated and associated to the resultant by-product. Allocation of costs to the byproducts depends on their significance. Where insignificant, they are allocated the various direct costs after the split-off point. If costs exceed the net realizable value, the net realizable value gets used, and the vice versa applies true (Drury, 2012).
Organizing indirect costs
The Billiton company overheads require organization in terms of variables and fixed production overheads. The arrangement is to ensure that variable production overheads relate to the cost of inventory, work in progress and finished goods based on the levels of production. Also, the overhead costs require distinct classifications. They include the supervisor’s salaries and other payroll related activities. The indirect materials relate to various products such as iron ore, lead, uranium and other related products including the petroleum (Hoggett, 2012).
The maintenance costs of various mines are recorded separately to enhance final allocation to the various products from distinct mines. Similarly, the mine acquisition costs are captured separately for each mine for apportioning to the specific products from the mine. The waste removal costs require separate records to ensure concise decision making by the comparison of the stripping ratio to the expected life of the mine. The comparison guides the decision whether the costs are capitalized or allocated to the products as indirect costs (Kieso, & Weygandt, 2001).
The fixed overheads are organized based on the normal level of production. Normal capacity reflects the expected average production over several periods as opposed to the periods with abnormally high levels of production (Warren, & Reeve, 2005).
The Proper arrangement of overheads improves the judgment to establish the various attributes to production including their respective portions. For example the identification, allocation and differentiation of administrative overheads that do not contribute to the conversion of inventories into their present location and condition. The finance department in the plant should focus on the payments of production costs such as wages and associated marketing, distribution and general administration. Also, separate entities for tracking the costs of consumables and other spare parts are imperative in the classification process (Bragg, 2005).
Allocation of indirect costs
The allocatio...