Executive Summary: Accounting (Research Paper Sample)

Accounting
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TABLE OF CONTENTS TOC \o "1-3" \h \z \u Executive Summary PAGEREF _Toc359351134 \h 3Introduction PAGEREF _Toc359351135 \h 4Fixed and variable costs PAGEREF _Toc359351136 \h 4Cost-volume-profit analysis PAGEREF _Toc359351137 \h 6Product and period costs PAGEREF _Toc359351138 \h 8Cost estimation PAGEREF _Toc359351139 \h 9Methods of cost estimation PAGEREF _Toc359351140 \h 10Recommendations PAGEREF _Toc359351141 \h 14Conclusion PAGEREF _Toc359351142 \h 15References PAGEREF _Toc359351143 \h 16
Executive Summary
An accounting system should be able to measure costs as this is one of the major prerequisites of effective cost-management. There are various cost accounting concepts that are important for purposes such as profit determination, evaluation of business performance, cost control, and inventory valuation.Some of the universally applied primary concepts in this regard include fixed and variable costs, cost-volume profit analysis, product and period costs, and cost estimation.The concepts are a critical component of any objective cost accounting system. Fixed costs refer to those expenses that remain unchanged as other business activities change, within a particular period of time or production scale.
Cost-volume-profit analysis (CVP is an accounting practice that looks at the changes in profits as a result of changing prices, costs and volume of sales. It is usually used as a planning tool for future operational activities, and provision of essential information including, whether to increase the level of fixed costs, determining the budgetary allocation for anticipated risks, the products or services to prioritize, and so on.
In product and period costs, the classification of costs as either product or period costs is determined by their capitalization to the costs of produced products. Product costs describe such expenses that are included as part of the costs of manufactured goods. They are realized on the process of production, either directly, for instance, labor and material costs, or indirectly like overheads.
Cost estimation is an important concept for purposes such as decision making, planning, and management of profit. The three aspects describe some future expectation, thus, cost estimation seeks to address future events as in the present period.
Introduction
One of the major purposes of an accounting system is to measure costs which later on are applied for various purposes such as performance evaluation, profit determination, cost control, and inventory valuation. It is therefore very important to understand what is meant by the term cost as well as how costs are calculated. Cost is basically a valuable thing that is given up in exchange for something else. It is the price paid to acquire something of valuable such as goods and services. Cost may entail materials, money, time, labor, and so on (Maher, Stickney & Weil, 2011). Different costs exist for different purposes as far as cost management is concerned.
This paper gives a detailed look at the basic cost management concepts namely; fixed and variable costs, cost-volume profit analysis, product and period costs, and cost estimation. The concepts are highly important for any business firm as the ability to manage costs effectively is one of the factors that can put an organization at a competitive advantage (Maher, Stickney & Weil, 2011). There will be a critical examination of what each concept entails. After the main discussion, a set of recommendations will be given, with a focus, on how a firm can effectively manage such costs so as to attain one of the biggest goals of effective management of business activities.
Fixed and variable costs
Fixed costs refer to those expenses that remain unchanged as other business activities change, within a particular period of time or production scale(Heisinger, 2009). These costs do not vary with the output realized from business operations. Thus, when the level of sales shows an increase, fixed costs do not increase. Similarly, when the total sales decrease, fixed costs remain the same. For instance, rent and utility expenses have to be met by a business irrespective of the revenue generated. Variable costs, on the other hand, describe the expenses that change in a similar proportion to the overall business activities such as production volume and sales(Heisinger, 2009). When the output is zero (0), there are no variable costs, and as production increases, the value of variable costs also increases.Examples of variable costs are the cost of raw materials and electricity.
Both fixed and variable costs make up the components of total cost. Fixed costs are usually expressed as existing for a certain period of time as they are not dependent on the output (sales) levels(Weygandt, Kimmel, &Kieso, 2009). This may either be daily, weekly, monthly or annually. They also remain ‘fixed’ for a certain period of time or within a given business activity. At the end of such period or activity, all the expenses are considered variable. A graphical representation of fixed costs is as shown below:
Source: (ruralwomen.org.uk)
From the diagram, fixed costs remain at £2000 for different values of output. At an output of zero, fixed costs show a similar value. Thus, fixed costs are independent of volume of production or sales. Direct costs describe those costs that are attached to a certain product. Variable costs include these costs but not all variable costs become deemed as direct costs, for instance, overheads accruing from production processes represent types of indirect costs despite being variable in nature. ‘Unit-level costs’ is a common term that defines variable costs, since these costs differ with the changing values of finished products.
Cost-volume-profit analysis
Cost-volume-profit analysis (CVP) describes a practice that looks at the changes in profits as a result of changing prices, costs and volume of sales(Hansen &Mowen, 2006). It is usually used as a planning tool for future operational activities, and provision of essential information including: whether to increase the level of fixed costs; determining the budgetary allocation for anticipated risks; the products or services to prioritize; and determining the sales volume required for attainment of a specific profit level. The basic profit equation serves as the platform for drawing up a CVP analysis:
Profit = total revenue – total costs
This is more elaborated through a clear expression of the total costs which includes fixed and variable costs, thus, profit is expressed as:
Profit = total revenue- (fixed costs + variable costs) or = total revenue-variable costs- fixed costs
Contribution margin entails the difference between total revenue and variable costs (Hansen &Mowen, 2006). Thus, the contribution margin per unit is expressed as selling price per unit less the variable cost per unit. In determining the impacts of output on profit, the contribution margin and contribution margin per unit become significant in consideration(Weygandt, Kimmel, &Kieso, 2009). The latter assists in the determination of the amount of revenue per unit necessary for application towards fixed costs. When fixed costs are offset through unit sales, the contribution margin per unit from the remaining sales is deemed to be the profit from such an activity.The contribution margin ratio is determined by dividing the contribution margin by total sales or unit contribution margin by price per unit.
Contribution Margin = Total Sales – Total Variable Costs
Contribution Margin per Unit= Unit Selling Price – Unit Variable Cost
The cost-volume-profit analysis makes various assumptions including uniform values of sales price, the variable cost per unit, fixed cost, and sales mix. It also rests on the assumption that the number of manufactured goods is similar to the number of goods sold(Heisinger, 2009).This approach expounds on the data provided by the use of a breakeven analysis. A break-even point describes the point where a firm realizes neither losses nor profits as the total revenues equal total costs, both variable and fixed costs. Thus, a breakdown of revenues from sale of products and total costs provides a deeper insight into the involved activities.
Source: (Kieso, Kimmel &Weygandt, 2010)
Product and period costs
The classification of costs into product and period costs is determined by their capitalization to the costs of produced products (Jan, nd). Product costs describe such expenses that are included as part of the costs of manufactured goods. They are realized on the process of production, either directly,for instance, labor and material costs, orindirectly like overheads. From the accounting matching principle, expenses are supposed to be matched to the generated revenue(Weygandt, Kimmel, &Kieso, 2009). Thus, it only becomes necessary to record product costs as expenditure on the realization of revenue from sale of products. To attain this, product costs are debited to the cost of manufactured products and deemed as expenses on sale. Examples of product costs include labor, fuel and packaging, depreciation (factory) and raw material.
Their initial assignment to inventories or stock gives them their common description as inventorial costs(Heisinger, 2009). Product costs categorize broadly into direct materials, direct labor, and overheads. Direct materials are those that can be physically traced with convenience to a certain good, for instance, wood as raw material for a chair. The labor costs that can also be conveniently traced in their physical form to a product arereferred to as direct labor(Hansen &Mowen, 2006). Overheads include all manufacturing costs of a product other than direct labor or materials. These inclu...