• Identify and describe the type of cost accumulation system that was used.
• Explain how the system was used and, specifically, how overhead was allocated.
• Discuss how the use of cost accumulation enhanced the company’s operations.
Companies while accumulating cost use two types of method. Job order or a process costing systems is generally used while doing it. This usually varies on the kind of product or service which the company provides to its customers. Mainly the, pharmaceuticals, chemical processing, plastics, tile manufacturing, semi-conductor chips, beverages and cold drinks, and breakfast cereals use the method of process costing to accumulate their cost. (Kinney & Raiborn, 2012)When costs are shown in the process, separate costs are separated into cost categories in process costing system according to different timings. Navarro Steel uses the process costing method for cost accumulation. Now we shall study further about process costing through its real life application in the above mentioned industry.
Type of cost accumulation system used
Process costing is the method used here. According to CIMA process costing is used in places where many continuous operations are used which result in the outcome of goods. During the period, calculation of units produced usually calculates the average cost. (Drury, 2007) The sub unit of an organization is referred to as a process specially defined for cost collection purpose.
The key points in process costing follow:
Step 1: It usually involves the summarizing of the flow of units of output.
Step 2: Computation of output on the basis of equivalent units.
Step 3: To summarize the total costs that has to be accounted for.
Step 4: Computation of cost of each equivalent unit.
Step 5: Assignment of total costs to unit that has been completed.
Usage of Process Costing System and Allocation of Overheads
Navarro Steel is a steel production factory. Its processes and procedures are
- melt iron ore,
- In the process of adding alloys, material is usually skimmed so that tensile strength and flexibility could be adjusted.
- Oxygen extrudes the material and gives the material its finished form (I-Beams, sheet steel, coils, etc.).
Accountants have come up with the idea of equivalent unit, which can be described as a physical unit which could be expressed in terms of final goods to deal with continuous processes cost allocation through process costing. (Robinson, 2009) Overheads are applied on this basis only but if due to any reason, they are applied on some other basis such as that of machine hours then a separate method of equivalency will be used for labor and overheads which would be very difficult and a lengthy process to account for
Benefits to the Company through cost accumulation
Through application of process costing system the company reduced its bookkeeping work as in this method unit costs are more like averages. It provides exact matching of the cost of the product against the revenues which are earned through related sales and ensures that the costs of the product are transferred from final goods to the cost of goods the has been sold as sales. (Hnasen, Mowen, & Guan, 2007) It is an effective and corrective measure providing maintain over the manufacturing process. Managers are provided with feedback which is used for month wise comparisons. It ensures that the costs are kept in line with the projected manufactured budgets. It allows the senior managers to identify and deal with the insufficiencies within the supply chain.IRS also uses the reports for tax computations. Application of the process costing enhances uniformity all along the organization and the members of the manufacturing supply chain are synced appropriately
These industries have a large number of departments and the goods passes through a large number of processes. Its own budget is prepared by each of these departments. Thus proper process costing should be in place for compilation of each group’s respective costs that they undertook.
Drury, C. (2007). Management and Cost Accounting. Boston: Cengage Learning EMEA.
Hnasen, D., Mowen, M., & Guan, L. (2007). Cost Management: Accounting and Control. Boston: Cengage Learning.
Kinney, M., & Raiborn, C. (2012). Cost Accounting: Foundations and Evolutions. Boston: Cengage Learning.
Robinson, R. (2009). Cost. New York City: HarperCollins UK.