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https://www.myaccountingcourse.

com/accounting-dictionary/actual-costing
iii)

Actual costing:

Definition:
Actual costing is a cost accounting system that uses actual cost, direct-cost rates, and actual
qualities used in production to decide the cost of particular products. Usually an actual costing
system traces direct costs to a cost object or something that has a measurable cost.
In other words, managers go back to the source of the costs (cost objects) like labour and
materials. Managers can analyse how many hours of manufacturing time a product
need to calculate the actual costs of producing that product.

What does actual costing mean?

Here are the typical actual costing system formulas:

Example
Managers can use these formulas to calculate the total production costs. For example, managers
first need to find out how many hours it took the company to produce the product and how much
the company is paying its employees per hour. Using the first actual costing formula, these
numbers make up the labour portion of the production costs. The same is done for materials.
Overhead is a little different.

Since overhead like utility usage is a little difficult to assign to a single product, managers
usually make estimates. They estimate how much overhead was used and how long the overhead
was used. Using the second actual costing formula, management can determine the indirect
productions costs for producing the product. After all the calculations are done, add up the totals
and you’ll get the actual cost of producing your product.
After the actual cost is known, management can change the production process in order to meet
budget goals.

https://www.myaccountingcourse.com/accounting-dictionary/normal-costing
Normal costing:
Definition:
Normal costing is cost allocation method that assigns costs to products based on the materials,
labour, and overhead used to produce them. In other words, it’s a way to find the price of an item
that is being produced using three different cost factors (which make up the product cost).

What Does Normal Costing Mean?


What is the definition of normal costing? The product costs that make up normal costing are
actual materials, actual direct costs and manufacturing overhead. The materials and direct costs
are the true costs that are associated with producing the item such as raw materials (the materials
that make up the product) and labour.

In this costing approach, manufacturing overhead is an estimated rate decided by management or


accountants. Manufacturing overhead includes the expenses that are related to producing the
item but cannot directly be applied to the items. Examples of manufacturing overhead include
facility rent or mortgage, electricity in the facility and depreciation on the machines that are used
to produce the items.

Here is an example:
Terry is the CEO of a furniture manufacturing company. Terry needs to find the normal cost of
one of their most popular item, a coffee table. In the last production, the company produced
10,000 coffee tables. The actual materials used totalled to be $50.00 per table and direct costs
were $20.00 per table. The manufacturing overhead determined per table is $10.00. So, Terry
determines it costs the company $80.00 to produce one coffee table.

Terry can use this information in many different ways. One, is to value his inventory. Any
company that has inventory has to assess its value for accounting purposes. This costing method
is a popular way of valuating inventory because it associates 2 actual costs (materials and direct
costs) and only one estimated rate to the product. Terry can also use the normal cost per unit to
determine a mark-up for sales. If Terry makes each coffee table for $80.00 and wants to mark-up
all items at a 100% rate, he would sell the coffee table for $160.00.

https://www.myaccountingcourse.com/accounting-dictionary/standard-cost

Standard costing:
Definition
: A standard cost is an estimated expense that normally occurs during the production of a product
or performance of a service. In other words, this is theoretically the amount of money a company
will have to spend to produce a product or perform a service under normal conditions.
What Does Standard Cost Mean?
Standard costs are sometimes referred to as pre-set costs because they are estimated based on
statistics and management’s experience. Basically, management calculates how much each step
in the production process should cost based on the market value of goods, median wages paid per
employee, and average utility rates. This estimated calculated amount is the standard cost. It’s
the amount that the company should have to pay to produce a good.

Example:
Management uses these costs in two different ways. First, they use them to plan out future
production processes and increase efficiencies. By looking at the preset costs for operations,
management can innovate new ways of producing products that don’t require the same
procedures–thus, reducing cost.
Second, management uses these expenses to determine how reasonable the actual costs were for
the period. Since present costs and actual costs are rarely identical, management can evaluate
how close the actual expenses matched what they should have been. This is similar to
the budgeting process. If the actual expenses were higher than the preset expenses, the company
would have an unfavourable variance. On the other hand, if actual is less than the standard, the
difference is said to be a favourable variance. Management can use these variances twofold. It
can evaluate the efficiencies or inefficiencies that led to the variances and adjust them. It can also
evaluate the expenses for fraud.
For example, if actual material were way above the standard limit, management can investigate
why so many raw materials were purchased and whether or not all of the purchases were put into
production. This ensures employees aren’t ordering goods and stealing them. Typically, standard
costs are divided into three categories: material, labour, and overhead.

Iv) inventory management systems: http://www.managementstudyguide.com/inventory-


management.htm

Defining Inventory:
Inventory is an idle stock of physical goods that contain economic value, and are held in various
forms by an organization in its custody awaiting packing, processing, transformation, use or sale
in a future point of time.
Any organization which is into production, trading, sale and service of a product will necessarily
hold stock of various physical resources to aid in future consumption and sale. While inventory
is a necessary evil of any such business, it may be noted that the organizations hold inventories
for various reasons, which include speculative purposes, functional purposes, physical
necessities etc.
From the above definition, the following points stand out with reference to inventory:
 All organizations engaged in production or sale of products hold inventory in one form or
other.
 Inventory can be in complete state or incomplete state.
 Inventory is held to facilitate future consumption, sale or further processing/value
addition.
 All inventoried resources have economic value and can be considered as assets of the
organization.

Different Types of Inventory:


Inventory of materials occurs at various stages and departments of an organization. A
manufacturing organization holds inventory of raw materials and consumables required for
production. It also holds inventory of semi-finished goods at various stages in the plant with
various departments. Finished goods inventory is held at plant, FG Stores, distribution centers
etc. Further both raw materials and finished goods those that are in transit at various locations
also form a part of inventory depending upon who owns the inventory at the particular juncture.
Finished goods inventory is held by the organization at various stocking points or with dealers
and stockiest until it reaches the market and end customers.
Besides Raw materials and finished goods, organizations also hold inventories of spare parts to
service the products. Defective products, defective parts and scrap also forms a part of inventory
as long as these items are inventoried in the books of the company and have economic value.
Types of Inventory by Function

INPUT PROCESS OUTPUT

Raw Materials Work In Process Finished Goods

Consumables required Semi Finished Finished Goods at


for processing. Eg : Production in various Distribution Centers
Fuel, Stationary, Bolts stages, lying with through out Supply
& Nuts etc. required in various departments Chain
manufacturing like Production, WIP
Stores, QC, Final
Assembly, Paint Shop,
Packing, Outbound
Store etc.

Maintenance Production Waste and Finished Goods in


Items/Consumables Scrap transit

Packing Materials Rejections and Finished Goods with


Defectives Stockiest and Dealers

Local purchased Items Spare Parts Stocks &


required for production Bought Out items
Defectives, Rejects and
Sales Returns

Repaired Stock and


Parts

Sales Promotion &


Sample Stocks

V. Job costing systems: https://www.myaccountingcourse.com/accounting-dictionary/job-


costing

Definition: Job costing is an expense monitoring system that assigns manufacturing costs to each
product, enabling managers to keep track of expenses.

What Does Job Costing Mean?


Job costing systems determine manufacturing costs systematically by dividing them
in overhead, direct material, and direct labour costs and estimating them at their actual value.
Manufacturing firms are using job costing to control the use of raw materials, labour hours and
equipment by allocating the cost of each customer order separately.
Especially, when a firm’s products are not identical, job costing in an effective tool to allocate
the cost of each product and keep track of the order expenses. Nowadays, most businesses are
using computerized job costing systems to improve cost control and boost their profitability.
Let’s look at an example.

Example
Manufacturing company ABC uses a job costing system to allocate job order costs at their actual
value and track costs accurately to generate a profit. In January 2015, the company’s project
manager prepared a yearly plan, estimating approximately $625,000 in overhead costs.
Moreover, the carrying balances from 2014 were raw materials $25,000, work in progress
$95,000, and finished goods $31,000.
During 2015, the company has recorded a variety of transactions, as follows:
The company’s accountant prepares the job costing sheet taking into account the transactions of
the year and the carrying balances, as follows:
He allocates the costs per type of cost by creating three main categories, Raw Materials, Work in
Progress and Manufacturing Overhead.
Raw Materials includes the carrying balance of $25,000 for 2014 and $800,000 for 2015. From
the total of $825,000, the accountant deducts the cost of raw material used in work in progress A
$720,000. The remaining balance is $105,000.
Work in Progress includes the carrying balance of $95,000 for 2014, and the direct and indirect
costs for work in progress A and work in progress B. From the total of $1,434,740, the
accountant deducts the cost of finished goods. The remaining balance is $77,940.
Manufacturing Overhead includes the costs of work in progress B, the overhead for depreciation,
utilities and insurance, and the sales commissions expenses. From the total of $ 952,000,
accountant deducts the cost of work in progress A and work in progress B. The remaining
balance is $237,000.
Now, he can calculate the net operating income for 2015 by deducting the cost of goods sold for
the company’s sales to find the gross profit. Then, he deducts the costs of sales commissions,
administrative expenses, advertising expenses, travel expenses, and insurance to arrive at a net
operating income of $1,409,000.

b) presenting financial information:


I. different types of managerial accounting reports.

Scheduled reports:
Exception report:
Demand reports:
Planning reports:

II. why is it important for the information to be presented in manner that must be
understandable. https://bizfluent.com/info-8610383-importance-understandability-
accounting.html

Definition:
Understandability in accounting information implies clarity. Companies must follow standard
accounting principles in order to properly report business transactions. If a company fails to do
so, then stakeholders are typically unable to follow the company’s accounting information.
Essentially, companies that report financial information in their own specific manner strip away
understandability and the ability to understand financial reporting.

Consistency:
When companies follow standard accounting principles, understandability increases among
stakeholders. This also leads to consistency in financial reporting. Consistency means a company
handles its business transactions the same way each time they occur. When a company comes to
rely on these attributes, then reasonable expectations begin. For example, stakeholders believe
they can predict how a company will perform financially based on previous financial
information.

Comparability:
Comparability is a secondary aspect of understandability. Its importance comes from the review
of two different companies’ financial information placed next to each other. Stakeholders can
then understand each company’s information and make assertions based on the data in the
reports. Without understandability, comparability reduces, even to the point of its absence.
Stakeholders who cannot make decisions based on financial data lose benefits gained from this
information.

Considerations:
A reasonable amount of financial acumen is often an inherent assumption with understandability.
The concept does not imply a business must make its data understandable for all individuals,
regardless of business knowledge. Accountants should make every attempt to provide
information that regular business individuals can understand. For example, disclosures on
accounting policies can help increase understandability among stakeholders.