Table of contents

Contents
Bonus scheme applied to the managers of the factory ...................................................................... 7

Task 1
Identify different types of costs within Telstom Engineering Limited A manager accountant need the costing information to manage the companys operation effectively , the manager has to understand clearly about the classification of all costs which are incurred in the business of the company. Thus, the manager of Telstom Engineering Limited should identify different types of costs : 1. Cost objects: For the purpose of stock evaluation and profit measurement , the cost accountant must calculate the cost of one unit. The total cost of a cost unit is made up of the following three elements of cost : Materials , Labour ,Other Expenses . a. Direct costs : a direct cost is a cost that can be traced in full to the product , service , or department that is being costed . And in direct cost is classified into 3 types : direct materials , direct labour and direct expenses costs : Direct materials costs : are the costs of materials that are known to have been used in making and selling a product or providing a service . Direct material is all becoming part of the product (unless used in negligible amounts and /or having negligible cost ) . Withthis company, the direct material costs will be the costs of iron, thread, steel, plastic which are parts of jet engines. Direct labour costs : are the specific costs of the workforce used to make a product or provide a service . Direct labour costs can be called direct wages . Direct labour costs are established by measuring the time taken for a job, or the time taken in direct production work . In terms of Telstom Engineering Limited, the direct labour costs are the costs which relate directly to produce jet engine such as the wages and salaries processing employees , assemble employees and finishing employees and production managers . Other direct expenses : are expenses that have been incurred in full as a direct consequence of making a product , or providing a service , or running a department . They are charged to the product as part of the prime cost . Examples of direct expenses of Telstom Engineering Limited is the cost of special strong jet engines

b. Indirect costs : A indirect cost or overhead is a cost that is incured in the course of making a product , providing a service or running a department , but which cannot be traced directly and in full to the product , service or department . Overhead or indirect costs include all indirect material cost, indirect wages and indirect expenses incurred by a business .

Indirect material costs which can not be traced in the finished product . For examples , the material used in negligible amounts Indirect labour costs or indirect wages meaning all wages not charged directly to a product . Indirect wages are salaries and wages of non-productive personnel in the production department. For examples in terms of Telstom Engineering Limited: wages and salaries of production supervisors , executive supervisors , cleaning labour, security Indirect expenses which can not be directly , conveniently and wholly allocated to a product . For examples, The depreciation of machines , the rent, rates and insurance of the factory , the power , repairs and maintenance of plant , machinery and factory buildings of Telstom Engineering Limited 2. Cost behaviour : . There are 3 types of costs according to the cost behaviour : fixed costs , variable costs and semi-variable costs. a. Fixed costs : are the costs which are incurred for a particular period of time and which, within certain activity levels, is unaffected by changes in the level of activity . This means that the costs remain constant in total regardless of changes in activity within a relevant range. For example , the rental cost of business premises within a stated time period , insurance.. b. Variable costs :are the cost which vary with the level of activity . This mean that this cost will change directly with the amount of production . For examples , direct material costs ( rise as more units of jet engines are made ) or direct labour ( increase when the company expands, the company will produce lager amount of products and will need more labours ) . c. Semi-variable costs are the costs which contain both fixed and variable components and partly affected by changes with the level of activity , eg cost of energy, such as electricity, is a good example as it is integral to production of goods and services. This component straddles both the fixed and variable universe because electrical power is essential for the basic operation of the business in lighting and heating this portion is a sunk cost that is foregone regardless of production. As demand ramps up, more energy is required to ramp up the production process in the use of machinery or large banks of computers for instance. Cost of electrical energy will then rise accordingly as production activities increase. Therefore, the cost of electricity can be viewed as semi-variable cost.

Task 2
The possible costing systems that the company is currently using Absorption costing According to the given income statements of which show that the company is doing extremely well , the information was provided by using absorption costing or full costing . All the information are shown under the form of full costing , referred to gross profit , not contribution margin in marginal costing . Absorption costing is the costing system which treats all manufacturing costs including both the fixed and variable costs as product costs . Product costs include direct material cost, direct labour cost , variable overhead costs and fixed overhead costs . The absorption costing method take both fixed costs and variables cost as product costs , in contrast, only variable costs are taken into product costs in marginal costing . Absorption costing is often contrasted with variable costing or direct costing. Under variable or direct costing, the fixed manufacturing overhead costs are not allocated or assigned to (not absorbed by) the products manufactured. Variable costing is often useful for managements decision-making. However, absorption costing is required for external financial reporting and for income tax reporting.1 Therefore, using absorption costing (full costing) can show sufficiently about the Telstom Engineering Limited s situation. Job costing Besides asorption costing which allocating manufacturing costs and variable costs to each finished good, Telstom Engineering Limited can also use job costing. Job costing system can be understood as the process of tracking the expenses that incurred on a job against the budget for that job. In this case, The job cost sheet is also provided to calculate exactly each worker job.It also contains direct material, direct labor and overhead.

Task 4
Based on both plans of asorption and marginal costing system, the projected income statement for the first year of operation of the new factory are provided in the table below:

Income statement under absorption costing

Revenue

662750 0 96200 357500 19500 180,000 100492.308 552,708 110,042 2750

Cost of good sold

Beginning Inventory Direct Material

Direct Labor
Overhead Variable Fixed Ending Inventory Gross Margin Selling and Admin Expenses Variable

Fixed

90,000 92,750 17,292

net profit

Income statement under marginal costing

Revenue

662750 96200 357500 19500 2750 72800 403150 259600 180,000 90,000 270,000 -10,400

Variable cost of good sold

Direct Material

Direct Labor
Overhead Variable Variable Selling and Admin expenses Ending Inventory Contribution Margin Fixed Epense Fixed Manufacturing Overhead Fixed Selling and Admin

Net profit

We can see the different between 2 tables is oprerating income in absorption costing and marginal costing.because of the ending inventory, there is a difference between two income statements with the amount of $27692.308. The fixed manufacturing overhead ($180,000) per year also includes period cost.in addition , in maginal costing, there are 550 units off direct labor that includes $2750 of fixed manufacturing costs. Because of this, the cost will be excluded from cost of goods sold (COGS). For all these reasons, the net profit from the new factorys operation is much higher than the marginal costing income. For more detail, look at the formula below:

Task 5
Bonus scheme applied to the managers of the factory In order to make profit, manager of Telstom Engineering Limited needs to use the advantages of absorption costing system. As I have mentioned above, by using this system, the more company produce their products, the more net profit that they gain. Besides many advantages, they also need to consider about disadvantages of this system while it is often too many goods in the warehouse. Moreover, it is not really equal for the salary of staffs and managers because the bonus often used for just few of top managers. To reduce this unfair situation, Telstom

Engineering Limited should provide detaily report which mentioned carefully about each job of
workers and managers. They should also provide the bonus money for workers who do great job to encourage them working better. By this way, the profit of company is also increasing.

APEDIX

1. Income statement using absorption costing and marginal costing. a. By marginal costing Unit cost = direct labor + direct material + variable manufacturing overhead b. By absorption costing Unit cost = Material + Direct labor + Variable Manufacturing overhead

References
Process Costing - AccountingTools. 2012. AccountingTools. Available at: http://www.accountingtools.com/overview-process-costing [Accessed 10 October 2012]. Process Costing - AccountingTools. 2012. AccountingTools. [ONLINE] Available at: http://www.accountingtools.com/overview-process-costing [Accessed 19 October 2012]. Different Types of Costs with Examples - Layman Blog. 2012.[ONLINE] Available at: http://layman-blog.blogspot.com/2010/06/different-types-of-costs-with-examples.html. [Accessed 10 October 2012].