Executive Summary

Cost Sheet is the major part which is maintained by a company for costing and cost
control. Every Manufacturing companies in the world are maintaining cost sheet now-
a- days. We need to know the composition of cost at different stages. These will help
us in the analysis of cost of a product. Hasib Bakery maintain cost sheet for their
costing and cost control. Here, in this report we have learned about the cost sheet and
its component through analyzing the data of cost sheet of Hasib Bakery. It does not
maintain proper cost sheet. Through our limited knowledge we summarized the total
cost related information as a form of cost sheet and have come to a conclusion. Hasib
Bakery made large portion of his investment in bread also made the greater profit from
this sector. So we can say the most profitable sector for Hasib Bakery is Bread.

We have also described various contemporary issues of cost accounting. And

we find out the meaning, usage, procedures and the implementation area of the issues
in a short form at the bottom of the report.

Origin of the Report

We were assigning to prepare this report by our Honorable Course Instructor M. Takibur
Rahaman; Assistant Professor; Department of Accounting & Information
Systems; Faculty of Business Administration and Management; Patuakhali Science and
Technology University So we have selected to prepare this assigned report. It is one of the
report is a Pre-requisite for “Cost Accounting” course.

Scope of the Report

This report will fulfill all the tools and techniques of the analysis of cost sheet of the selected
Manufacturing Industry. We also calculate the per unit cost of every product that
manufactured by Hasib Bakery. The bakery produces mainly three items that are bread,
biscuits and cake.

Sources of data
To prepare this report we have used both primary and secondary data. Primary data are
collected from field survey of Hasib Bakery. Secondary data was collected from, documents,
relevant records, books and internet.

1
inTROduCTiOn:
Cost Accounting is that which identifies, defines, measure, reports and analyzes the various
elements of direct and indirect cost associated with the producing and marketing of goods and
services. It also measures the performance product quality and productivity. It’s a very
important for us to know about a company and their costing procedure. Another important
thing is to know how they control cost. Hasib Bakery is the well-known Bakery in
Patuakhali. So they maintain a well-organized cost sheet for performing well in their business
and we find pricing system of this bakery. Here, we analyze their cost sheet and mention the
selling price of these product.

OBjeCTiveS OF THe STudy:

To meet the new challenges of the competitive world we should have to gather more and
more knowledge about our courses. Firstly the purpose of the report is to meet up the course
requirement of “Cost Accounting”. To keep pace with the advance of new millennium as a
student of BBA program, we have to gather knowledge about which factors are most
important for the development of the country’s entire economy. Our report is fully based on
“Costing Practices in Hasib Bakery.” So, we have identified some objectives to prepare
this report. Our objectives of preparing this report are:

 To identify cost terminology involved in pricing decision;

 To know about the cost sheet including its format;
 To determine variable cost per unit and profit per unit;
 To evaluate current operations.
 To know about the pricing system of the organization.
 To analyze profitability of the organization.

2
meTHOdOLOgy OF THe STudy:
From the very beginning of preparing this report we have tried our level best to make
this report as a standard report. To prepare this report we have used both primary and
secondary data. Primary data are collected from field survey of Hasib Bakery. Secondary
data was collected from, documents, relevant records, books and internet.
In preparing this report we have maintained the following chronological stepladder:

Fixation of the Term Paper

Selection of the Sample

Go to working Sector

Analyze and Explanation

Collect Data and of
collected Data and Information

Processing Data and

Information

Final work ground of Term

Paper

We were assigned to prepare this report by our honorable course teacher M.Takibur
Rahman; Assistant Professor; Department of Accounting & Information
Systems; Faculty of Business Administration and Management; Patuakhali Science and
Technology University. Topics were selected by him and working sector was selected by us.
After that we have gone to the working place, collect data & information. Collected data and
information were interpreted to accomplish the report’s objective. At the final level the
findings we formatted and prepared for submission.

3
LimiTATiOn OF THe STudy:

Some limitation are given below –

1. There is no earlier report to maintain the standard for preparing this report.
2. Lack of sufficient and organized data which is strongly needed for preparation of
any report.
3. Lack of proper journal.
4. Minimum knowledge of resources.
5. Lack of sufficient privileges.
6. Unwillingness of business proprietors to provide their internal data.

4
 pART-1

ABOuT THe BuSineSS OF HASiB BAkeRy:

Name of the business:

The bakery is named as Hasib Bakery. It is operating its Business activities from the
Patuakhali district. The main office and the factory are situated in Sadar road, Patuakhali.

Background of the business:

This bakery was established at about eight years ago. Two brothers established Hasib Bakery
in 2002. It is a partnership Business which has only one factory.

Owner of the business

The nature of business is sole-proprietorship business. The present owner of the business is
Md. Humaun Kabir.

Product Category:

The bakery produces mainly three category products i.e., bread, cake, and biscuit.

Source of capital

There are mainly two sources, internal and external. The internal funds come from the owner
personal cash and loan from the relatives. The external fund comes from Bank loan.

Capital Structure

It was impossible to know the amount of initial investment of the bakery. But at present the
firm has a well debt and equity mix. The current investment of the firm is 40, 00,000. The
amount of cash investment is 20, 00,000 and the amount of loan is 20, 00,000.

Sources of raw-material
It collects raw-material from producer and wholesaler of nearest market. Only flour collected
from the producer and others raw-material collected from wholesaler.

5
Information about the SWOT analysis of bakery Business in
Patuakhali:
1. Strengths: (Internal)
 Availability of labor
 Availability of raw materials
 Use of modern technology
2. Weakness (internal ):
 Higher price of raw materials
 Absence of gas supply
 Lack of skilled manpower
3. opportunities (external):
 Higher demand of their product in local market
 Development of transportation system
4. Threats (external):
 Illegal demand of local terrorists
 Highly competitive market

Information about the SWOT analysis of Entrepreneur:

5. Strengths: (Internal)
 High educational qualification
 Supply of capital from internal sources.
 Enough knowledge about this business.

6. Weakness (internal ):
 Introvert
 Indifferent about business.

7. opportunities (external):
 Personal good will
 Member of various social organization

8. Threats (external):
 Personal conflict
 Political opponent

6
Literature review of the study:
Cost sheet: Meaning
Cost sheet is a statement which shows various components of total cost of a product
and analyses the components of cost of a product. Previous period data is given in the cost
sheet for comparative study. It is a statement which shows per unit cost in addition to total
cost. Selling price is ascertained with the help of cost sheet. The details of total cost presented
in the form of a statement are termed as cost sheet. Cost sheet is prepared on the basis of:
1) Historical cost
2) Estimated cost

Historical cost
Historical cost sheet is prepared on the basis of actual cost incurred. A statement of
cost prepared after incurring the actual cost is called historical cost sheet.

Estimated cost sheet

Estimated cost sheet is prepared on the basis of estimated cost. The statement
prepared before the commencement of production is called estimate cost sheet. Such cost
sheet is useful in quoting the tender of a job or a contract.

Importance of cost sheet:

The importance of cost sheet is as follows:-

 Cost ascertainment
The main objective of the cost sheet is to ascertain the cost of a product. Cost sheet helps in
ascertainment of cost for the purpose of determining cost after they are incurred. It also helps
to ascertain the actual cost or estimated cost of a job.

 Fixation of selling price

Fixation of selling price of a product or service, it is essential to prepare the cost sheet .it
helps in fixing selling price of a product or service by providing detailed information of the
cost.

 Help in cost control

For controlling the cost of a product it is necessary for every manufacturing unit to prepare a
cost sheet. Estimated cost sheet helps in the control of material cost, labour cost and
overheads cost at every point of production.

7
  Facilitates managerial decisions
It helps in taking important decisions by the management such as whether to produce or buy a
component, what prices of goods are to be quoted in the tender, whether to retain or replace
an existing machine etc.

Components of total cost:

The components of cost are shown in the classified and analytical form in the cost
sheet. Components of total cost are as follows:

 Prime cost
It consists of direct material, direct wages and direct expenses. In other words “Prime cost
represents the aggregate of cost of material consumed, productive wages and direct expenses.
“It is also known as basic, flat, first or direct cost of a product.
Prime cost = direct material + direct wages + direct expenses

Direct material means cost of raw material used or consumed in production.

Opening stock of material is added and closing stock of raw material is deducted in the
material purchased and we get material consumed or used in production of a product. It is
calculated as:

Material consumed = material purchased+ opening stock of material- closing stock of

material.

 Factory cost
In addition of prime cost it includes works or factory overheads. Factory overheads consist of
cost of indirect material, indirect wages and indirect expenses incurred in the factory. Factory
cost is also known as works cost, production or manufacturing cost.
Factory cost = prime cost +factory overheads

 Cost of goods sold

It is not necessary that all the goods produced in a period are sold in the same period. There is
stock of finished goods in the opening and at the end of the period. The cost of opening stock
of finished goods is added in the total cost of production in the current period and cost of
closing stock of finished goods is deducted. The cost of goods sold is calculated as:

Cost of goods sold = total cost of production + opening stock of finished goods –closing
stock of finished goods.

8
 COST SHEET – FORMAT

Particulars Amount Amount

Opening Stock of Raw Material ***
Add: Purchase of Raw materials ***
Add: Purchase Expenses ***
Less: Closing stock of Raw Materials ***
Raw Materials Consumed ***
Direct Wages (Labour) ***
Direct Charges ***
Prime cost (1) ***
Add :- Factory Over Heads:
Factory Rent ***
Factory Power ***
Indirect Material ***
Indirect Wages Supervisor Salary ***
Drawing Office Salary ***
Factory Insurance ***
Factory Asset Depreciation ***
***
Works cost Incurred ***
Add: Opening Stock of WIP ***
Less: Closing Stock of WIP ***
Works cost (2) ***
Add:- Administration Over Heads:-
Office Rent ***
Asset Depreciation ***
General Charges ***
Audit Fees ***
Bank Charges ***
Counting house Salary ***
Other Office Expenses ***

Cost of Production (3) ***

Add: Opening stock of Finished Goods ***

Less: Closing stock of Finished Goods ***

Cost of Goods Sold ***

9
Add:- Selling and Distribution OH:-
Sales man Commission ***
Sales man salary ***
Traveling Expenses ***
Advertisement ***
Delivery man expenses ***
Sales Tax ***
Bad Debts ***

Cost of Sales (5) ***

Profit (balancing figure) ***

Sales ***

10
 COST SHeeT AnALySiS OF HASiB BAkeRy
Table-1:

Basis of overhead
Items Bread Biscuit Cake
Floor area(sq. ft) 400 250 150

Number of workers and employees 25 15 12

Light and fan points 12 10 10
Machinery 70000 55000 40000
Machine Hours 250 240 230
Direct wages (tk) 15000 8000 7000
Sales unit 4170 950 580

From the table above, we get that, 400 sq.ft floor areas is used for production of bread. 250
sq.ft floor areas is used for production of biscuit. And for cake production, 150 sq.ft floor
areas is used.

The number of workers and employees employed for production of bread, biscuit and cake is
consequently 25, 15 and 12.

Light and fan points used for bread production are 12, for biscuit this amount is 10 and for
cake production, the used number of light and fan points is 10.

Machinery cost for bread is 70000, for biscuit is 55000 and for cake the machinery cost is
40000.

250 Machine Hours is used for bread production, 240 machine hours is used for biscuit
production and 230 machine hours is used for cake production.

In case of direct wages, 15000 Tk is the production cost of bread, 8000 tk is the production
cost of biscuit and 7000 Tk is the production cost of cake.

Sales unit cost for bread, biscuit and cake is 4170, 950 and 580 consequently.

11
 COST OF FACTORy OveRHeAd:
Table- 02:
Cost of factory overhead TK
Factory rent 5000
Fuel, Gas & Water 24000
Electricity cost of factory 2000
Nonproductive wage 3600
Sundry Factory expense 1000

Selling and distribution overhead cost TK

Supplier's Salary 6000
Agent Commission 5000
Bad debt 7000
Packaging Cost 24000
Sales Manager's Salary 6000

In the table-2, we can get the cost of factory overhead for Factory rent, Fuel, Gas& Water,
Electricity cost of factory, Nonproductive wage, Sundry Factory expense and Selling and
distribution overhead cost.

12
 Factory, Selling and distribution Overhead Distribution:
Table- 03:

Factory Overhead Distribution Summary

Total Production department
Items of expenses Basis of apartment Bread Biscuit Cake
Nonproductive wage Direct wages(15:8:7) 3600 1800 960 840
Factory rent Floor space(8:5:3) 5000 2500 1562.5 937.5
Electricity cost of factory Light points(12:10:10) 2000 750 625 625
Sundry Factory expense Direct wages(15:8:7) 1000 500 266.6667 233.3333
Fuel, Gas & Water M/H(25:24:23) 24000 8333.333 8000 7666.667
Selling and distribution Overhead Summary
Items of expenses Basis of apartment Total Production department
Bread Biscuit Cake
Supplier's Salary No. of employee(25:15:12) 6000 2885 1731 1385
Agent Commission Do 5000 2404 1442 1154
Sales Manager's Salary Do 6000 2885 1731 1385
Bad debt Sales unit(417:95:58) 7000 5121 1167 712
Packaging Cost Do 24000 17558 4000 2442

From the above table, we can easily realize the proportion of Factory Overhead Distribution
and Selling and distribution Overhead Summary for production of bread, biscuit and cake.

13
 Statement of cost of Goods Manufactures:

Hasib Bakery
Statement of cost of Goods Manufactures(monthly)

Period : Year Ended 31 December ,2010

Daily Cost Monthly Cost
Cost Items
Price
Total Price Total
Raw Material Consumed Unit Per Unit
Cost Per Unit Cost
Unit
Purchase Of Raw Materials
Flour (kG) 240 33 7920 7200 33 237600
Sugar (KG) 80 53 4240 2400 53 127200
Oil (Ltr) 20 87 1740 600 87 52200
Dalda (Ltr) 5 103 515 150 103 15450
Eggs (Dozen) 50 63 3150 1500 63 94500
Powder Milk (KG) 2 240 480 60 240 14400
Baking Powder (KG) 5 80 400 150 80 12000
Glucose (KG) 6 90 540 180 90 16200
Odour (GM) 500 0.8 400 15000 0.8 12000
Black Seeds (GM) 250 0.21 52.5 7500 0.21 1575
Salt (KG) 5 10 50 150 10 1500
East (KG) 3 280 840 90 280 25200
Total Purchase Of Raw Materials 20327.5 609825
Less : Abnormal Loss of Raw material 5280
Total Raw Material Consumed 604545
Add : Carriage Inward 5000
Add : Direct Wage 30000
Prime Cost 639545
Add : Factory Overhead
Factory rent 5000
Fuel, Gas& Water 24000
Electricity cost of factory 2000
Nonproductive wage 3600
Sundry Factory expense 1000
Cost of Production / COGS 675145
Add; Selling & Distribution
Overheads
Supplier's Salary 6000
Agent Commission 5000
Bad debt 7000
Packaging Cost 24000
Sales Manager's Salary 6000
Total Cost Of Production 723145

14
 Profit & Loss Account (Monthly)
For The Year ended December 31, 2010
Days
Sales Items Monthly
Unit Price Sold
Category-1(350gm) 400 25 10000 300000
Biscuits: Category-2(450gm) 300 30 9000 270000
Category-3(750) 250 50 12500 375000
Category-1(400gm) 200 20 4000 120000
Category-2(500gm) 200 25 5000 150000
Cakes:
Category-3(640) 100 32 3200 96000
Category-4(800gm) 80 40 3200 96000
Category-1(22gm) 3000 2.5 7500 225000
Category-2(35gm) 500 4 2000 60000
Category-3(45gm) 500 5 2500 75000
Bread:
Category-4(110gm) 100 12 1200 36000
Category-5(130gm) 50 15 750 22500
Category-6(220gm) 20 25 500 15000
Total 5700 61350 1840500
Less: Cost of Goods Sold (675145)
Gross Profit in Month 1165355
Less: Selling & Distribution overhead (48000)
Net Profit 1117355

15
 Production wise Statement of cost of Goods Manufactures:
Hasib Bakery
Production wise Statement of cost of Goods Manufactures(monthly)
Period : Year Ended 31 December ,2010
Raw Material Consumed: Production department
Purchase Of Raw Materials Bread Biscuit Cake Total cost
Flour (kG) 173823 39600 24177 237600
Sugar (KG) 93057 21200 12943 127200
Oil (Ltr) 38188 8700 5312 52200
Dalda (Ltr) 11303 2575 1572 15450
Eggs (Dozen) 69134 15750 9616 94500
Powder Milk (KG) 10535 2400 1465 14400
Baking Powder (KG) 8779 2000 1221 12000
Glucose (KG) 11852 2700 1648 16200
Odour (GM) 8779 2000 1221 12000
Black Seeds (GM) 1152 263 160 1575
Salt (KG) 1097 250 153 1500
East (KG) 18436 4200 2564 25200
Total Purchase Of Raw Materials 446135 101638 62052 609825
Less : Abnormal Loss of Raw material -3863 -880 -537 -5280
Total Raw Material Consumed 442272 100758 61515 604545
Add : Carriage Inward 3658 833 509 5000
15000 8000 7000
Add : Direct Wage 30000
Prime Cost 460930 109591 69024 639545
Add : Factory Overhead
Factory rent 2500 1562.5 937.5 5000
Fuel, Gas & Water 8333.333 8000 7666.667 24000
Electricity cost of factory 750 625 625 2000
Nonproductive wage 1800 960 840 3600
Sundry Factory expense 500 266.6667 233.3333 1000
Cost of Production / COGS 474814 121005 79326 675145
Add; Selling & Distribution Overheads
Supplier's Salary 2885 1731 1385 6000
Agent Commission 2404 1442 1154 5000
Sales Manager's Salary 2885 1731 1385 6000
Bad debt 5121 1167 712 7000
Packaging Cost 17558 4000 2442 24000
Total Cost Of Production 505665 131076 86404 723145

16
Table-4:

Determination of profit per unit of Bread:

Profit determination per unit for bread

Selling
Production Cost Price Profit per unit (tk)
Category-1(22gm) 2.39 2.5 0.11
Category-2(35gm) 3.81 4 0.19
Bread

Category-3(45gm) 4.89 5 0.11

Category-4(110gm) 11.96 12 0.04
Category-5(130gm) 14.14 15 0.86
Category-6(220gm) 23.93 25 1.08

From Table- 04, we can determine Profit for per unit of bread for different categories.

The data can also be presented graphically-

Bread
30

25
25 23.93

20

15
15 14.14

11.96 12

10

4.89 5
5 3.81 4
2.39 2.5
0.86 1.08
0.11 0.19 0.11 0.04
0
Category 1 Category 2 Category 3 Category 4 Category 5 Category 6
Production Cost Selling Price Profit Per Unit (Tk.)

17
 Figure-1 Shows that blue color stands for production cost, red for selling price and
green for profit per unit. In the graph for category-1(22gm) of bread, production cost is 2.39
whereas selling price 2.50. As a result profit per unit is 0.11. For category -2(35gm) of bread
production cost is 3.81 whereas 39 selling price 4.00. As a result profit per unit is 0.19. For
category -3(45gm) of bread production cost is 4.89 whereas selling price 5.00. As a result
profit per unit is 0.11. For category -4(110 gm) of bread production cost is 11.96 whereas
selling price 12.00. As a result profit per unit is 0.04. For category -5(130gm) of bread
production cost is 14.14. Whereas selling price 15.00. As a result profit per unit is 0.86. For
category -6(220 gm) of bread production cost is 23.93 whereas selling price 25.00. As a result
profit per unit is 1.08.It is clear that for category-6 the company earns the maximum profit
per unit of bread.

Table-5:
Determination of profit per unit of Cake:

Profit determination per unit for cake

Production price per sales price per Profit per unit
unit unit (tk)
Category-
1(400gm) 16.332 20 3.668
Cakes

Category-
2(500gm) 17.915 25 7.085
Category-3(640) 27.1312 32 4.8688
Category-
4(800gm) 35.664 40 4.336

From Table- 05, we can determine Profit for per unit of Cake for different categories.

18
The data can also be presented graphically-

Cake
45
40
40
35.664
35 32
30 27.1312
25
25
20
20 17.915
16.332
15

10 7.085
3.668 4.8688 4.336
5

0
Category 1 Category 2 Category 3 Category 4

Production Price Per Unit Selling Price Per Unit Profit Per Unit

Figure-2 Shows that blue color stands for production cost, red for selling price and green
for profit per unit. In the graph for category-1(400gm) of Cake, production cost is 16.332
whereas selling price 20.00. As a result profit per unit is 3.668. For category -2(500gm) of
Cake production cost is 17.915 whereas selling price 25.00. As a result profit per unit is
7.085. For category -3(640gm) of Cake production cost is 27.1312. Whereas selling price
32.00. As a result profit per unit is 4.8688. For category -4(110 gm) of Cake production cost
is 11.96 whereas selling price 12.00. As a result profit per unit is 0.04. For category -
5(800gm) of Cake production cost is 35.664. Whereas selling price 40.00. As a result profit
per unit 4.336.It is clear that for category-2 the company earns the maximum profit per unit
of Cake.

Table- 06:

Determination of profit per unit of Biscuit:

Profit determination per unit for Biscuit

Item Production price per unit selling price per unit Profit per unit
Biscuit

Category-1(350gm) 22.19 25 2.81

Category-2(450gm) 28.53 30 1.47

Category-3(750gm) 47.55 50 2.45

19
 From Table- 06, we can determine Profit for per unit of biscuit for different categories.

The data can also be presented graphically-

Biscuit
60

50
50 47.55

40

28.53 30
30 25
22.19
20

10
2.81 1.47 2.45
0
Category 1 Category 2 Category 3

Production Price Per Unit Selling Price Per Unit Series 3

Figure-3 Shows that blue color stands for production cost, red for selling price and green
for profit per unit. In the graph for category-1(350gm) of Biscuit, production cost is 22.19
whereas selling price 25.00. As a result profit per unit is 2.81. For category -2(450gm) of
Biscuit production cost is 28.53 whereas selling price 30.00. As a result profit per unit is
1.47. For category-3(750gm) of Biscuit production cost is 47.55 whereas selling price 50. As
a result profit per unit is 2.45. It is clear that for category-1 the company earns the maximum
profit per unit of Biscuit.

20
FindingS
We have surveyed bakery house named “Hasib Bakery”. And through making this
report we have some findings. Our findings are-

 Inappropriate profitability percentage.

 Inaccurate information about total monthly sales volume according to the
product line.
 Imperfect pricing system.
 No consideration of bad debt during pricing the product.

ReCOmmendATiOn
We have some recommendation from our own for this bakery house. Those are-

 Proper accounting practice should be developed.

 They should be more conscious about the total volume of sales.
 They should also pay attention to the costing system in case of pricing of
product alongside with the market price.
 They should consider bad debt while pricing the product.
 They should increase the production of most profitable product.

21
 pART-2

Contemporary Issues of Cost Accounting in Bangladesh

Introduction
Accounting systems take economic events and transactions that have occurred and process
the data in those transaction into information that is helpful to managers and others users. It
provides information about financial statements and performance reports

Complex Business Environment:

Modern cost accounting provides information managers need when making decisions. Cost
accounting provides information also for management accounting and financial accounting.
Management accounting is a specialized sub-set of accounting, focusing on internal needs of
businesses. The business environment is changing rapidly. Business is expanding their areas
day by day. For that reason, management of the companies is also becoming complex. For
reducing the complexity the new issues are coming to cope up in the new environment. The
contemporary issues of the management accounting are evolving to help and provide
information to the managers in a new business environment.

Cost Accounting:
Cost accounting is the internal business function responsible for allocating business costs to
goods or services produced by companies and analyzing other financial information resulting
from business operations. This accounting method is also referred to as cost accounting. Cost
accounting is the specific process of allocating raw material, labor and overhead costs to
consumer products. Managerial accounting often expands on this function to include
forecasting, budgets and assessing the profitability of current business operations.
Cost accounting deals with 3 main areas. They are-a) Direct material b) Direct labor c)
Overhead (Variable/Fixed)
Cost accounting is also concerned with forecasting the amount of sales or new business
opportunities companies may achieve when operating in the business environment.
Management accountants use statistical techniques such as decision trees, game theory, net
present value calculations or a variety of other quantitative or qualitative methods when
creating economic forecasts.

22
Contemporary Issues and techniques in Cost Accounting:
In the current world, manager is facing more complexities in the operation of daily activities.
Every day new techniques or strategies are innovating for operating or controlling
organization. As a result, to sustain in the competitive era as a manager have to adapt new
techniques or strategies. Those techniques or strategies managers is using for adapting or
controlling as well as for getting competitive advantages with new environment it’s called the
contemporary issues in management accounting. Such as;

1. Activity Based Costing (ABC)

2. Backflush Costing
3. Life Cycle Costing
4. Throughput Costing (TA)
5. Kaizen costing

Activity Based Costing:

Activity based costing (ABC) an accounting method that identifies the activities that a firm
performs, and then assigns indirect costs to products. ABC system recognizes the relationship
between costs, activities and products, and through this relationship assigns indirect costs to
products less arbitrarily than traditional methods. It is a methodology for more precisely
allocating overhead to those items that actually use it. The system can be used for the targeted
reduction of overhead costs. ABC works best in complex environments, where there are
many machines and products, and tangled processes that are not easy to sort out. Conversely,
it is of less use in a streamlined environment where production processes are abbreviated.

Process of Activity Based Costing:

Activity-based costing is best explained by walking through its various steps. They are:

 Identify activity and activity pools

 Directly trace or estimate costs to activities and cost objects
 Assign costs to activity cost pools
 Calculate activity cost driver’s rates
 Assign cost to cost objects
 Prepare reports

23
Uses of Activity Based Costing:

The fundamental advantage of using an ABC system is to more precisely determine how
overhead is used. Once you have an ABC system, you can obtain better information about the
following issues:

 Activity costs
 Customer profitability
 Distribution cost
 Make or buy
 Margins
 Minimum price
 Production facility cost

Limitation of Activity Based Costing:

 Cost pool volume.

 Installation time.
 Multi-department data sources.
 Project basis.
 Reporting of unused time
 Separate data set
 Targeted usage

24
What is Backflush Costing?
Backflush Costing a streamlined cost accounting method that speeds up, simplifies,
and reduces accounting effort in an environment that minimizes inventory balances, requires
few allocations, uses standard costs, and has minimal variances from standard. A product
costing system generally used in a just-in-time inventory environment. Backflush costing
delays the costing process until the production of goods is completed. Costs are then
"flushed" back at the end of the production run and assigned to the goods. This eliminates the
detailed tracking of costs throughout the production process, which is a feature of traditional
costing systems. By eliminating work-in-process accounts, backflush costing simplifies the
accounting process.

How it works/Example:
For example, let's assume that Company XYZ manufactures widgets. It has a variety
of choices in how it handles obtaining and recording the costs of its raw materials and labor.
For example, it could order a year's worth of widget parts every January and warehouse them
for use during the next 12 months of widget production or it could order widget parts once a
month and warehouse them for use during each month's production or it could order widget
parts only after it gets an order from a retailer, which minimizes the costs that Company XYZ
will have to incur to store widget parts.

This last idea is part of the just-in-time method of inventory management. By the time
Company XYZ has to pay the invoices for those raw materials (say, 90 days), it will have
already sold or at least finished producing the widgets and will thus have much more cash on
hand to pay those invoices.

Accordingly, Company XYZ decides to use backflush costing, whereby it records the raw
materials, labor, and other costs in its cost of goods sold and its finished goods inventory
accounts at a predetermined point in the production process (usually at the time of
completion, sale, shipment to the customer, or similar). Accordingly, backflush costing
results in recording very little in a company's Work in Process accounts.

Why Backlash costing:

An approach called backflush accounting (BA) has been developed to meet the
requirements of JIT manufacturing. The most important point to appreciate about BA is that
it isn’t a sequential tracking system. Block entries are made at the end of each month based
on the standard costing system to record the dispatch of goods, the manufacture of goods and
the use of raw materials. BA does not account for individual transactions. It also assumes that
there is no requirement to calculate manufacturing variances, because a modern
manufacturing environment will produce goods to predetermined specifications. Compared
with conventional accounting systems, BA is cheap to run, too. International Decorative
Products (IDP) produces a range of paints in separate production lines at its factory. Last year
the company entered into JIT arrangements with its suppliers and customers as part of a
program me to modernize its management practices.

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When Backlash costing:
The accounting department, after evaluating a number of BA methods, decided to introduce
BA using the following trigger points for transactions:

 Accounting entries are made when materials arrive in the factory from suppliers.
“Goods received” notes are raised.
 Other accounting entries are made at the end of month at standard cost on the basis of
total sales of products.

Why it Matters:

Backflush costing is a more streamlined method for accounting for the costs to produce goods
and services. Companies can measure the true and complete costs of a particular production
run because they record all of the costs at once, at the end of the process, rather than before,
during, and after the production process. This hastens the entire accounting process
considerably, but it comes at a price: Backflush accounting typically does not conform to
generally accepted accounting principles and makes companies difficult to audit.

Because companies using backflush costing essentially work backward by calculating the
costs of products after they're sold, finished, or shipped (rather than before and during the
production process, which is the typical method and is called sequential tracking), they often
assign "standard costs" to the units they produce. In the real world, companies that use
backflush costing eventually need to recognize the variances in standard costs and actual
costs by, for example, comparing the amount of labor cost they assign to a production run
with the actual payroll expense for that production run.

Life Cycle Costing:

The process of identifying and documenting all the costs involved over the life of an
asset is known as Life Cycle Costing (LCC). The initial capital outlay cost is, however, only
a portion of the costs over an asset’s life cycle that needs to be considered in making the right
choice for asset investment.

This Life Cycle Costing Tool has been developed to assist asset managers in decision
making based on performing a systematic assessment of the life cycle costs of selected water
and wastewater assets.

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Where Life Cycle Costing is applicable:
The total cost of ownership of an asset is often far greater than the initial capital outlay cost
and can vary significantly between different alternative solutions to a given operational need.
Consideration of the costs over the whole life of an asset provides a sound basis for decision-
making. With this information, it is possible to:

 Assess future resource requirements (through projection of projected itemized line

item costs for relevant assets);
 Assess comparative costs of potential acquisitions (investment evaluation or
appraisal);
 Decide between sources of supply (source selection);
 Account for resources used now or in the past (reporting and auditing);
 Improve system design (through improved understanding of input trends such as
manpower and utilities over the expected life cycle);
 Optimize operational and maintenance support; through more detailed understanding
of input requirements over the expected life cycle)
 Assess when assets reach the end of their economic life and if renewal is required
(through understanding of changes in input requirements such as manpower,
chemicals, and utilities as the asset ages).

Why is Life Cycle Costing Important to a utility?

This analysis will enable the Utility to:

 Make decisions for capital and O&M investments based on least life cycle costs,
 Rank each of the projects based on total cost of ownership,
 Combine the costing data with the Project Validation (See the Capital Project
Validation and Prioritization Tool for an in-depth discussion of project validation
concepts and practices) and Risk Reduction (See the Business Risk Exposure Tool for
an in-depth discussion of risk) scores to prioritize the projects,
 Make more informed decisions, and
 Allow better reporting to key stakeholders.

How Life Cycle Costing performs:

The life cycle of an asset is defined as the time interval between the initial planning for the
creation of an asset and its final disposal. This life cycle is characterized by a number of key
stages:

 Initial concept definition;

 Development of the detailed design requirements, specifications and documentation;
 Construction, manufacture or purchase;
 Warranty period and early stages of usage or occupation;

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  Prime period of usage and functional support, including operational and maintenance
costs, with the associated series of upgrades and renewal;
 The disposal and cleanup at the end of the asset’s useful life.

Estimating Life Cycle Costs:

The life cycle cost of an asset can be expressed by the simple formula:

Life Cycle Cost = initial (projected) capital costs + projected life-time operating costs +
projected life-time maintenance costs + projected capital rehabilitation costs + projected
disposal costs - projected residual value.

Throughput Costing:
Throughput Costing (TA) is a principle-based and simplified management accounting
approach that provides managers with decision support information for enterprise
profitability improvement. It is an approach that identifies factors that limit an organization
from reaching its goal, and then focuses on simple measures that drive behavior in key areas
towards reaching organizational goals.

TA was proposed by Eliyahu M. Goldratt as an alternative to traditional cost

accounting. As such, Throughput costing is neither cost accounting nor costing because it is
cash focused and does not allocate all costs (variable and fixed expenses, including
overheads) to products and services sold or provided by an enterprise. Considering the laws
of variation, only costs that vary totally with units of output (see definition of T below for
TVC) e.g. raw materials, are allocated to products and services which are deducted from sales
to determine Throughput. Throughput Costing is a management accounting technique used as
the performance measure in the Theory of Constraints (TOC).

How Throughput is calculated?

This is sales minus totally variable expenses, which usually translates into sales minus the
cost of direct materials, and perhaps commissions. Because so few costs are truly variable,
throughput as a percentage of sales should be quite high.
Throughput = Sales revenue – Total Variable Costs
Throughput Costing Ratio = Return per factory hour/Cost per factory hour.

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Kaizen costing:

Kaizen costing is a method to reduce the cost of a product through small, continuous
improvements during the manufacturing stage of the total life cycle of a product.

Why Kaizen costing:

A cost variance investigation is undertaken under Kaizen costing in order to compare actual
cost reduction amounts to target Kaizen cost reduction amounts. Variance investigation
occurs whenever cost-reduction targets are not attained.
The Kaizen costing system operates outside of the standard costing system because the
standard costing system is oriented to complying with Japanese financial accounting
standards and not internal operations.

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COnCLuSiOn

Cost Sheet is a major part which is maintained by a company for cost control and costing. We
need to know the composition of cost at different stages. This study helped us in the analysis
of cost of three products of Hasib Bakery on which conducted our study.

Cost Accounting identifies, defines, measure, reports and analyzes the various
elements of direct and indirect cost associated with the producing and marketing of goods and
services. It also measures the performance product quality and productivity. Cost Accounting
is very important for us to know about a company and their costing procedure. Another
important thing is to know how they control their cost.

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ReFeRenCeS:

 John A. Caspari and Pamela Caspari - Management Dynamics - ISBN 0-471-67231-9.

 Eric Noreen -Theory of Constraints and its Implications for Management Accounting-
ISBN 978-0-88427-116-1.
 Banerjee Bhabotosh, Cost Accounting Theory and practice, 12th edition prentice hall
of India private Limited, New Delhi-110001.
 Basu Prasad Sanker and Das Monilal, Theory and practice of cost accounting, 13th
edition, Rabindra library, 18M, Tamer lane, Kolkata-700009.
 Edward J.Venderbeck principal of cost accounting, 15th edition.

Appendix:

 Interview Schedule of “Hasib Bakery”

………………

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