Cost accounting

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Module Name: Cost Accounting
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TableofContents
Introduction ......................................................................................................................................1
Letter-1 .............................................................................................................................................3
Point-1 and its Solution...........................................................................................................................................................3
Letter-2 ...........................................................................................................................................10
Types of management accounting techniques.............................................................................................................10
Recommended Management Accounting for Your Business .................................................................................12
References......................................................................................................................................13

1
Introduction
This assignment is about the Cost Accounting. In this assignment I will mention the
different management accounting techniques. Inventory controlling techniques such as
LIFO, FIFO, Weighted Average, JIT and many others methods will be mentioned. These
all will be discussed in the following sections.

3
Letter-1
Tel:
Email: admin@secondcitysolutions.co.uk
Website:
26 January, 2013
Ruth Houghton
The owner
REH, a small company
Dear Madam,
I am a partner in a medium-sized accounting practice. Recently I attended a business
lunch to discuss how business can cope with the current economic uncertainty. At this
event I meet with you. In this event the specific points you has made with your problems
are given in the following:
Point-1 and its Solution
Point-1: One of REH’s main purchases is the glass that is used to frame the poster.
Since the warehouse is small, fresh deliveries of glass are placed on top of the ones
from older deliveries. You have used your current supplier for a number of years but are
worried that they are more expensive than rivals.
Solution to Point-1: Your worry can be solved in the way that can get a better
deal by telling your suppliers what price their competition is quoting. After that your
suppliers do not reduce the expense, and then you can switch your suppliers to test the
better one.

4
Point-2: You have been having a discussion with your accountants over how to value
the inventory of glass. Your accountants talked about FIFO, LIFO and weighted
average. You didn’t really understand what they meant.
Solution to Point-2: At first as a partner in a medium-sized accounting practice
firms, I am defining FIFO, LIFO and weighted average. There are three methods used
when valuing the goods that you have on hand at the end of the period. The following
example will illustrate this:
Your organization namely REH, a small company (5 employees) provides framed
posters that are sold in local furniture shops:
 July 1 Purchases 1,200 the glass at $1 each.
 July 13 Purchases 500 the glass at $1.20 each.
 July 14 Sells 700 the glass at $2 each.
First of all, how many lollypops does she have at the end of the month?
Answer:
1,200 + 500 – 700 = 1,000 lollypops
Now, there are three ways that you could value your closing stock:
1. The First-In-First-Out Method (FIFO)
This method assumes that the first inventories bought are the first ones to be
sold, and that inventories bought later are sold later (Arnold and Glen, 2008).
The value of our closing inventories in this example would be calculated as
follows:

5
Using the First-In-First-Out method, our closing inventory comes to $1,100. This
equates to a cost of $1.10 per lollypop ($1,100/1,000 glass).
2. The Last-In-First-Out Method (LIFO)
This method assumes that the last inventories bought are the first ones to be
sold, and that inventories bought first are sold last (eHow, 2012).
The value of our closing inventories in this example would be calculated as
follows:
Using the Last-In-First-Out method, our closing inventory comes to $1,000. This
equates to a cost of $1.00 per lollypop ($1,000/1,000 l glass).
3. The Weighted Average Cost Method
This method assumes that we sell all our inventories simultaneously (Horner,
2008).

6
In our example above (assuming the weighted average cost method was allowed
for valuing the lollypops), the value of our closing inventories would be calculated
as follows:
Using the weighted average cost method, our closing inventory amounts to
$1,059. This equates to a cost of $1.06 per lollypop ($1,059/1,000 lollypops).
Recommended Methods for You
According to Randolph and Jeffrey (2003) I am suggested for your organization namely
REH, a small company (5 employees) provides framed posters the FIFO methods
because of the following advantages of FIFO Method:
 The main advantage of FIFO method is that it is simple to understand and easy
to operate.
 It is a logical method because it takes into consideration the normal procedure of
utilizing first those materials which are received first.
 Closing stock of materials will be valued at the market price as the closing stock
under this method would consist of recent purchase of materials.
 This method is also useful when transactions are not too many and prices of
materials are fairly steady.

7
Point-3: The points that made Ruth Houghton about the EOQ and a more modern
method called JIT and the benefits or problems of REH using them.
Solution to Point-3: In the following I am describing the benefits and problems
behind the use of EOQ and JIT.
 Economic order quantity is the order quantity that minimizes total inventory
holding costs and ordering costs. It is one of the oldest classical production
scheduling models. EOQ applies only when demand for a product is constant
over the year and each new order is delivered in full when inventory reaches
zero. There is a fixed cost for each order placed, regardless of the number of
units ordered. There is also a cost for each unit held in storage, sometimes
expressed as a percentage of the purchase cost of the item (Mick and John,
2003).
 Just in time (JIT) is a production strategy that strives to improve a business
return on investment by reducing in-process inventory and associated carrying
costs. JIT focuses on continuous improvement and can improve a manufacturing
organization's return on investment, quality, and efficiency. To achieve
continuous improvement key areas of focus could be flow, employee involvement
and quality (McLaney and Atrill, 2010).
Point-4: The last issue that you mentioned in the event is to change accountants, and
you need someone who can explain things clearly to you.
Solution to Point-4: As you current Accountant was not able to advise you the
above term clearly you need to change your Accountants but remember that the
accountants must be honest and the person who can the above mentioned terms very
clearly.

8
I would be very grateful if you could let me know whether this kind of information is
useful to you and I am eagerly waiting for your reply.
……………………….
Yours faithfully
Sophie Benson
A partner in a medium-sized accounting practice

10
Letter-2
Tel:
Website:
26 January, 2013
Hansa Nahwad
The finance director
PJL, UK
Dear Madam,
I am a partner in a medium-sized accounting practice. Recently I attended a business
lunch to discuss how business can cope with the current economic uncertainty. At this
event I meet with you. As I heard from you that up to now, PJL have never used
management accounting since you- owner (100% shareholding) has said that you could
not see the point; you knew how to run your company. So for your kind information in
the following I am mentioning the different types of management accounting:
Types of management accounting techniques
Management accounting provides information to people within an organization while
financial accounting is mainly for those outside it, such as shareholders (McLaney and
Atrill, 2010). Management accounting, or managerial accounting, is a type of accounting
that analyzes information of a business in order to increase the business’s growth and
profitability.

11
 Management Accounting Technique-1: Strategic Management: According to
Randolph and Jeffrey (2003) the goal of strategic management accountants is
studying information internally within the organization and by taking external
factors into consideration as well. They not only analyze financial information of
the company, but other factors as well. For Example: Strategic accountants
always look at the whole picture by taking all necessary information into
consideration.
 Management Accounting Technique-2: Financial accounting is required by
law while management accounting is not. Specific standards and formats may be
required for statutory accounts such as in the I.A.S International Accounting
Standard within Europe (McLaney and Atrill, 2010).
 Management Accounting Technique-3: Cost accounting is an approach to
evaluating the overall costs that are associated with conducting business.
 Management Accounting Technique-4: Risk Management: Risk management
accountants have a focus on identifying, measuring, managing and reporting
risks of the company (eHow, 2012). For Example: Risk managers try to achieve
goals the company has set but also look for ways to avoid risk. This type of
management accounting focuses on identifying any risks associated with the
company.
 Management Accounting Technique-5: Transfer pricing is the rates or prices
that are utilized when selling goods or services between company divisions and
departments, or between a parent company and a subsidiary. For Example:
transfer pricing is considered to be a relatively simple method of moving goods
and services among the overall corporate family (eHow, 2012).
 Management Accounting Technique-6: Throughput accounting is a new
concept relating to the basic principles of management accounting. For
Example: throughput accounting theory transforms the traditional focus of cost
accounting from cutting costs to an accounting method that attempts to maximize
output (eHow, 2012).

12
Recommended Management Accounting for Your Business
Recommended Management Accounting for the Business (Given in the Case Study) is
Cost accounting which is an approach to evaluating the overall costs that are
associated with conducting business. Thus, you would like approval to employ a
management accountant and would like my help with persuading the managing director
that this would be beneficial to the company. For choosing the management account I
am giving you the following suggestions:
 Generally based on standard accounting practices, cost accounting is one of the
tools that managers utilize to determine what type and how much expenses is
involved with maintaining the current business model to the Business project
changes to these costs in the event that specific changes are implemented
(McLaney and Atrill 2010).
 When it comes to measuring how wisely the Business (Given in the Case Study)
resources are being utilized, cost accounting helps to provide the data relevant to
the current situation.
 By identifying production costs and further defining the cost of production by
three or more successive business cycles, it is possible to note any trends that
indicate a rise in production costs without any appreciable changes or increase in
production of goods and services (McLaney and Atrill 2010).
So the Management Accounting technique for your Business is cost accounting.
I would be very grateful if you could let me know whether this kind of information is
useful to you and I am eagerly waiting for your reply.
Yours faithfully
Sophie Benson
A partner in a medium-sized accounting practice

13
References
Arnold and Glen, 2008. Corporate financial management, Harlow; Pearson Education
eHow, 2012. The Types of Management Accounting. [Online] Availabl;e at:
http://www.ehow.com/list_6738707_types-management-
accounting.html#ixzz2FcvzbpiK[accessed on 20-1-13]
Horner, D., 2008. Accounting for Non-Accountants: A Manual for Managers and
Students Kogan Page
Marsh and Clive, 2009. Mastering financial management Harlow; Financial Times:
Prentice Hall.
McLaney, E. and Atrill, P. 2010. Accounting: An Introduction. Financial Times: Prentice
Hall
Mick B and John C, 2003. Managing Financial Resources (A Butterworth-Heinemann;
2003, 3rd edition) ISBN: 0750657553
Randolph W, Jeffrey J- Modern Financial Management (McGraw-Hill Higher Education;
2003, 8th edition) ISBN: 0071286527
Weston. F and Copeland. Thomas. (1979). Managerial Finance. CBS College, New
York.

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