Cost Accounting - ArcelorMittal - Essay Example

Cost Accounting Contents Reference 10 11 Part ArcelorMittal is one of the leading steel manufacturing companies in the world. In 2010 ArcelorMittal produced almost 90.6 million tones of steel which represents almost eight percent of steel production of the world (ArcelorMittal-a, n.d). While manufacturing a stainless steel a lot of processing takes place. Separate costs are incurred in every process and they are recorded as per that. The raw material has to undergo many sub processes for manufacturing the steel. Steel is made of two elements namely iron and carbon. Stainless steel contains 1.2% iron where as the other steel like cats steel and carbon steel has 2% of carbon (ArcelorMittal-b, n.d). The stainless steel is manufactured in five main processes. These processes are melting, hot rolling, annealing and pickling, cold rolling and finishing. All the processes are done in different departments. The process of steel manufacturing starts with melting in the melt shop. In this department the scrap is melted. The scrap acts as the raw material of the stainless steel. Once the scrap is melted in the melting the output is transferred to the hot rolling mill for further processing. In this rolling department the meted scrap is rolled two meter wide. Once the hot rolling department is done with its work then the output is transferred to the annealing and pickling department for further processing. In this department fine coil of thickness varying from 1.2 mm to 13 mm is produced. The mechanical properties of the stainless steel are regained in this process. Some of these coils are sold to the industries the remaining ones are transferred to the fourth process of cold rolling. Hence the cost is allocated after considering the products which is sold to the industries. In cold rolling and annealing department the thickness of the coil is again reduced to 0.3mm in order to meet up the customers’ needs. In this process the coil is rolled into a flat surface to give the stainless steel flatness. Once this is done the output from this department is transferred to the metal finishing department. In this department the flat stainless steel is cut into different shapes and sizes which will be ultimately sold to the market (ArcelorMittal-c, n.d). As the manufacturing is done in a series of processes therefore the costing of the outputs must be done as per the process costing. Part 2 While manufacturing any product many costs are incurred. Some of these costs can be identified form the products and some cannot. The costs which can be traced form the product are directly allocated to the product costs while those costs which cannot be traced from the products like the different costs associated with the overheads are allocated to the cost of the product with the help of different cost allocation methods. While manufacturing stainless steel also many types of costs are incurred some of the main costs are given below:- Direct costs: Direct cost can be defined as the costs which can be traced from the cost of the product (Horngren et al, 2009, p.26). The direct cost involves cost of direct material, direct labor and other costs which can be identified from the products. Direct labor: Direct labor signifies the labor of those employees who are directly involved in the manufacturing process that is the process of converting raw material into finished goods. Cost incurred for direct labor is the direct labor cost (Rajshekharan & Lalitha, 2010, p.116). The wages given to the workers who does the melting, cutting and other processes for manufacturing steel is the direct labor cost. Direct material: Direct materials imply the raw materials which are used for manufacturing the product. While manufacturing the stainless steel the direct material is the scrap which forms the basis of the product. This is also a traceable cost. Direct product costs: Direct product cost can also be termed as the as the direct cost associated with the product. This is the sum of the direct labor cost, direct material cost and other direct cost. This cost can be traced form the product. Fixed costs: fixed costs are the indirect costs which cannot be traced from the cost of the product. These costs will be incurred even if no product is produced. The salary of the manager of the factory, supervisors’ salary, rent of the office premises etc are the fixed costs. Indirect labor: Indirect labor signifies the labor of those employees who does not work in manufacturing the product directly. They are indirectly associated with the production. Salaries given to the store manager of the factory, salaries of the administrative staff etc are indirect labor costs. Indirect materials: indirect materials are those materials which support the manufacturing process but do not become the product’s part. The cutters used in the metal finishing department are the indirect materials (Kumar et al, 2003, p.186). Inventoried costs: inventoried costs are the cost of inventory. Inventory includes the finished product which is ready for sale. Manufacturing costs: Manufacturing costs includes the cost of the manufacturing the product. It includes both direct and indirect cost of the finished product as well as the work in progress. It shows how much costs have been incurred while producing the product. Prime costs: Prime costs can be described as the direct cost of production or the direct expenses. It includes the cost of direct material, direct labor and other direct expenses. It is a traceable manufacturing cost which has a major impact on the overall cost of the product. Uncontrollable costs: Uncontrollable costs are those costs which are cannot be controlled by the managerial intervention. The lease payment for the land for factory building is an example of uncontrollable costs. Variable costs: Variable costs are the direct costs which can be traced for the cost of the products. These costs vary as per the production. The cost of the raw material and the direct labor cost are the variable cost. Unlike the fixed cost variable cost depends on the production (Ross, Westerfield and Jordan, 2008, p.345). Controllable costs: Controllable costs are the cost which can be controlled by managerial intervention. Usage of material direct as well as indirect can be specified as the controllable cost as through managerial intervention excess usage of material can be controlled (Lal and Srivastava, 2008, p.41). Conversion costs: Conversion costs are the costs which are incurred while converting the material into finished stock. This includes the costs of direct labor and cost of manufacturing overhead which have been used for production (Horngren et al, 2009, p.40). Batch level costs: Batch level costs are the cost of product produced per batch. There are many products which are produced per batch. The cost incurred for production per batch is the batch level cost. The cost of individual product of the batch cannot be traced but he cost of the batch can be traced. Discretionary costs: Discretionary costs are those costs which are not essential for the short term profitability but are incurred for the long term benefit like the cost of advertising, research and development etc. The research and development helps the company in gaining competitive advantage in the long run. Therefore the research and development costs are considered as discretionary costs. Period costs: Period costs are the costs which are not directly related to the production of the product. These costs are incurred for a definite period of time therefore it is known as period costs. Cost like administrative expenses, commission, salary of the employees etc are the examples of period costs. Semi variable costs: Semi variable costs are those costs which have both fixed and variable cost in it. This cost includes both fixed and variable component. Payment made to the production manager who is entitled to incentive is an example of semi variable cost as his salary is fixed and incentive will vary. Indirect costs: Indirect costs are those costs which cannot be traced from the cost of the product. Indirect costs can be both fixed and variable. Indirect labor cost, indirect material costs and other associated indirect costs are a part of indirect costs. The cost of operation is highly depended on the indirect costs. If the company incurred high indirect costs then the net profit will be affected. Facility level costs and unit level costs: facility level costs are those costs which are incurred for maintaining a facility. Like the cost incurred to maintain the blast furnace of the steel plant or the insurance paid for the steel factory will be considered as facility level costs. Unit level costs on the other hand are the costs which are incurred for a unit produced (Jackson, Sawyers and Jenkins, 2008, p.161). The cost of producing a single unit of stainless steel is the unit level cost. The indirect costs are generally allocated to the product by the activity based costing. As per the activity based costing the costs are allocated according to the activity. Implementation of activity based costing needs proper identification of the cost drivers. As per the activity based costing first of all the major activities of the manufacturing and other business process are identified. This may include the handling of material, cutting of the flat stainless steel, rolling other material etc. then the cost drivers that is the factors which responsible for the activity are determined. Like the cost driver for the allocating the labor cost will be the labor hours, indirect materials used in terms of machine will be machine time etc. Once the cost drivers are identified then the costs will be allocated as per the drivers (Saxena and Vashisht, 2004, p.4.37). Part 3 Many strategies are used by the companies to gain competitive advantage over the other companies operating in that industry. The two main strategies which are generally used by the companies are product differentiation and cost leadership. Cost leadership can be implemented by reducing the overall cost of the product. With the reduction of the cost of the products more profits can be earned with the sale of every single unit. Cost leadership is one of the generic strategies used by many companies to gain competitive advantage. To gain competitive advantage the company targets to achieve economies of scale and produces a standard product at low cost (Porter, 1998, p.12). The product differentiation strategy is generally practiced in that industries where there are a large number of sellers are selling more or less same type of products. It is a common strategy in monopolistic markets. Product differentiation can be described as a situation where the products of the different companies appeared to be same but are not perfect substitute because they vary in features or any other condition which make them unique among the others (George, Joll and Lynk, 1992, p.213). The competitive strategy which the ArcelorMittal generally follows is the cost leadership strategy to gain the competitive advantage. They achieve cost leadership by increasing the productivity of the employees, reducing the consumption of the energy and decreasing the cost of the inputs at the same time they aims at improving the quality of the products and the productivity (The Financial Express, September 17, 2008). In 2008 their plan regarding the next five years include cost saving which in turn will help the company to gain the competitive advantage through cost leadership (ArcelorMittal-d, 2008). To gain competitive advantage the company should choose the project after conducting the financial feasibility study. This can be done with the help of different capital budgeting techniques and cost volume profit analysis. Cost leadership also enables the company to reach the breakeven point faster. Breakeven signifies a situation where the company neither gains profit nor suffers loss. In this situation the revenues earned and costs incurred are at par. The costs of the company are controlled through variance analysis and standard costing where the actual costs are compared with the budgeted costs or planned costs of the product which helps the management to find out the reason for any variance. Thus all these factors are also important to gain competitive advantage. Reference ArcelorMittal-a. (No Date). Profile. [Online]. Available at: http://www.arcelormittal.com/index.php?lang=en&page=9. [Accessed on: September 24, 2011]. ArcelorMittal-b. (No Date). Discover stainless. [Online]. Available at: http://www.arcelormittal.com/stainlesseurope/what-stainless-steel.html. [Accessed on: September 24, 2011]. ArcelorMittal-c. (No Date). Manufacturing process. [Online]. Available at: http://www.arcelormittal.com/stainlesseurope/manufacturing-process.html. [Accessed on: September 24, 2011]. ArcelorMittal-d. (2008). Press releases. [Online]. Available at: http://www.arcelormittal.com/index.php?lang=en&page=49&tb0=339&tblng=1. [Accessed on: September 24, 2011]. George, K. D. Joll, C. and Lynk, E. (1992). Industrial organisation: competition, growth and structural change 4th ed. Britain: Routledge. Horngren. et al. (2009). Cost Accounting. India: Pearson Education India. Jackson, S. R. Sawyers, R. B. and Jenkins, G. (2008). Managerial Accounting: A Focus on Ethical Decision Making 5th ed. Canada: Cengage Learning. Kumar. et al. (2003). Entrepreneurship Development. India: New Age International. Lal, J. and Srivastava, S. (2008). Cost Accounting. India: Tata McGraw-Hill Education. Porter, M. E. (1998). Competitive advantage: creating and sustaining superior performance : with a new introduction. USA: Simon and Schuster. Rajshekharan, V. & Lalitha, R. (2010). Cost Accounting. India: Pearson Education India. Ross, S. A. Westerfield, R. and Jordan, B. D. (2008). Fundamentals of corporate finance 8th ed. India: Tata McGraw-Hill Education. Saxena, V. K. and Vashisht, C. D. (2004). Advanced cost and management accounting textbook 5th ed. India: Sultan Chand and Sons. The Financial Express. (September 17, 2008). ArcelorMittal announces $4 bn cost saving plan. [Online]. Available at: http://www.financialexpress.com/news/arcelormittal-announces-4-bn-cost-saving-plan/362556/. [Accessed on: September 24, 2011]. 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