Costing Procedures Used by Hugh - Essay Example

Finance and Accounting Table of Contents (a)Costing procedures used by Hugh 3 (b)Necessity of this procedure 4 (c)Usage of the accounting procedures by Pedro 5 (d)Discussion of the comment made by Hugh Knock 6 Reference List 8 (a) Costing procedures used by Hugh The costing procedures that Hugh Knock had thought of, for selling bags of peanuts, are Operating Costing or Service Costing and Overhead Costing. Operating cost can be defined as the ongoing cost for running a business, product or system. It basically denotes day-to-day expenses that a business has to incur. In an income statement, it is presented as sum of expenses for a period of time, such as, a month or year (Mittal, 2006). Operating expenses help to find out costs that are incurred for running a particular service. In this costing technique, each service is treated as separate units. For running a nursing home, a unit can be treated as cost of a bed, payment to employees and other such services. Therefore, operating expenses include: Accounting expenses Advertising expenses License fees Repairs and maintenance expenses Office expenses Insurance Property taxes Supplies Travelling expenses “Lean Cost Management is another approach to financial measurement that makes waste and the costs it creates visible, and hence actionable, wherever and whenever it occurs in an organization” (Hobbs, 2011). Following this approach, a business can very well eliminate excessive transaction costs, re-ordering costs; minimize inventories and all other unnecessary costs involved. The lean cost management technique brings into notice all excessive costs and helps the business to reduce it accordingly. It foregrounds the required agility with which the level of production can be increased as well as the cost that can be reduced without hampering quality of products. Its aim is to reduce seven forms of wastages in manufacturing made by any business, like, unsold inventory, which is considered as overproduction as per this method. Lean costing technique is a perfect example of costing in an agile environment. There are various expenses that are incurred by a business. These overheads expenses can be effortlessly allocated by using lean cost management and operating costing technique. Based on these techniques, expenses for each overhead incurred by a business can be noticed more prominently and allocation of funds can be done in an effective and methodological manner. These cost management techniques allow a business to forecast the cost and lessen it as per necessity. Therefore, the technique that Hugh Knock had decided for Pedro’s business was rightly the operating costing and lean cost management method (Gupta, 2009). According to Knock, this method will help Pedro to find out the unnecessary unit cost involved in his future business and curb it accordingly. Hugh also stated the necessity of bigger business to allocate the cost per unit of their service. He made the statement with a thought that this will eventually help Pedro to reduce cost of several overheads as well as maintain level of profitability. Thus, operating and lean costing techniques can provide Pedro with the best way to estimate the cost to be incurred for each overhead in his business and also, allocate and curb it afterwards, as per suggestion of Hugh Knock (Arora, 2009). (b) Necessity of this procedure The accounting procedures of lean and operating cost management help to reflect the excessive cost and reduce it as per need of the business, with agility. It gives an idea for judging costs that are required to incur and make investments accordingly. These procedures aid in profit planning, fixing prices and cost control. For any business, it is necessary to calculate the expenses that are incurred. Expenses should then be distinguished as per their nature. When a business identifies the costs as fixed and variable or direct and indirect costs, it becomes easier to allot funds for each of these units, as per business needs. By using Lean costing method, any business can reduce wastages and produce as per demand of the customer (Ries, 2011). These costing policies and techniques are favourable measures to calculate the cost of business. Through the use of these techniques, the future costs can also be foreseen, thereby enabling the business to take measures and reduce unnecessary costs related to rent, transportation, insurance, license fees, repairs and maintenance and any sorts of supplies. Calculated measures can easily be taken from beforehand in order to reduce these costs and increase revenue margins of any business. Also, these costing techniques have provided fruitful results in the past for multiple corporate houses. There are many other costing techniques, which are used for the purpose of cost reduction of business entities. Operating costing and lean cost management methods are the most popular among them (Eldenburg and Wolcott, 2007). (c) Usage of the accounting procedures by Pedro Hugh has rightly used the accounting procedures and policies for the peanut venture of Pedro. It will only add to the profit margin of the latter. Pedro thought of selling the products at prices, which will be higher than the purchase price (Shim and Siegel, 2009). Unfortunately, he did not consider any costs that will be involved in running his peanut business. He thought like a layman while deciding upon his business and avoided all other factors, which are responsible of raising his cost, instead of his profit margin. Without any accounting judgements, Pedro had contemplated starting business and making enough profit to visit his mother. Being a qualified accountant helped Hugh to see the darker side of starting a business. He stated that if his volume of peanut sales increases, it will also lead to higher operating expenses. With the expansion of his business, he will also have to handle expenses related to depreciation of his products. In short, Hugh made it clear to Pedro that the bigger his business will grow, the more he would need to allocate for operating expenses (Ries, 2011). Therefore, he suggested the technique of operating costing and lean cost management for Pedro’s business. He believed that these cost management techniques will appropriately aid Pedro to gain in the long run by making right investment choices as well as reducing wastages, like, the inventory, by matching the customer demand with the supply. These costing techniques will help Pedro to identify expenses related to rent, wages and area of the counter and reduce them as well. Pedro can cut down on these expenses by moving to a building with cheaper rent, lowering wages, washing the windows every other week, reducing area of the counter and in all other ways that he wants to. Only if he follows an accounting procedure, as suggested by Hugh, can he achieve a level of profitability of his expectation. Operating costing method is useful for Pedro in this respect as it will guide him to judge and forecast per unit cost of various expenses related to his business and cut down on them so as to increase his margin of profit. He would be able to reduce his fixed and variable costs as per the necessity of his peanut business. Lean cost management, on the other hand, will help him to lower the unnecessary cost, increase production with agility as well as run the business more logically. This method will help Pedro to maintain the cost incurred for production and lessen the cost related to other overheads of the business, which he intends to start. Both operating and lean cost management techniques are widely used in business and thus, being a professional accountant, the guidance of Hugh was essential to reduce the cost margin of Pedro’s business (Eldenburg and Wolcott, 2007). He also offered Pedro suggestions to increase price of the peanuts, instead of aggravating unnecessary costs of the overheads required for his business. Hence, Hugh Knock’s suggestion about accounting procedures and policies for the venture, that Pedro wants to start, are quite appropriate. (d) Discussion of the comment made by Hugh Knock The statement made by Hugh Knock to his colleague is justified to a large extent. The accounts of any business should be such that it helps it to maximise profit, after covering all the costs related to it. The second most important motive of accounting is shareholders’ wealth maximisation. Companies should maintain their costs well; take steps to identify any excess cost; and reduce them as per the necessity of business operations. Following these costing techniques helps organisations to exhibit more agility in their business as well as greater level of performance. The lean costing techniques provide remedies not only to highlight the excessive costs, but also help to boost the production techniques with dexterity (Tyson and Schell, 2011). This will help the company to realise its profit well out of the cost incurred earlier. Shareholders’ wealth is maximised only when business is robust and is making profit throughout with excellent performance. Hence, it is a necessity for any business to adapt styles of accounting, which would be appropriate and saves the same from any losses in the future. Sound accounting system aids identification of the units related to a business, which are lowering the profit margin of the company. After a proper analysis, measures can be taken in order to eliminate or find ways to reduce the costs related to these units. The shareholders are legal owners of the business (Blocher, et. al., 2006). Therefore, besides maximising their profit, it is necessary for companies to maintain full transparency, while dealing with their accounts. This can be done by only those enterprises, which make true presentation of their costs and profitability position. It enables these businesses to gain confidence among the shareholders. Investors might feel more confident in investing in those companies, who have a strong profitability position and transparency in their accounts. If the shareholders realize that the business in which they have made an investment has least cost and more revenue, then they acquire the required assurance easily. It can give them motivation to invest more in shares of the company. A company with more cost and less profit can never satisfy the shareholders and might lead to collapse of the business, thereby harming the people associated with it (Huntzinger, 2007). Hence, it is extremely necessary to maintain healthy accounting techniques as well as identify costs involved and reduce them for facilitating growth and expansion of the business. If these are not taken care of, then it might significantly affect profitability position of the company. The company might go bankrupt and be full of debt, if it loses the required cautiousness and focus towards proper maintenance of accounts. Cost cutting should always be one of the mottos of any company. Business entities should never forget to maximise their profits for the benefit of the management and employees as well. If a company, out of excessive debt and cost, ceases to exist itself; then, it renders the individuals associated with it vulnerable too. To sum it all, we can say that the statement made by Hugh Knock to his colleague was absolutely correct and justified. He had given a true insight and apt presentation of the business world through this statement. Reference List Arora, M.N., 2009. A texbook of cost and management accounting. Noida: Vikas Publishing House Pvt Ltd. Blocher, C., Chen, K., Cokins, G. and Lin, T., 2006. Cost management: a strategic emphasis. New York: Tata McGraw-Hill Education. Eldenburg, G.L. and Wolcott, K.S., 2007. Cost management: measuring monitoring and motivating performance.USA: John Wiley & Sons. Gupta, P.K., 2009. Cost management: measuring, monitoring & motivating performance. New Delhi: Global India Publications. Hobbs, P.D., 2011. Applied lean business transformation: A complete project management approach. New Castle: J. Ross Publishing. Huntzinger, R.J., 2007. Lean cost management: Accounting for lean by establishing flow. New Castle: J. Ross Publishing. Mittal, D.K., 2006. Cost accounting. New Delhi: Galgotia Publications. Ries, E., 2011. The lean startup: How todays entrepreneurs use continuous innovation to create radically successful businesses. New York: Crown Business. Shim, K.J. and Siegel, G.J., 2009. Modern cost management and analysis. New York: Barrons Educational Series. Tyson, E. and Schell, J., 2011. Small business for dummies (3rd ed.). New Jersey: John Wiley & Sons. Read More