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Cost classification assignment

   

Added on  2021-05-19

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FinanceLeadership Management
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MACB - 1Prepared by Table of ContentsI.Introduction.......................................................................................................................................................2II.Identify and analyse the cost information within Intel Semiconductor Ltd...............................................21.Using the cost classifications to classify different categories of cost incurred in Intel Semiconductor.........................................................................................................................................................2Direct costs............................................................................................................................4Indirect costs..........................................................................................................................4Fixed costs.............................................................................................................................7Variable costs.........................................................................................................................7Semi-variable costs................................................................................................................8Step costs..............................................................................................................................9Product costs.......................................................................................................................10Period costs.........................................................................................................................102.Apply different costing techniques on the given information for Intel Semiconductor.......................11Absorption costing................................................................................................................14Marginal costing:..................................................................................................................163.Using appropriate techniques to calculate costs for product C1 and C2............................................19Activity Based Costing (ABC) method...............................................................................19Standard costing...............................................................................................................24FIFO method (First in, First out)........................................................................................25LIFO method (Last in, First out)........................................................................................264.Using appropriate techniques to analyse the cost data on the basis of above cost classification..28One dimensional/direction diagrams.................................................................................28Two-dimensional diagrams...............................................................................................28Three-dimensional diagrams.............................................................................................285.Utilize performance indicators to find out the potential improvements...............................................376.The recommendation for improvements to reduce costs, appreciate the value and quality...............44Cost reduction...................................................................................................................44Enhancing value...............................................................................................................45Total Quality Management................................................................................................49III.Conclusion......................................................................................................................................................52IV.Reference.......................................................................................................................................................53I.Introduction1
Cost classification assignment_1

MACB - 1Prepared by In fact, each and every company needs accounting to manage their costs and budgets. IntelSemiconductor is also no exception. From that point, this report will show how the companyapply Cost Classification to categorize each of their costs into Cost behaviour (Fixed orVariable) and Management function (Direct or Indirect). Moreover, in order to value its stock, the report will try to apply both LIFO and FIFO methods forIntel Semiconductor so that the company can easily choose the most appropriate one. Besides, this report will also emphasize on Marginal and Absorption costing thenrecommending the better method to be applied into the company to reduce tax liability. Inaddition, process costing, standard costing, AVCO method, TQM, KPIs will also be introducedin this report. II.Identify and analyse the cost information within Intel Semiconductor Ltd.1.Using the cost classifications to classify different categories of cost incurred inIntel SemiconductorThere are two main types of accounting including: Management Accounting and FinancialAccounting.Management Accounting is on the behalf of internal activities, which specifically relate to thecareful calculation of the costs incurred in the company so that Intel Semiconductor can easilyanalyse them and based on these results, they can anticipate what will happen in theforthcoming period. Since then, due to this, the company can improve and fix the situation sothat it can easily increase profits once increasing the productivity effectively. For instance, inIntel Semiconductor, the company can apply management accounting to foresee how cost willincrease in the next period in terms of the costs for health, welfare system to ensure the fitnessof its human resources, or the level of increase or decrease of some production activities. Sincethen, Intel can easily find out the most effective way to balance all the changes in such costsand then remain the stable situation for the company. Furthermore, as it is just related tointernal activities and operations, Management Accounting can be flexible rather than ensuringthe strict rules and regulations.In contrast, financial accounting is on the behalf of external activities and instead of predictingwhat is going on in the forthcoming period, financial accounting is applied to record, summariseand analyse the costs that incurred in the past. Besides, as it is referred to the outside activitiesof the organization, this type of accounting relate directly to external stakeholders rather than2
Cost classification assignment_2

MACB - 1Prepared by internal ones like the first mentioned types of accounting, it includes customers, government,bank, creditor, debtor, distributor, supplier, etc.In this report, the main ideas will be emphasised on the first type that mentioned above,management accounting.As for business, cost is actually important. In fact, each and every business needs to calculatethe amount that they have to be paid or given up in order to get something. In other words, costin business is usually a monetary valuation of its effort, material, labour, time and otherresources or risk incurred as well as opportunity forgone in production and the delivery ofproducts or services. Therefore, controlling the cost effectively helps businesses achieve theirobjectives easily. However, the question here is how to keep control of unexpected changes.This is the issue that is concerned solely by most of businesses. Intel Semiconductor is also noexception. In order to control the cost, one of the most important things this technologicalcompany needs to do is to classify all of their incurred cost which related to three elements asfollows:oMaterialsoLaboursoOther expensesFirst of all, the cost can be classified as follows:3
Cost classification assignment_3

MACB - 1Prepared by Figure 1.1: The diagram of direct and indirect costsFrom the chart that given above, there are two main types of cost including direct and indirectcost that Intel Semiconductor will have to pay to sustain its operations. Direct costs: are the costs that can be completely identified with a particular cost centreor cost object such as departments, products, processes, services (Business DictionaryWebsite)Direct costs include direct labour, direct material as well as direct expenses for production. Itmeans: Direct costs = direct material costs + direct labour cost + other direct expenses.Moreover, the level of some of this type of cost will change and vary according to the rate of theoutput. For instance, in terms of the direct labour and direct material, the more amount ofproducts that Intel Semiconductor produce, the more cost of these categories they will pay. In addition, such cost will be recognised under the unit of production such as per labour, perhour, per unit, etc. such as an amount of wage that an assembly worker is paid per hour or theexpense paid for each plastic board used to mount the chip, etc.Indirect costs: are whatever costs that are not related directly to any specific product orfunction within the general operation of a business though it provides the services or running a4
Cost classification assignment_4

MACB - 1Prepared by department. Therefore, this type of costs will absolutely have an impact on the entire operationof any business in general and Intel Semiconductor in particular. And since it influences on thewhole activities, making it hard to charge them into a specific function or departmentSimilarly, indirect cost will be calculated as follows:Indirect cost = indirect material cost + indirect labour cost + indirect expensesMoreover, in order to identify the wide application of this cost, there is a term that indirect costsare sometimes called as ‘overhead’.In terms of Intel Semiconductor, the cost for the administration of its business is a goodexample. In particular, when manufacturing a computer chip, the company has to pay a sum ofsalary for indirect labours for the monitoring and evaluating processes including supervisors,production manager, etc. Additionally, with a technological company, Intel will definitely need topay a huge amount for a hundred of engineers within its company. Besides, there are athousand of non-productive personnel within Intel Company such as officers includingaccountants, assistants, managers, etc. will also receive monthly salary incurred from indirectcosts of this organization. Moreover, the materials that used for negligible amounts after makinga defective chip will be classified as indirect material costs since this part of material cannotfunction normally and will be thrown away instead of being traded into the market. In addition,the items such as paper, pens and other essential stationary to serve for the use of recordingand keeping the level of productivity in factory or other functions in each department are alsoclassified in this category. Furthermore, the payment for services such as auditing andpreparation of legal documents that impact on the overall operation are also considered asindirect expenses of Intel in nature. Besides, with the technological company like Intel, it hasapplied many state-of-the-art technologies for manufacturing products, from that point, thepayments for upkeep and maintenance of such modern business facilities are also consideredas huge indirect expenses for Intel to pay. In addition, in terms of selling overheads, SemiConductor also need to spend commission for its salesperson which depend on their weekly ormonthly sales. All of these ideas mentioned above can assume in the chart below:5
Cost classification assignment_5

MACB - 1Prepared by Figure 1.2In the other words, it can also be assumed that: Total cost = Direct material costs+ Direct labour costs + Overheads. From the above formula to calculate the total cost, the total cost of direct materials and directlabour can be seen as Product cost or Prime cost. The rest of the amount, overheads (in termsof Admin and S&D Overheads) will be seen as Service cost for this IT Company.Then, for Intel Semiconductor, based on the given scenario, those mentioned costs will beclassified clearly in the table below:Direct costsIndirect costsLaboursMaterialsLaboursManufacturingOverheadsAdminOverheadsS&DOverheadsAssembly workerwhoattachchips toplasticboardPlasticboardused tomountthe chipSalary for factorymaintenanceworkersReal Estate taxespaid on thefactoryReal Estatetaxes paid onthe companyofficeAdvertisingcosts topromoteproductsFactory supervisorDepreciationcosts onmachinerySalesperson’commissions6MATERIALOVERHEADLABOURDirectcostDirectcostIndirect costIndirectcostIndirect expenses for Production overheadsAdmin overheadsS&D overheadsTOTAL
Cost classification assignment_6

MACB - 1Prepared by Salary for the chieffinancial officerFrom the above table, there are only two direct costs including the assembly workers andplastic boards. The rest of them are overheads in terms of manufacturing, selling andadministration overheads.Secondly, based on Cost behaviour, apart from the above classification, cost can also beclassified into three other small groups including fix, variable and semi-variable costs. Let’shave a look to examine the characteristics of each single group as follows:Fixed costs: are the costs that do not vary or depend on the increase or decrease ofproduction or the level of other operations. It tends to be time-related such as the monthlysalaries or payments of rent and often relate to the overhead costs. For instance, IntelSemiconductor will need to pay salaries for officers, accountants, managers, etc. no matter howhigh level in sales or productions.Besides, the expenses for advertising, marketing, R&D aftermanufacturing chips are also a good example for fixed costs that this company has to pay.However, this type of costs is not permanently fixed at all, they may change over time, they justfix in relation to the quantity of production in the relevant period. For example, IntelSemiconductor will need to pay just a fixed amount of renting for their ware houses within theperiod that they signed in the contract with the owner.Variable costs: is in contrast to fixed costs as such variable costs are changed inproportion to the activity of a business.This type of costs is sometimes called unit-level costs asthey vary with the number of units produced (Wikipedia Website). Let’s take an example of thepayment of labour in Intel Semiconductor, when the activity is decreased, fewer labours areneeded, so the spending for labours falls. By contrast, once the level of operation in factory isincreased as the demand for computer chips grows unexpectedly, the number of laboursneeded to manufacture will definitely increase, it is when the spending for labours is higher thanthe previous mentioned period.7
Cost classification assignment_7

MACB - 1Prepared by Figure 1.3 (Source: Wikipedia)From the chart, the horizontal line shows the amount of fixed costs and the going-up linerepresent for variable costs. It is easy to figure out that fixed costs and variable costs made upthe two components of total costs. Direct costs, can be easily associated with a particular costobject. However, not all variable costs are direct costs. In Intel Semiconductor, for example, thecommissions for salespersons are variable and increase according to the higher number ofgoods sold, but it is seen as indirect expense for the company.Semi-variable costs: are expenses that consist of the mix characteristics of both fixedcosts and variable costs (Wikipedia Website). In fact, the fixed cost element is a part of the costthat needs to be paid without considering or being influenced by the level of activity. On theother hand, the variable component of the cost is considered as a payable amount according tothe proportion of the level of activity. For example, Intel Semiconductor will pay for maintenancefees in each period regardless of how much power gets used. It shows similarities to someelectrical equipment such as air conditioning, lighting, etc. They also may be kept running evenin periods of low activity. In this period, these expenses can be classified as fixed. However,beyond this, the company will use electricity to run machinery or other plants as required. Sincethen, when the output is experienced changes, the demand ramps up, therefore the busier thecompany, the more power will be required and run. For this reason, the more electricity getsused as the cost of electrical energy will rise accordingly as the production activities increase.This extra expense can be regarded as variable. Another example is salaries for salespersonwho receive commissions. Although this group is paid on a fixed salary, they still can get reward(which is regarded as variable) based on the volume of sales that they achievedIn the given scenario about Intel Semiconductor, those costs can also be classified into thesementioned categories of costs based on Cost behaviour as follows:8
Cost classification assignment_8

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