Management Accounting Report: Cost Classification and Process Costing

This report examines management accounting principles, specifically focusing on cost classification and process costing techniques within the context of the Tea Factory Company (TFC). The report begins by defining and categorizing various cost classifications, including fixed, variable, and semi-variable costs, as well as classifications based on function, nature, and time period. It then analyzes the value of these classifications for TFC, highlighting their benefits in budget preparation, efficiency measurement, cost control, and operational expansion. The report further explores how cost classification aids in decision-making processes, such as product mix selection and pricing strategies. The second part of the report introduces process costing as the most appropriate technique for TFC's new tea-flavored chillers and ice cream production, detailing the five-step procedure involved in process costing, including summarizing the flow of physical units, computing equivalent units, calculating unit costs, and assigning costs. The advantages of process costing over other methods are also discussed. Finally, the report outlines the benefits of adopting process costing for TFC's management, such as ease of cost computation, simplified documentation, and effective cost control.

RUNNING HEAD: MANAGEMENT ACCOUNTING
Management Accounting

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Requirement 1
Cost is basically a measurement of the resources used for producing goods and services.
However the classification of cost is done on several basis. They are as follows:
 On basis of variability
Under this basis, the cost is classified as fixed, variable and semi variable. Fixed cost is the
one which remains fixed at all the levels, variable ones changes with the change in quantity
produced and semi variable includes the components of both the fixed and variable cost
(Rajasekaran, 2010).
 On basis of function
In this, cost is classified as production costs, administrative cost, selling and distribution cost.
It represents the cost incurred by each department of the organizations during the process of
production.
 On the basis of nature
The direct and indirect cost comes under this category. Direct cost are the one which are
easily traceable to a product. Whereas the indirect ones cannot be allocated to a product
directly (Vanderbeck, 2012).
 On the basis of time period
Under this criteria, costs are categorized as standard cost, pre-determined cost, historical cost
and estimated cost. These cost are incurred according to the time horizons (Boyd, 2013).
Value of classification for TFC

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Certain value or benefits will be enjoyed by the Tea Factory Company, if it classifies all the
cost that are incurred on production of the new tea products, on the basis of above criteria.
They are as follows:
 The classification will help the company to prepare its budgets easily and also for
each and every department. It will enable TFC to know about the exact amount of cost
incurred in different department of the company.
 TFC can easily measure the efficiency of its business. By critically observing the
amount and place where the cost has incurred, Tomohiro Hasegawa can measure the
efficiency of the firm.
 Cost control can be established with the help of cost classification. Labour cost can be
control by measuring the efficiency of the labours, material cost can be minimized by
controlling the material wastage and the overhead cost is controlled by knowing the
accurate amount of expenses incurred in every department.
 TFC can also expand its operations, if the company knows exactly where its cost is
incurred. By classifying the cost of its new production, TFC can expand its business
and production by controlling the cost (Batini & Scannapieco, 2016).
However, such classification can also help in improving the decision process of a company.
By properly categorizing the costs, Tomohiro can improve its decision making related to
some important aspects of the company. Cost classification enhances the process of decision
making in the following ways:
 The classification of cost into fixed and variable will help the CEO of TFC to take
appropriate decisions like buying or making a product, selecting a perfect product
mix, keeping the standard capacity and many more.

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 Decisions related to profit planning can also be enhanced once the CEO of the
company know about the behaviour and types of cost incurred during the production
of new products.
 Fixing the selling price is also stimulated by the categorization of cost into fixed and
variable elements. On the basis of such classification, Tomohiro can opt for a suitable
selling price policy which will earn profits for the company.
 Estimations regarding marginal costing and break even analysis can be easily made.
Apart from the above decisions, there are several types of decisions required to be taken by
the CEO of TFC which he can easily made with such classification of cost.
Requirement 2
In order to be competitive in the market, TFC has planned to introduce the new products
named as tea-flavoured chillers and tea-flavoured ice cream. The production of these items
require a long process and involves several departments which starts with extracting the tea
content from the tea leaves to delivering the finished product directly to the retailers for the
purpose of sale. For this, the most appropriate technique employed by the company is process
costing. It is the method of costing used in the units where the products are manufactured or
developed through one or more processes.
Under this method, the cost per unit is calculated by dividing the total cost of inputs with the
expected output units. The production tea products goes through many phases and through
many departments. The raw materials are imported from JAS certified organic tea leaves
from Japan and Rainforest Alliance tea leaves from Kenya. Packaging materials are taken
from Australia and these are order by the procurement manager and delivered to the
warehouses. The materials are then used in the manufacturing plants and each type of tea
product has different and unique manufacturing process. After the product is finished, it is

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then sold directly to the retailers and the management of the same is been controlled by the
wide network of sales office of TFC.
Process costing works in the following way:
With the adoption of this technique, TFC is required to follow the five step procedure to
identify the cost of its products. The procedure is as follows:
 Summarize the flow of physical units of output
Tea product developing at TFC will flow through various processes and each of the process
has certain cost associated with the products. These cost are generally material, labour and
overhead cost. In TFC, cost comprise of extraction of tea element, labour required and the
expenses incurred on the same (Lal, 2009).
 Computing equivalent units
To calculate the overall cost, TFC will have to determine the number of units completed at
each stage. Equivalent units are to be calculated in process costing method as they represent
the completed products and the incomplete one are include in work in progress.

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 Compute the unit cost
It is calculated by adding the WIP and cost incurred during the month, divided by the total
equivalent units. WIP represents the incomplete equivalent units and the process cost will be
assigned to the 100% completed units.
 Analysing and assign the costs
The final stage is to analyse the total cost of the process and assign the cost to the equivalent
units and ending WIP. This also includes number of units produced and their associated cost.
By properly following the above procedure, TFC can easily determine the cost of process and
then can calculate its products cost.
The process costing is superior to the other costing techniques because it is simple and direct
method of ascertaining the cost of all the departments. It ignores the cost related to specific
jobs and calculates the overall cost of the department. This also helps in reducing the volume
of data and make the collection easy and quick. Process costing also makes it easy to predict
the average cost of product by applying correct estimates (DRURY, 2013).
Requirement 3
Certain benefits are been there to the management of TFC for adopting the process costing
technique in its business.
 It is easy to compute the cost periodically at the end of every particular period.
 Requires less documentation and is simple to apply
 In order to determine accurate cost, process costing makes its simple to allocate the
expenses to processes
 Includes effective use of standard costing system
 Helps the management to prepare tenders and quotes for their products.

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 Management can easily establish a control over the cost as the cost data of each
process, department and operation is easily available (Horngren, 2009).

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References
Batini, C., & Scannapieco, M. (2016). Data and information quality: dimensions, principles
and techniques. Berlin: Springer.
Boyd, K. (2013). Cost Accounting for Dummies. New Jersey: John Wiley & Sons.
DRURY, C. M. (2013). Management and cost accounting. (7th ed.). USA: Springer.
Horngren, C. T. (2009). Cost accounting: A managerial emphasis. (13th ed.). New Delhi:
Pearson Education India.
Lal, J. (2009). Cost Accounting. (4th ed.). New Delhi: Tata McGraw-Hill Education.
Rajasekaran, V. (2010). Cost accounting. New Delhi: Pearson Education India.
Vanderbeck, E. J. (2012). Principles of cost accounting. USA: Cengage Learning.

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