Management Accounting BHP Billiton Samples †MyAssignmenthelp.com

Question: Discuss about the Management Accounting BHP Billiton. Answer: Introduction Product costing is the cost which is incurred by the company to create the product. These costs may be direct or indirect and can be apportioned at various stages of the development of the product. In short it the process to determine all the expenses of the company pertaining to the creation of the final product of the company (Horngren, 2011). This type of costing system helps in identifying the cost of a unit of product as it involves all the resources of utilisation of the materials and inputs which have been utilised at the various levels of productions. As per Maher (2005) product costing has been emerged as the modern costing technique as it helps as a great decision tool for the management at various levels and also finds out various leakages and loopholes in the current structure of the organisation. The company selected by us is a leading manufacturer of iron, steel, gas, oil, copper, silver and aluminium in the world named as BHP Billiton it has various aspects of working and a multinational presence which makes it a global leader in its space. This company mainly incurs exploration, site development, extraction (automatic and by labour) and then sell the final product in the demanding market, so product costing is very much important as each of the above-mentioned product manufactured is produced by resource utilisation at various level and quantity (BHP Billiton, 2016). This makes the usage of a proper costing system and absorption of costs very useful for achieving economies in the business adopted by it. Costs needed to be included in the product cost of BHP Billiton Direct Costs: These are the costs which can be directly attributable to the cost of the products of the company. These are mainly of 3 types: Direct Materials: The various materials procured to convert the raw material to desired final product are direct material costs. For example, alloys purchased to produce iron, copper, aluminium and chemicals to purify them. So Raw materials and consumables used is part of the direct cost (Horngren, 2011). Direct Labour: The compensation paid to workers which convert the raw material to finished product and also the costs of various benefits paid to workers. So Wages, salaries and redundancies, social security costs and pension obligation are part of direct labour. Other direct costs: BHP Billiton also incurs a large amount of freight inward and outward, sales commission paid to various agents in other countries are to be included in the direct costs of the company. Indirect costs: These are the costs other than direct costs of the product which are also referred to as manufacturing overhead, factory burden/ overheads. There are a large number of costs which are included in indirect costs like electricity, outside services, depreciation, repairs and maintenance and other manufacturing related costs (Vanderbeck, 2013). These are mainly allocated on the basis of machine hours, labour hours, labour costs, etc. The Indirect costs for BHP Billiton are as follows: Costs of external services procured by the company in the various production phases. Government royalties paid and payable. Depreciation and amortisation expense incurred. Exploration and evaluation expenditure incurred and expensed in the current period. Operating lease rentals. Third party commodity purchases. Manner in which BHP should track the direct product cost In this competitive environment, there are always predetermined standards or budgets in the organisation which are used as a tool for analysing the costs and the reasons for its deviation from the standard set by the organisation during its initial budgeting or historical trends observed by the company. So, standard costing techniques can be used to track the direct product cost (Shim Siegel, 2009). Standard costs are pre-determined costs representing the actual cost of the product at the most efficient conditions for production and operations. This is done by a collection of technical data relating to production and applying costs to each element at the various levels. Types of direct costs include materials and labour which form a major part of the cost of a unit, so it is very important to track direct costs of the products as any variance from the standards defined can affect the cost of the product to a great extent making it a sensitive to many factors. Variance from the standards set by the company must be recognised on regular intervals so as to get the proper idea of the efficiency of the company (BHP Billiton, 2016). The extent of tracking the direct product costs can be determined by the tolerable limits set by the management of BHP Billiton, these costs can be traced by measuring the variances which are mainly of the following types: The variance of efficiency: This arises due to efficiency or inefficiency in the utilisation of the materials or labour. These can be measured using the standard cost technique of using the variances of efficiency like usage, mixture and yield (for materials), efficiency and idle time (for labour). These are ascertained by comparing the actual quantities with the standards set. The variance of Price/Rates: These are the variances which result from the changes in the unit material prices, hour rates and standard rates for indirect costs. E.g. Material price variance, material usage variance, etc (Lanen et. al, 2008). Variance due to volume: Difference between the level of actual activity and the standard of activity set while estimating the level. For example capacity variance, Calendar utilisation (Needles, 2011). The various direct costs variances are as follows: Material yield variance, Material mix variance, Material price variance, Labour mix variance, Labour Rate variances which might be favourable as well as adverse. Evaluation of the organisation of indirect product costs by BHP Billiton. The need to organise indirect cost arises because many a time a single expense involves more than one expense account so there is always a need to have a proper method of splitting costs so as to record them in proper accounting head which can lead to accurate determination of unit cost of the product (Lanen et. al, 2008). Organising indirect cost is done mainly by the units of work or tasks which may be a single activity or a series of activities undertaken. For e.g. Purchase order includes an activity like purchase requisition, ordering, identification of suppliers, placement follow-ups, etc (Horngren Foster, 2008). So identification of the types of activity is important and can be elaborated as follows: Of units produced: These are mainly costs for which we can identify the utilisation of resources on the basis of a number of units produced. These are the costs of activity which can be related to a number of units produced. Examples: Use of indirect material inputs, Inspection or testing costs incurred on a process. of batches: These are the activities related to setting up of batch or production run. In BHP Billiton there are many production activities which take place in the batches like the production of iron, copper, etc. and extraction of resources. So organisation of costs on the basis of batches is the best method as a number of production runs is identifiable at every level (BHP Billiton, 2016). Some examples of this type of batch costs are: Material ordering Where an order is done for every batch. Machine set-up where machine requires setting up before every batch. Inspection costs where every batch is inspected after production. The level of product activities: This method is mainly used when a new product line is developed. This method is not related to BHP Billiton as there is no new emerging product in its product portfolio. It mainly includes costs like designing the product, technical designing and advertisements. Facility Level Costs: These are the costs which are required to keep the production process running and maintenance of various machinery and activities. These mainly cost like maintenance, security personnel, production managers salary, etc (Horngren Foster, 2008). Allocation of costs can be done in the following suggestive method by BHP Billiton. Sr No. Name of Expense as per annual report available (June 2016) Suggestive allocation strategy of indirect costs incurred 1. Freight and Transportation Cost These costs can be allocated on the basis of a number of orders placed for a product by the company. 2. External Services This service may include a number of costs like valuation, marketing, distribution and designing of the product. So it is not easy to judge the correct cost allocation strategy but it can be allocated on the basis of a number of hours allocated by the team to the relevant product (Larry Christopher, 2012). 3. Third party commodity purchases These are the various materials which are not directly related to the product. So they must be allocated on the basis of actual consumption and utilisation of the commodity (Larry Christopher, 2012). 4. Government royalties paid and payable This cost can be on the basis of asset value so it not possible to judge the allocation head but it can be done on the basis of asset value for which such cost is incurred (Robinson Last, 2009). 5. Depreciation and amortisation expenses Extraction so depreciation costs are generally very high and form a major cost component in a mining company. Allocation is done on the basis machine hours run of the machine as they are identifiable by the company records. 6. Exploration costs This is a primary activity of the company for product development so it must be allocated to the product development cost of the product developed and identified (Shim Siegel, 2009). 7. Operating lease rentals If they are incurred for the storage of products then it can be allocated on the basis of area utilised by the product storage from the total area available (Needles, 2011). 7. All other operating expenses There are large numbers of costs under this head which are to be allocated on the basis of the utilisation. Conclusion A proper product costing system can help the organisation in knowing the actual position of the business of the company and helps in achieving economies in this largely competitive world which thrive for continuous cost reduction along with quality improvement (Drury, 2011). Product costing can help as a tool of managerial decision making in various manners like: Cost evaluation: It is behavioural analysis so there is more focus on outcome rather than listing. Cost Control: As each part of the cost is judged there is always readily available data which can be easily compared with budgets and the reason for variance can be judged. Resource Management: As cost evaluation and control is achieved there is always a scope of achieving economies which are the ultimate objective of the company (Drury, 2011). Flexible: Product costing is a flexible system so there is always a scope of deviation from the adoption of one method to another (Venanci, 2012). A good product costing system adoption by the company can also help it in achieving a proper financial accounting and reporting of such matters can also be made more reliable and realistic as lesser assumptions are used in the cost determination. References BHP Billiton. (2016). BHP Billiton 2016 Annual Report Accounts 2016. Retrieved May 26, 2017 from https://www.bhpbilliton.com/investor-centre/annual-reporting-2016 Drury, C. (2011). Cost and management accounting. Andover, Hampshire, UK: South-Western Cengage Learning. Horngren, C T Foster, G. (2008). Cost Accounting: A Managerial Emphasis. United States Edition Horngren, C. (2011). Cost accounting. Frenchs Forest, N.S.W.: Pearson Australia. Lanen, W. N., Anderson, S Maher, M. W. (2008). Fundamentals of cost accounting. NY: Hang Loose press. Maher, L. (2005). Fundamentals of Cost Accounting. McGraw-Hill Larry M. W Christopher J. S. (2012). Managerial and Cost Accounting. Pearson Press Needles, S. C. (2011). Managerial Accounting, USA: South-Western Cengage Learning. Robinson, M Last, D. (2009). Budgetary Control Model: The Process of Translation. Accounting, Organization, and Society. NY Press Shim, J. K Siegel, J G. (2009). Modern Cost Management and Analysis. Barron's Education Series Vanderbeck, E J. (2013). Principles of Cost Accounting. Oxford University press Venanci, D. (2012). Financial Performance Measures and Value Creation. New York: Springer.