ACKNOWLEDGEMENTS

All praises and thanks are for ALMIGHTY ALLAH who is entire source of all
knowledge and wisdom to mankind.

Special praises for the HOLY PROPHET MUHAMMAD (P.B.U.H) who

forever is touch of knowledge and goodness for humanity as a whole on the successful
completion of the project. I would like to acknowledge my deep sense of gratitude and
indebtedness to academic assistance of my teacher Mr. Prof. Ahsan without his
continued guidance and timely advice the completion of this report would have been
difficult. He has been a source of continuous encouragement throughout the execution of
studies.

Words cannot say the gratitude that we feel for our parents, friends and the
members of my family whose affection and prayers have always been the key to my
success.

I applaud the nice company of my best and true friends Mr. Ayaz Hafeez, Mr.
Naeem Wajid and all the class fellows during the past few months of MBA studies. I will
always remember my association and affinities with all of them and treasure the good
days and happy moments spent with them.

Finally I am also very thankful to all members of Accounts representatives of

ZTC, with out their guidance and help, it will be impossible for me to complete my
report.

Thanks to all who helped me in completing my report.

I
 Table of Contents:
COVER PAGE

ACKNOWLEDGEMENT
TABLE OF CONTENT

1 INTRODUCTION TO COST ACCOUNTING

2 MANUFACTURING COST TERMS

3 FLOW OF MANUFACTURING COST
4 OVERVIEW OF JOST ORDER COSTING
5 INTRODUCTION THE COMPANY
6 ORIGINAL SYSTEM
7 NEW SYSTEM (CAIS)
8 CONCLUSION
APPENDEX
REFERENCES
Introduction
The Cost accounting information system (CAIS) is one of the most important information
systems in any business. It is the key to management's assessment of the company's
efforts to achieve a profit.

Since it is so important, the CAIS must be carefully designed and properly maintained.

Small businesses are the backbone of the countries economy. They provide, in the
aggregate, most of the jobs for "working country.' They account for 38 percent of all
sales, 44 percent of assets, and 55 percent of private sector employment. Therefore, it is
extremely important that these businesses survive and grow. A properly functioning
CAIS is an essential ingredient for survival and growth. It keeps management informed
by monitoring and reporting the results of operations, and provides information essential
for planning, controlling, and other decision-making needs of management.

Many small businesses are cash poor, especially in the critical early years. Thus, many
small business managers feel they are in a very difficult situation--they cannot afford a
"good' CAIS, but they can't afford to be without one. This is especially true of managers
of small manufacturing concerns operating on a job-cost basis. The cause of this seeming
paradox is management's misconception of what constitutes a "good' CAIS. Cost
accounting concepts and techniques usually taught in business courses are presented in
the context of large companies. Therefore, even those who have some formal accounting
education sometimes experience difficulty in applying these concepts and techniques in a
small business context. A good (optimal) CAIS is one that provides management with
needed information that is

1) cost/benefit justifiable;
(2) presented in a form that management can work with; and
(3) available when it is needed.

To gain a better understanding of how small businesses can utilize conventional

managerial accounting concepts and techniques in designing and implementing an
effective Job-Order Cost Accounting Information System, the following case example is
presented.
Manufacturing Cost Terms

Direct Materials: The cost of materials that are an integral part of the product.
Direct Labor: The cost of labor directly involved in converting material into the product.
Factory Overhead: Manufacturing costs other than direct materials and direct labor.

Direct
Direct
Materials
Materials

Product
Product Direct
Direct
Costs
Costs Labor
Labor

Factory
Factory
Overhead
Overhead
Cost Accounting Systems

Job order cost system: Provides a separate record for the cost of each quantity of
product that passes through the factory.

Process cost system: System in which costs are accumulated for each of the departments
or processes within the factory.
Flow of Manufacturing Costs

Direct Labor
Factory Overhead

MATERIALS
STOREROOM PRINTING PLANT

INK INK
Job 73

Materials Work in Process

Inventory Inventory

CAMPUS
WAREHOUSE BOOKSTORE

Job 69
Job 70

Finished Goods Cost of

Inventory Goods Sold
Overview of Job Order Costing

Product Costs Balance Sheet

Materials Materials
Materials
Materials
Purchases Inventory
Inventory
Purchases
Direct
Direct Work
Workinin Cost of goods
Labor
Labor Process
Process manufactured
Inventory
Inventory
Factory
Factory
Overhead
Overhead
Finished
Finished
Goods
Goods
Inventory
Inventory
THE COMPANY

ZTC Sign Company is a small closely-held corporation with the only stockholders being
its two managers. The company employs seven people, including the managers. It
manufactures metal, plastic, and painted (wood) signs to specifications and provides
contract maintenance services (e.g., keeping signs clean, replacing burned-out bulbs, and
keeping electrical wiring in good repair).

The company has four departmental functions:

(1) accounting and administrative services;

(2) plastic and metal signs;
(3) painted signs; and
(4) service contract work.

The major stockholder and president of the company believed that profit margins were
not what they should be and that his pricing policy was the major cause. The pricing
decisions were made based on "ball-park' estimates of costs. Management failed to
explicitly include any overhead costs. In most instances, estimates of total labor hours
expended on a job were used because there was no complete accounting for employees'
time. Compounding these problems was the fact that prices often had to be quoted before
any work was done. Since the owners had no clear idea of overhead and labor costs, there
was no way of knowing whether the quoted prices would cover costs and provide a profit.
Thus, the president wanted an accounting system that would provide more complete
information on the cost of individual jobs. Due to the "jobshop' nature of the production
process (producing to specification), a Job-Order CAIS was implemented.

THE PLANNING PHASE

The following plan of action can be followed as a guide when developing a new CAIS
with the aid of a knowledgeable consultant.

1. Discuss the company's strategic and operational business objectives with members of
the management team.

2. Analyze the decisions made by management and the decision processes, to identify
information needs.

3. Analyze the existing CAIS, noting its strengths and weaknesses in filling
management's information needs.

4. Identify the characteristics a well-defined job-order cost system should possess.

5. Based on 1 through 4 above, design a system to fill overall information needs. This
step necessarily involves making many cost/benefit evaluations, some of them subjective.

6. Review management's response to the proposed system. Identify possible pitfalls and
oversights. Try to involve all management personnel who will be affected by the system.
In addition, impress upon management the importance of "selling' the system to
employees.

7. Make adjustments as required and test the system through hypothetical job runs and
pilot runs on actual data.

These procedures provide the methodology for developing the CAIS and are not different
from those usually employed in systems design for larger companies. Moreover, this
guide facilitates an efficient and effective design process.

DESIGN OF THE SYSTEM

During the systems analysis phase (1 through 4 above), management and the consultant
determined the old system's shortcomings and how it should be changed to meet
management's information needs. The results of this analysis provided a basis for
establishing the goals of a new system. The established goals of the CAIS were:

(1) to produce technical information to facilitate management's assessment of the cost of

jobs, and

(2) to accomplish this in an accurate, timely, and cost-effective manner. The CAIS was
then designed to accomplish these goals

Small business applications of cost accounting concepts and techniques are often subject
to organizational constraints, such as the following:

1. ZTC Sign Company's bookkeeper is also a secretary who prepares work orders and
records transactions. She has a limited accounting background and management wants
the system to be simple enough for her to maintain while performing her secretarial
duties.

2. No one in management has an accounting background.

3. The company employs an independent accountant to prepare its financial statements.

This service is quite expensive and thus should be held to a minimum. That is, the system
should not require input from the independent accountant.

These are typical design constraints for small businesses, which must be considered in the
design of a new CAIS. First, however, the old system must be reviewed.
Original System

In ZTC Sign Company's old system, orders for signs were taken over the phone or in
person by the secretary. She prepared a three-copied work order (WO) and entered it in a
WO ledger. In addition, the job was posted on a bulletin board so that everyone could see
what jobs were in process. One copy of the WO was sent to the appropriate department;
the second and third copies were filed in a temporary workorder file

In the department, the job was completed and shipped to finished goods (if not a service
order). Descriptions and quantities of the materials and supplies used were entered on the
WO copy by the person(s) who did the work. The copy was then sent back to the
secretary who draws a line through the entry in the ledger and removed the job number
from the board. Copies 2 and 3 were then retrieved from temporary filing and sent, along
with copy number 1, to the president (manager).

The president then priced the job based on the cost of materials and estimated labor costs,
plus some "arbitrary' mark-up to cover overhead costs and provide a profit. If the job was
bid or price-quoted, he simply noted the price and allocated the difference between price
and identifiable costs to overhead and profit arbitrarily. These allocations were entered on
the WO copies and sent back to the secretary for billing and bookkeeping.

Upon receipt of the WOs, the secretary /bookkeeper prepared and mailed an invoice (if a
service job) or had the invoice delivered to the customer along Aith the completed sign.
She then filed WO copies 1 and 2 in a permanent WO file. WO copy 3 was temporarily
filed in an accounts receivable file, after which the secretary/bookkeeper recorded the
transactions; sale, receivables, materials usage, direct labor, etc. Once payment was
received and recorded, copy number 3 of the WO was discarded, completing the process.

The analysis of this system indicated a number of weaknesses and deficiencies when
compared to what is traditionally taught in cost, managerial, and systems design classes.
However, when one considers the relatively high costs and low benefits of many of the
more conventional CAIS designs (especially systems control aspects) in a small business
context, the deficiencies are not nearly so glaring. Still, management needed more
information; and information is not cost-free. Additional costs, mainly in terms of
employee time and effort, are usually necessary to improve cost accounting systems.
Once an analysis of the old system is made, management must make a subjective
cost/benefit assessment and decide how to proceed.
The New System

The major objective of a job-order cost system is to accumulate costs for each job
independently. The customer can then be charged a price that will recover the costs of the
job and provide a reasonable profit. Theoretically, this would require that all of the costs
associated with a specific job be charged to that job. However, this can be almost
impossible to achieve. The direct materials and labor employed in the processing of a job
are usually fairly easily identified. Still, factory overhead costs (indirect costs) must be
allocated. Overhead costs (e.g., depreciation, repairs, maintenance, heating, lighting)
cannot be pinpointed for specific jobs. Nevertheless, in order for the costs assigned to
jobs to be useful for product pricing, income determination, and inventory valuation,
overhead costs must be included.

Management must be able to compute the costs of jobs as they are completed rather than
having to wait until all actual overhead costs for an accounting period have been
determined (usually days after the end of the month). One practical way of applying
overhead costs is on a predetermined basis. However, often the overhead rate is not
computed on a departmental basis even though actual factory overhead may differ
significantly among departments. Rather, one factory overhead rate is computed based on
annual projections of factory overhead. This method, although not altogether accurate,
can be a cost-effective solution for small manufacturers. The primary concern is that total
overhead costs be accounted for in the cost of goods manufactured.

Thus, actual overhead costs are accumulated separately, and adjustments are made
accordingly to the cost-of-goods-sold account, at the end of each reporting period. (The
adjustment of the cost-of-goods-sold account, rather than the use of some of the more
theoretically sound methods of adjusting factory overhead, is a widely accepted practice,
even in large companies, because of its practicality.) As the firm develops better means of
predicting overhead costs and labor hours (the base chosen for applying overhead to
products), the system can be adjusted.

The new system provides more accurate recordkeeping, which allows management to
better assess the costs of jobs in a timely and cost-effective manner. It also aids
management in estimating both labor and materials costs. Note that the system can be
adapted to accommodate growth and change. The new system is depicted in exhibit 1. A
sample clock sheet for recording labor costs, a sample materials usage ledger sheet, and a
sample job-cost sheet are shown in exhibits 2-4.

Clock Sheet. Direct labor costs for a given job are accumulated here. Ideally, employees
should "clock-in' and "clock-out.' However, this procedure is not cost/benefit justified for
this company. Therefore, the clock sheet is maintained by the employee and submitted
weekly. All time worked during a week is accounted for. If time is spent working on
something other than a job, then a brief description of the activity is written in the job
number column. At the end of the week, administrative personnel compute the total
number of hours and costs to be charged to each job and enter the total costs on the job-
cost sheet. Space is also made available for the computation of gross earnings.

Materials Usage Ledger. This ledger is designed to record all materials used. Ideally, one
person should be responsible for dispensing all materials (based on properly authorized
requisitions) and maintaining this ledger. However,-this is sometimes not practical. In
such cases, each individual must provide the desired information (job number, date,
description, and quantity) each time that the materials are drawn from stock.
Administrative personnel can then fill in the "unit cost' and "amount' columns.

Job Costs Sheets. This is the basic document for accumulating costs for individual jobs. It
is to be completed by office personnel. Information from the clock sheets and materials
usage ledger is transferred to this sheet periodically. Until the job is completed, this sheet
is maintained in a "work-in-process' file. Upon completion of the job, the direct materials
and labor costs can be totalled and the factory overhead computed (using the
predetermined rate) to arrive at the total cost of the job. The job cost sheet is then filed in
a "finished goods' file.

Note that all of the above forms should be pre-numbered for control and reference
purposes. Clock sheets and the materials usage ledgers should also be filed appropriately
and maintained for a specified period as back-up.

The new system more closely monitors the three basic categories of costs involved in the
manufacturing of any product:

(1) Direct labor,

(2) Direct materials, and
(3) Overhead.

Therefore, increased cost accountability and job-cost control are accomplished. Managers
need these data to facilitate the making of many decisions, both routine (e.g., costing,
inventory, pricing) and no routine (e.g., discontinuing production of a particular product).

Under the old system, management was forced to use estimates of total labor hours
expended on a job. The revised system, through the use of the clock and job-cost sheets,
explicitly gathers this information for each job in a timely manner. The new system also
provides management with a basis for charging to each job a portion of total
manufacturing overhead costs (accumulated on the job-cost sheet). Moreover, the
materials usage ledger allows the tracking of materials usage to departments as well as to
jobs. Therefore, inventory valuation and income determination will be more reliable for
financial reporting as well as management decision-making.
Management's ability to properly price products should be enhanced, using the system's
well-established cost basis. Also, costs recorded for past jobs can be used as the basis for
making bids and quoting prices before work is done.
Another important feature of the new system is its flexibility. The weekly clock sheet,
materials usage ledger, job-cost sheet, "work-in-process' file, and "finished goods' file can
be very easily modified to accommodate the company as it grows. For example,
controlled, punched, time cards may be used rather than clock sheets, and
departmentalized overhead rates may be easily incorporated.
CONCLUSION

Job-order costing can be a relatively expensive proposition because of the detailed

recordkeeping required for each job. The amount of information incorporated into the
system will depend upon an assessment that weighs management information needed for
decision making against the cost of more detailed recordkeeping. Relatively simple, cost-
effective systems can be designed for small businesses.

In the case described here, the Cost Accounting Information System was designed with
flexibility so that it can be modified to accommodate the needs of a growing business. It
was tailored to meet the needs of management for more accurate cost information without
imposing undue strain on present personnel. Continuous evaluation of management's
decision-making needs and the effectiveness of the system in satisfying those needs is
paramount to the successful operation of any business--especially a small one. Most
small businesses can adopt effective cost accounting systems through the application of
conventional cost accounting information system concepts and techniques.

CAS has financial merits to obtain more accurate pricing. However, primarily due to the
presence of customer approach and anonymity of accounting department, CAS is unable
to surpass many strategy-related issues in decision-making, planning, control and
performance measurement. This is because CAS can bring efficiency but less on
profitability and growth. As reflected in ZTC's minimal effort to support the new CAS,
sustainability and persistence of system of costing is unshielded to the supremacy of
other strategy-related issues (e.g. customer relations management). In the contrary, CAS
is more relevant when a firm is very large, very known and very efficient. This would
require less customer power (because they are diverse and numerous) and more pressure
to use cost-related strategies (because cost is what makes most companies in an industry
successful like in real estate).

Appendix

In its old cost accounting system (CAS), ZTC Sign Company failed to include
overhead cost as well as accurate measure of labor costs when issuing quoted prices to
their customers (Williams 1985 p. 17+). The president, who prices a job order, uses
arbitrary values to cover overhead costs with regards to arrive at a profit. Such process is
practical for ZTC because it is a small company which employs seven people. In the
contrary, the company and the president cannot determine if the quoted prices really
cover costs and provide profit due to lack of cost control particularly on overhead costs.

As a result, the company introduces a new system that would capture overhead
costs in a more accurate manner (Williams 1985 p. 17+). There is a need to
independently accumulate the overhead costs of each job so that customer will be
charged at a "reasonable" price quotation. However, overhead costs such as depreciation,
repairs, maintenance, heating and lighting cannot be allocated to specific jobs. This is
aggravated by the fact that the management is only able to get such information at the end
of an accounting month. In effect, the president would continue a subjective approach to
pricing because quotation must be handed to customer before the work even started.

In view of this problem, the company used the overhead cost projection based on
an annual basis (Williams 1985 p. 17+). The method might not be as accurate as it can be
but considering the small size of the business it can be a practical as well as useful guide.
In adapting the new system, the company does not want to increase the load of its
accounting-secretary employee. It chose to undermine financial benefits of accurately
capturing overhead head in favor of its human resources. This resulted in classifying
overhead costs as cost of goods sold that are accumulated at the end of the accounting
month. Coupled in this strategy, clock sheet (records direct labor costs) and material
usage (records all materials used) are installed when a job order is on-going

References
For more detailed discussions of the advantages of job-order costing systems see: Charles
T. Horngren, Cost Accounting: A Managerial Emphasis, 5th edition (Englewood Cliffs,
New Jersey: Prentice-Hall, Inc.); Paul M. Fischer and Werner G. Frank, Cost
Accounting: Theory and Applications (Cincinnati, Ohio: South western Publishing Co.);
and Ray H. Garrison, Managerial Accounting, 3rd edition (Plano, Texas: Business
Publications, Inc.).