Accounting Abstract

Accounting Abstract




Accountancyis the professional measurement, processing and communication of thefinancial information about economic entities. The entities engagedin the provision of services use similar procedures to recognizerecord and communicate their financial information similar toProduction firms (Hoggett, 2012).

Warrenand Reeve (2005), assert that in accounting for merchandising firmsproduct revenues are obtained from sales and gross profit fromdeducting the cost of the purchases from the overall sales.Operational costs are later deducted to arrive at the profit beforetax. The deduction of tax from the profit before tax provides the netprofits made by the entity for the given period.

Bragg(2001) asserts that manufacturing entities are special entities. Thespecialty emanates from tracing the costs and revenues from variousproducts. Unlike merchandising firms that obtain profits by deductingcosts from revenues, manufacturing firms encounter remains in variousresources that require recording. First, the raw materials may not befully utilized by the end of a period. Secondly, there may beproducts still in the process of development referred to as work inprogress. Finally, there are finished products that may not end up onthe market. It is necessary to match the revenues obtained and thecosts incurred in the production of goods. to generate the profit andloss.

Theessay provides guidelines on the accounting procedures for BHPBilliton with head offices in Australia and Thailand. It haslocations in Australia, Africa, and South Asia. It is a leadingglobal resources company and a manufacturing firm listed on theAustralian stock exchange. It is the world’s largest manufacturerand exporter of metallurgical and domestic thermal coal, copper,silver lead, iron, and uranium. It is also a world leader in oil andpetroleum exploration (BHP Billiton, 2015).

Thechoice for the company was intentional to discuss the accountingmethods as applied by one of the world largest manufacturingentities. The choice came up after the ForbesMagazinelisted the organization as the number one out of forty largestcompanies in Australia. According to Forbes, the company makes anaverage sale of 40 million USD and profits of 13 million USD. Theasset value of the company is 58 million USD while the market valueis 220 million USD. The company owns an unrivaled portfolio thatguarantees its growth and continued satisfaction of the customers(Pierse,2007).

Second,the choice was led by the observation of the diverse nature of thecompany’s interests. The diverse products are an indication thatthe firm calls for appropriate accounting to manage the variousassociated costs centers (BHP Billiton, 2015).

Third,the choice was driven by the various awards given to the companyconsequent to its superior performance in the health community,safety, and the environment sectors. Awards indicate superiorperformance. Given the scope of the company, it was worth the choicefor discussion (BHP Billiton, 2015).

Descriptionof products Cost

Theproducts costs for BHP Billiton should include the most obvioussource of the cost that is the materials, labor and the overheads.Materials and labor are direct costs. They refer to costs that aredirectly traceable and related to the production of a specificproduct such as coal, iron ore, uranium and silver (BHP Billiton,2015).

Thecompany’s direct costs include the production materials andservices. First, the materials include explosives, fuel, catalysts,power and consumables. Explosives are materials used mining processesto access the product by tearing the ground. The company requiresfuel for the different machinery used in the mining sites. Catalystmaterials are required to initiate and control the rate at whichchemical processes take place. For example in the mining of iron, acatalyst is required to lower the boiling points and enhance theextraction process. Power is for moving objects and provision of heatand light. Materials include the cost of wasted materials in theproduction process. The company also traces the cost of services suchas drilling. Billiton’s direct labor includes the payroll costs ofsite engineers, mining contractors and other personnel involved inextraction processes. The cost of transporting materials from themining site to the factory forms part of direct costs attributable tomaterials (Sherman, &amp Sperry, 2003). .

Indirectcosts are the cost of associated materials or labor necessary forproduction.The costs are hard to measure for each productmanufactured. They include the incidental labor inform of equipmentmaintenance and supervision. There are costs associated with thedepreciation of the mining and manufacturing equipment. Thedepreciation of the mine property acquisition costs and associateddevelopmental costs together with mine maintenance costs. Besidesthere is waste removal cost not capitalized to differed stripping,when the stripping ratio is above the expected life of the mine(Warren, &amp Reeve, 2005).

Levelof details on direct product costs

Thedirect production costs for Billiton includes direct labor and directmaterials required in details. First, there is need to differentiatethe costs as they get associated with the various products like ironore, silver, uranium petroleum and oil. The process requires greatattention as the processes may take a long period. Besides, some mayhappen consecutively for different products. The process involvesinitiating an early cost tracking process to capture initial directcosts such as the acquired materials like explosives, fuel, power,and catalysts (Warren, &amp Reeve, 2005).

Directcosts require recording to the level of identifying joint andby-products. In the mining industry, the production of more than onemetal is a common occurrence from one process. The resultant productsare joint and by-products. For example, lead materials can produceboth lead and silver products. In contrast, Petroleum products oftenproduce separate by-products with a relative significant sales value.The products identify as joint to a given production level referredto the split -off point. The International Accounting Standards IIrequires consistency in the cost allocation processes. Theconsistency rule applies whenever the conversion costs for a productare not identifiable to a given production level (Bragg, 2005).

Variouspractices require different details of direct costs to value jointand by-products. Most of details of direct costs guide decisions ontheir point of application- the split-off point or the initialprocesses of mining. In valuing joint products, the split off basisvaries. Direct costs relate to joint products from the split-offpoint depending on their contribution to revenue. Both the netrealizable value at the split-off point and the volume of productionmethods are applied. The general rule calls for the use of directcosts at the lower of cost and the net realizable value. Whicheverthe method initially used, it should be consistently applied (Drury,2012).

By-productsare valued based on their net realizable value due to theirinsignificant nature. The details of direct costs should not affectthe consistent application of the methods for comparability. Costscaptured to the split-off point are then separated and associated tothe resultant by-product. Allocation of costs to the byproductsdepends on their significance. Where insignificant, they areallocated the various direct costs after the split-off point. Ifcosts exceed the net realizable value, the net realizable value getsused, and the vice versa applies true (Drury, 2012).

Organizingindirect costs

TheBilliton company overheads require organization in terms of variablesand fixed production overheads. The arrangement is to ensure thatvariable production overheads relate to the cost of inventory, workin progress and finished goods based on the levels of production.Also, the overhead costs require distinct classifications. Theyinclude the supervisor’s salaries and other payroll relatedactivities. The indirect materials relate to various products such asiron ore, lead, uranium and other related products including thepetroleum (Hoggett, 2012).

Themaintenance costs of various mines are recorded separately to enhancefinal allocation to the various products from distinct mines.Similarly, the mine acquisition costs are captured separately foreach mine for apportioning to the specific products from the mine.The waste removal costs require separate records to ensure concisedecision making by the comparison of the stripping ratio to theexpected life of the mine. The comparison guides the decision whetherthe costs are capitalized or allocated to the products as indirectcosts (Kieso, &amp Weygandt, 2001).

Thefixed overheads are organized based on the normal level ofproduction. Normal capacity reflects the expected average productionover several periods as opposed to the periods with abnormally highlevels of production (Warren, &amp Reeve, 2005).

TheProper arrangement of overheads improves the judgment to establishthe various attributes to production including their respectiveportions. For example the identification, allocation anddifferentiation of administrative overheads that do not contribute tothe conversion of inventories into their present location andcondition. The finance department in the plant should focus on thepayments of production costs such as wages and associated marketing,distribution and general administration. Also, separate entities fortracking the costs of consumables and other spare parts areimperative in the classification process (Bragg, 2005).

Allocationof indirect costs

Theallocation of indirect cost is an important process for the BillitonCompany. It requires accurate accounting to determine the total costof manufacturing for the various products in the company’sportfolio. It forms an important part of the budget control processdue to the lack of specific information regarding the specific coststo relate to various products. It is, therefore, necessary toestimate an overhead rate and costs applicable to the variousproducts (Warren, &amp Reeve, 2005).

First,the overheads are classified as variable, mixed or fixed to assist inthe generation of forecasts. Billiton’s allocation process mayassume a somewhat difficult nature due to the diversified nature ofher portfolio. Besides key, attention to identifying the correlationof various costs to their activity bases proves imperative. Overheadssuch as indirect labor require a link to direct labor, direct machinehours or direct materials. Others similar to administration costsrequire an apportion to an activity base such as overall productionoperations carried in a given mine or location. The various Materialoverheads require a relationship based on their area of use such asmachinery repair tools and equipment or with direct materials(Warren, &amp Reeve, 2005).

Afteridentification and allocation, the various costs require to beclassified in tandem with the various products across the company’sportfolio. The relevant costs are further classified based on thedifferent geographical locations such as Australia, Thailand andAfrica for reporting purposes (Warren, &amp Reeve, 2005).

Theaccounting department uses the activity bases to create projectedfigures on the various overheads. A monthly job cost ledger tracesthe forecasts, relating them to the actual incurred costs. The resultis a variance between the actual and forecasted figures mostlyreferred to as the burden variance. It indicates whether theoverheads were over or under applied. When over-applied, the rateused exceeded the real overheads incurred and while under applied,the rate fell short of the real overhead expenditure (Warren, &ampReeve, 2005).


Theabove essay is about BHP Billiton. It is a leading manufacturing firmlisted on the Australian stock exchange with locations in Australia,Africa, and South Asia. It is the world’s largest manufacturer andexporter of materials and a portfolio of metallurgical and domesticthermal coal, copper, silver lead, iron, and uranium. It is also aworld leader in oil and petroleum exploration.

Theproduct costs for Billiton Company entails prime/ direct and indirectcosts. The direct costs include the production materials, services,and labor. Materials include explosives, fuel, catalysts, power andconsumables. Direct labor includes the payroll costs of siteengineers, mining contractors and other personnel. The materialstransportation cost adds to direct costs attributable to materials.

Thedirect production costs require elaborate details to differentiatethe various products. Their identification gets to the level of jointand by-products that result from the same process. In such cases, theInternational Accounting Standards II requires consistency in thecost allocation processes whenever the conversion costs for a productare not identifiable.

Finally,the allocation of indirect cost is an important process for theBilliton Company. It requires accurate accounting to determine thetotal cost of manufacturing for the various products in the company’sportfolio. After identification and allocation, the various costsrequire to be classified in tandem with the various products acrossthe company’s portfolio. The relevant costs are further classifiedbased on the different geographical locations such as Australia,Thailand and Africa for reporting purposes.


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