MANAGEMENT ACCOUNTING

DMS 4033
2019/2020
ASSIGNMENT 1 – 20%

1. Describe the overhead cost for the service industry.

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Introduction

Generally, indirect cost also known as overhead cost is refer to a cost object on the basis
to the cost allocations. Operating expenses often referred to overhead is those the expenses
associated with running a business that may not be conjunction to make a products or
service. Overhead costs are all of the cost that include the income statement in the company
no matter to the manufacturing of any product or services as well. While on the other hand,
it is totally different with the direct cost that involving some other elements of allocation
with certain document, certain management and different attribution as well.

Transport

Administration cost

Cost Allocated Directly

Selling cost

Office cost

Security cost
Diagram 1. Cost Allocated Directly.

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Service Industry

For this era, I dare to say that global is currently depend on the service industry to
produce all the manufacturing product or services all over the world. Compare to the
previous industry at the previous many years ago, world is learning to achieve something
that could be serve and provide the easiest way in our life. Service industry become one of
the elements whereby produce something that provide a lot of benefits to the communities
as well. Specifically, indirect cost also known as fixed cost. Nominally, service industry
is such an industry made up of companies that primarily earn revenue through providing
intangible products and services. Service industry companies are involved in retail,
transport, distribution, food services, as well as other service-dominated businesses.
Service industry also called as service sector, tertiary sector of industry.

Rent

Utilities

Insurance
Overhead Cost
Examples

Office supplies

Office equipment

Diagram 2. Overhead Cost Examples.

Salaries that are not
job or product service

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 When goes to the construction company particularly to the contractors and suppliers, in
bid preparation, contractors commonly focus on direct cost estimation and apply an
overhead-cum-mark up rate on top of the estimated direct cost for producing a bid. Since
contractors often have to cut their bids to compete, determining an overhead-cum-mark up
rate subjectively without a sound approach certainly involves a greater risk. For a
contractor, the maximum risk it can take and the degree of its need for work, which both
are subjective and fuzzy, will determine the minimum overhead-cum-mark up rate for it.
In order to prevent an inadequate bid, the applied rate should achieve a balance between
the chance of winning and loss risk according to the bidder’s position.

The proposed bidding model in the present research is firstly based on building a
regression equation that relates the perceived rate in the winning bid to project attributes
and is used to obtain more accurate estimates of chance of winning for various bid levels.
Then, using the chance of winning and the chance of making a loss as the evaluation
criteria, the model incorporates a contractor’s bid position on its degree of need for work
and attitude toward risk in the fuzzy rules and membership functions. It determines the
minimum overhead-cum-mark up rate for a project as the one achieving the highest fuzzy
score. As shown by the illustrative example, the proposed fuzzy logic model can
differentiate the possible bid positions of a contractor in varying scenarios and suggest
minimum overhead-cum-mark up rates consistently. The model generally reflects fuzzy
logic’s flexibility, manageability, and robustness and fills a gap among existing models.
The principal findings of this research and its contribution to the body of knowledge on bid
decision in construction are that by formulating appropriate fuzzy rules contractors’ bid
positions can be distinguished and incorporated in the model, thereby suggesting consistent
overhead-cum- mark up rates for contractors in bidding. (Chao & Liaw, 2017).

Based from description of article above, the minimum overhead-cum-mark up rate for
a project might be harmed the contractors in bidding the project accordingly. Normally for
the contractors, fuzzy decision on bidding the tender brings nothing. Logically, a balance
between a loss risk and chance of winning should be achieved in order to prevent any fuzzy
information. Therefore, the contractors usually focusing on direct cost estimation and this
discipline is contrary to the overhead cost which is commonly focusing to indirect cost.

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 Particularly, the overhead cost is important to be monitored entirely. They are not
directly related to revenues, tragically they can drain the business when it was not been
monitored meticulously. According to Jiang & Shi (2016) the positive effect of reducing
overhead cost on the aggregate output is weakened by its adverse effect on average
productivity. We then apply the model to infer these two costs and to quantify their
potential effects, using six-digit U.S. manufacturing data. The quantitative results show that
some reduction in entry cost increases output, whereas the same percentage of reduction in
overhead cost increases output. Meaning to say for the service industry, there are balance
either reducing or increasing the overhead cost in certain cases because there are balance
of advantage and disadvantage of the overhead cost that shall be considered meticulously
prior to execute the business that involving all the cost pertaining.

Indirect Cost That Attribute A Profit

Besides, indirect cost and direct cost are exactly provided their own profits to their
respective organization either the allocation is being treat wisely or not. But, all the
allocation of the costing must be recognized well in order to attribute the profits in right
manner as well. On the topic of how overhead spending impacts the financial success of
non-profits, there are more subjects to explore. Are the effects we found true for all
organizations, or are the effects different for organizations with different missions? Is the
relationship between the overhead ratios and financial success linear and monotonic, or are
there diminishing returns? What is driving the seemingly counterintuitive result we found
for the fundraising ratio? Further research can explore our conjectures.

Perhaps donors dislike “fundraising machines” that spend a significant amount of

resources on fundraising, seeing them as ineffective agents of change. While fundraising
has been shown to have a large return Andreoni and Payne (2011), it could be that when
these extra funds are raised donors appreciate those funds being spent on programs rather
than reinvested in fundraising. Perhaps large non-profits tend to have a small number of
generous donors, and therefore spend less on fundraising while still being successful in that
regard. In any case, there are many areas left to investigate. (“COLLEGE OF SOCIAL

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SCIENCES AND PUBLIC POLICY DONOR ATTITUDES TOWARD OVERHEAD
COSTS AND THE EFFECTS ON NONPROFIT ORGANIZATIONS By JOSEPH L .
STINN A Dissertation submitted to the Department of Economics in partial fulfillment of
the requirements for the de,” 2018).

Regarding to the dissertation article, the organization seemingly fuzzy of their profit or
non profit probably they are not recognized well the costing either from direct or indirect
costing. In this case, an organization should be established to investigate the initial step in
managing the cost and then determine the cost well.

Modern Watch Company of Service Industry

In corporations of the indirect cost, there are a lot of manufacturing company in the
service industry. Normally, manufacturing company have enormous or vary budget
allocation of attribution. It might be indirect cost or direct cost to be allocated and
conjunction with this, all the costing should be identified and determined cautiously in
order to ensure that the company may grab the exactly profit as per planned and discussed
prior to the business running through over the years. One of the examples of service
industry goes to the watch company. According to Farkas, Kersting, & Stephens (2016),
the present instructional resource provides an integrative approach to cost system design
choices. Overall feedback from students suggests that the Modern Watch Company
resource was perceived as an effective learning tool for undergraduate cost accounting
students. Although most students had a very positive experience completing the resource,
some limitations exist.

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 First, the production environment of Modern Watch Company was simplified to ensure
all three cost-allocation alternatives resulted in the same operating income. Therefore, the
number of units produced equals the number of units sold. Although this assumption creates
a simplification of the company’s environment, we believe the benefits of structuring the
resource this way out-weigh the costs of added realism. Specifically, we believe that it is
vital to highlight that the cost-allocation alternatives can end in the same operating income
in order to emphasize the point that one of the major benefits of normal and standard costing
is more reliable interim financial statements.

Whilst on the other hand, there are several of overhead cost examples such as a rent,
utilities, insurance, salaries that are not job or product specific, office supplies and office
equipment just like computers, laptop, telephone, fax machine, air conditioner and
photocopy machine as well. Generally, company overhead cost depends on circumstance
and nature of the business. Nevertheless, one important conclusion relates to the
identification of a number of changes to the overhead cost allocation system design due to
the implementation of a transfer pricing tax compliance strategy. Specifically, we noticed
an increase in the formalization of services and a discontinuation of allocations by divisions
to business units. Instead, allocations were carried out directly from headquarters to
business units.

These changes were carried out in order to enhance external acceptance of overhead
cost allocation, including consistency between the functional analysis and the actual cost
allocations to business units. In addition, we identified an increased differentiation in the
proportions of different service centre allocable one important conclusion relates to the
identification of a number of changes to the overhead cost allocation system design due to
the implementation of a transfer pricing tax compliance strategy.

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 At first glance, we noticed an increase in the formalization of services and a
discontinuation of allocations by divisions to business units. Instead, allocations were
carried out directly from headquarters to business units. These changes were carried out in
order to enhance external acceptance of overhead cost allocation, including consistency
between the functional analysis and the actual cost allocations to business units (Rossing
& Rohde, 2010). In general, there are three types of overhead cost that running the coasting
in business field. All the three types have their advantages and disadvantages respectively
and with each method, each behavioural and certain circumstances, all the three types
would be utilized well in order to provide fix profit in future undertaking.

Fixed

Types of Overhead Cost Variable

Semi-Variable

Diagram 3. Types of Overhead Cost.

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Conclusion

Specifically, the indirect cost is not directly accountable to an object cost such as
facilities, function or any particular project. It may be either variable or fixed cost.
Personnel, security cost and administration are involving for indirect costing as well.
There are two types of indirect costs.

One of the fixed indirect costs which contains activities or costs that are fixed for a
particular project or company like transportation of labour to the working site, building
temporary roads, etc. The other are recurring indirect costs which contains activities
that repeat for a particular company like maintenance of records or payment of salaries
(“Indirect costs,” 1991). In general, there are two types of cost that usually charged
directly or allocated indirectly that related to certain circumstances and requirement.
All the two types have their advantages and disadvantages respectively and with each
method, each behavioural and certain circumstances, all the three types would be
utilized well in order to provide fix profit in future undertaking. Obviously, there are a
cost either charged directly or allocated indirectly as follow:

a. Electricity (mostly if it needs allocation it is always indirect).

b. Directors Salary (this is normally indirect cost).

Directors salary
Cost Usually Charged (indirect usually)
Directly or Allocated
Indirectly
Electricity (indirect,
if it needs allocation)

Diagram 4. Cost Usually Charged Directly or Allocated Indirectly.

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 The same cost can be label as indirect in one industry and direct in another. For
example, fuel cost in a telecom is usually allocated as an indirect cost, while for an
airliner it is a direct cost. As to conclude, it is crucial thing to recognize well the
differentiate between indirect cost and direct cost because of the attribution the profit
over the selling product or service as well. With exactly allocation of the cost, so then
the profit will be produced nominally due to the wise management of the costing
allocation.

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References

Chao, L. C., & Liaw, S. J. (2017). Bidding Model Incorporating Bid Position for Determining
Overhead-cum-markup Rate. Procedia Engineering, 196(June), 302–308.
https://doi.org/10.1016/j.proeng.2017.07.203

COLLEGE OF SOCIAL SCIENCES AND PUBLIC POLICY DONOR ATTITUDES

TOWARD OVERHEAD COSTS AND THE EFFECTS ON NONPROFIT
ORGANIZATIONS By JOSEPH L . STINN A Dissertation submitted to the
Department of Economics in partial fulfillment of the requirements for the de. (2018).

Farkas, M., Kersting, L., & Stephens, W. (2016). Modern Watch Company: An instructional
resource for presenting and learning actual, Normal, And standard costing systems, And
variable and fixed overhead variance analysis. Journal of Accounting Education, 35, 56–
68. https://doi.org/10.1016/j.jaccedu.2016.02.001

Indirect costs. (1991). Academic Medicine, 66(7), 399.

Jiang, Z., & Shi, H. (2016). The selection of firms based on productivity: Different roles of
entry and overhead cost. Economic Modelling, 54, 537–544.
https://doi.org/10.1016/j.econmod.2016.01.019

Rossing, C. P., & Rohde, C. (2010). Overhead cost allocation changes in a transfer pricing
tax compliant multinational enterprise. Management Accounting Research, 21(3), 199–
216. https://doi.org/10.1016/j.mar.2010.01.002

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NATIONAL DEFENCE UNIVERSITY OF MALAYSIA

MASTER IN BUSINESS ADMINISTRATION

(SUPPLY CHAIN & LOGISTICS)

MANAGEMENT ACCOUNTING
(DMS 4033)

PREPARED FOR:
ASSIGNMENT 1 (INDIVIDUAL)

PREPARED BY:
WAN MOHD AKRAM BIN HJ SAIDON (3191174)

SUBMISSION DATE:
9 AUGUST 2019

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