QUESTION 1
a)Costs can be classified on the basis of cost objective which could be stock valuation or decision making or for control purposes. Describe each classification of cost.
Costs for stock valuation
In costs for stock valuation, all elements related to the production process (Direct and indirec costs) have to be accounted for in getting the accurate cost of a single product. In other words, Direct costs must include all direct materials, labor and other direct costs. Indirect costs must include all production overheads, administrative overheads, selling overheads and distribution overhead costs. All these costs must be included in the stock valuation.
Costs for decision making and planning
This classification looks into the relationship between costs and revenues, the behavior of costs in relation to changes in activity levels and the relevance if costs and revenues.
…show more content…
This will make them set reasonable prices that will increase the company 's revenues unlike high prices which will discourage the sales volumes and therefore lead to losses.
It is also important for them to know the nature of the costs they incur (Whether they are fixed costs, variable cost, semi variable or semi fixed costs) and how they react at different levels of activities. This will help the managers in controlling and maintaining the costs of production. The relevance of costs and revenues is also important to the managers. They need to know what costs are relevant so that they can account for them in their decision making and planning. The irrelevant costs are not put into consideration in the decision making since they have no impact on the decisions. An example of irrelevant cost is sunk costs and examples of relevant costs are marginal costs and opportunity
The managerial accounting system at Bridgeton, as it is presented, seems to be lacking detail necessary for efficient analysis. The sections used are sales, direct material, direct labor and overhead by account number, each divided into individual accounts and summed to find totals. There is no separation of fixed and variable costs in any of the accounts, making it difficult to analyze exactly where operations are costing money and, therefore, how they could possibly be improved. The presentation of the information groups all sales together and the different categories of costs together and does not provide for individual product analysis. The products are analyzed (categorized into classes) based on their costs, with no consideration to revenues associated with these products, and no real understanding of the overhead applied to each product. The overhead costs are applied to accounts based on labor and materials of the company as a whole, rather than using considerations associated with the individual products.
In order to find out what are some of the key drivers’ of the analysis I will further run different sensitivity analysis. I think some of the key drivers of our assumptions could be sales growth, production costs as a percentage of sales, inventories as a percentage of cost of goods sold etc.
should not use the traditional method over the ABC costing method. Although the Traditional method is easier to implement, this method doesn’t take into account that Woodward Farm Inc. uses an automated process in order to produce goods.Therefore in this method, due to the automated process, direct labour hours is most frequently used in order to calculate the overhead cost. Under the traditional method other cost drivers such as quality control and soldering activities would not be accounted for which results in an inaccurate representation of the actual image of the company 's progress. Therefore if traditional method is used to compute the overhead, this could lead to inaccurate and wrong managerial
1. Extend the concept of cost behavior. ABC uses cost driver to interpret the cost behavior and classify costs as short-term variable cost, long-term variable cost and fixed cost.
Even though a myriad of tools and techniques learnt in the Strategic Cost Management and Strategic Business Analysis courses are not fully exploited in this essay, it is generally recognised that those techniques are useful for a corporate to formulate strategy, do strategic planning, control costing and quality, as well as eventually elevate its values, regardless the nature and size of organizations.
In the case of making a TCO model, also opportunity costs and present value are taken into account. Taking present value into account means; making a difference between future and past cash outlays. This way the time value of money can be considered when comparing the different alternatives. Opportunity costs finally can be described as:
An organization if not so conscious in costing the product which it is going to manufacture often spend more cost then may be needed for the production and ultimately it has to increase the sales price to obtain a reasonable profit. Otherwise it has to face the situation in which the costs are higher than the sales value and the result is loss. The loss suffering organization ultimately suffers the situation which is known as “Financial
Asset valuation – when costs are accurately allocated to departments it is much easier for an organization to identify which departments are the most or least profitable. Management can use this information to decide which departments may need to be sold or closed as well as determining which departments might need to be expanded.
Activity-based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs. Activity-based costing is mostly used for internal decision making and managing activities while traditional costing method is used to provide data for external financial reports. Most organization uses activity-based costing as an addition system for using traditional absorption costing as sometimes the traditional cost system misleads the product’s profitability. In a company, there are many products on sale, if one product is sold at a high price with low product margin and a product with high product margin at a low price, it may result in a loss. In addition, due to the reason that cost drivers and enterprises business may change, activity-based costing analysis also needs to be revised periodically. This amendment should be prompted to change pricing, product, customer focus and market share strategy to improve corporate profitability.
Job costing involves usage of situations where every job is done cost differently, consumers specifications play a bigger picture in this case. Direct and indirect costs are encountered. It is believed that job costing has lots of costs accrued from the production to the consumers (REEVE, J. M., WARREN, C. S., & DUCHAC, J. E. 2012). This involves labor, running of machines, and all the individuals who are involved in the production of a product from raw to the final product, indirect costs are applied in this order. Job costing order is best showcased in a manufacturing company, let’s take coca cola company, company specialized in beverages manufacturing and distribution, usually customers have no say in the final products of this company, but as the trends for consumption of a certain flavor, according to their statistics they will conform with the demands. The special requirements, like name branding on the bottles of the beverages, customization of the containers have had a significant impact in the consumption of coca cola products (Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. 2010).
Every company has some kind of Revenue and they all have costs that are associated with running the company. It is also true that if a company wants to increase their Revenue, their costs will increase too. It is every company’s goal to maximize revenue and either through Production or Services, and minimize cost. These things are easy to figure out, but actually identifying the production and figuring out how it will increase or decrease with change is very difficult.
But there are many factors that limit the volume of output of a firm, such as market demand for the product, non-availability of a specific raw material, availability of labour hours and machine hours etc. These limiting factors are called ‘Key Factor’. In such situation it is not enough to compute the contribution but contribution for each unit of key factor is required to be calculated. The total contribution for the limiting factor must recover the fixed cost. Further contribution per limiting factor helps in the product-mix decision. In order to maximise profits that product which gives highest contribution per limiting factor should be produced to the maximum possible level keeping in mind the market demand and firm’s capacity to produce. The quantity of production of other products should be determined in the same
Relevant costs are all costs and revenues that vary according to management’s decision alternatives. They represent all those costs that should be considered during decision-making. A cost is relevant when it occurs in future and differs among the alternative courses of action. Firstly, decision-making involves selecting alternative courses of actions based on future expectations and therefore relevant costs should have expectation of occurring in future. This means that costs that have already been incurred are considered irrelevant in decision-making.
Cost optimization: Determine the product costs by tracing detailed cost using analytical tools. To maximize profit by detect precise cost of products, optimize margins by inventory valuation.
Therefore, to achieve this objective, managers have to make choices in decision-making, which is the process of selecting a course of action from two or more alternatives (Weihrich & Koontz; 1994, 199). A sound decision making requires extensive knowledge of economic theory and the tools of economic analysis, that are directly related in the process of decision-making. Since managerial economics is concerned with such economic theories and tools of analysis, it is very relevant to the managerial decision-making process.