Module 3
ACCT802 Group Research Module #2
“Rolls-Royce Phantom”
Manufacturing Cost
By Group 5
Kiara Verdin
Ronald Fassl
Si-Yu Wang
Songhong Beng
Jasmin Marie De Leon
October 30, 2023
I. Recorded and reported
Recorded Costs
Cost recording is a thorough and precise process for producing the Rolls-Royce Phantom VIII. Precision and meticulous attention to detail are required in this luxury vehicle's design and craftsmanship and in managing the complex financial aspects of production. It is important to go deeper into the cost-recording process in this expanded explanation, outlining several factors and variables that Rolls-Royce considers.
Direct Materials and Customization Costs
The remarkable craftsmanship and wide range of customization choices of the Rolls-Royce Phantom VIII are well-known. It is critical to distinguish between the expenses incurred for modification versus the standard model. Important components are the direct materials, which include plastics, rubber for tires, metals (such as steel and aluminum), and several kinds of upholstery. In the company's chart of accounts, these materials are attributed to particular accounts. Even though they are all under the direct materials category, every substance is closely monitored. With the various personalized features that Rolls-Royce offers, buyers can customize their cars down to the last detail (Roll-Royce Phantom VIII). Every customization aspect should be considered a separate cost item, and customization expenses should be meticulously documented.
Direct Labor and Labor Intensity
An in-depth examination of direct labor costs is necessary due to the laborious nature of Rolls-Royce's manufacturing method, particularly in the building process of the Phantom. The car's body and interior are handcrafted by talented artisans and crafters known for their unrelenting dedication to precision. The detailed workmanship that distinguishes Rolls-Royce is made possible by these professionals. The direct labor costs include the salary and perks paid to these skilled workers. The salary and benefits are considered direct labor costs and are reported as such. This financial tracking of each vehicle's manufacture is essential. Rolls-Royce must maintain precise records of the time and skill invested in each vehicle to ensure that the labor contribution of this highly talented personnel is reflected in the overall cost structure.
Quality Control and Testing Expenses
Quality control and testing are essential to guarantee that every Rolls-Royce Phantom VIII satisfies the company's exacting standards of excellence. Upholding these criteria is crucial to preserving the brand's reputation for luxury, excellence, and performance. Strict quality control procedures are implemented at every stage of the manufacturing process, covering everything from engine performance to chassis integrity to interior details. To ensure that every Phantom meets Rolls-Royce's strict quality standards, all quality control costs, including the salaries of quality control staff and specialized testing equipment, are tracked.
Transportation and Supply Chain Management
Transportation expenses of many kinds are incurred when acquiring materials and components needed for the construction of the Phantom. These expenses cover the transportation of supplies from vendors to Rolls-Royce's production site. Some variables, like the supplier's location and the kind of items being delivered, might affect the costs. Furthermore, Rolls-Royce works with a global supplier chain, necessitating careful supply chain management. Relationship management with suppliers is something the business must handle, including contract negotiations and performance reviews. Since they immediately affect Phantom VIII's cost structure, these expenses are documented as part of the cost recording procedure.
Reported Costs
The cost of producing a luxury car like a Rolls-Royce is higher than the cost of producing a more mainstream vehicle. This is because luxury cars use higher-quality materials and components, and have more complex designs and features that require more time and resources to produce.
In addition to the direct manufacturing costs, there are also other costs associated with producing the car, such as research and development expenses, marketing and advertising costs, and distribution and logistics expenses. All of these factors contribute to the overall cost of a vehicle.
Costs associated with the manufacturing of the Rolls-Royce Phantom are reported with a clear distinction between direct materials, direct labor, and manufacturing overhead costs. Direct materials, including a significant portion of production costs, contain the expenses related to the exquisite materials directly integrated into the vehicle's construction. These materials include high-quality steel and aluminum for the body, opulent leather and wood for the interior, and specialized electronic components. These direct material costs are diligently monitored and initially recorded as assets, specifically in inventory accounts that are in the form of raw materials, work in progress (WIP), or finished goods, depending on the manufacturing stage. As each Rolls-Royce Phantom nears completion, the cost of the direct materials utilized is systematically transferred from inventory to the Cost of Goods Sold (COGS) section of the income statement.
Similarly, direct labor costs include another integral component of the manufacturing process. These costs encapsulate the compensation provided to workers who were directly engaged in crafting the luxury vehicle, including highly skilled assembly line workers, machinists, and technicians. Much like direct materials, direct labor costs are initially recorded within inventory accounts while the vehicle is being produced. As the Rolls-Royce Phantom advances through the various stages of manufacturing, these direct labor costs are progressively shifted from inventory to the COGS.
Moreover, manufacturing the Rolls-Royce Phantom necessitates a spectrum of indirect expenses that collectively form the manufacturing overhead. These costs encompass various indispensable but non-directly attributable expenses, such as factory rent, utilities, equipment depreciation, maintenance costs, and management salaries. These costs do not lend themselves to straightforward allocation to individual units, and thus they are allocated to each unit produced using a predetermined method, often based on machine hours or labor hours. The sum of manufacturing overhead costs for a given period is integrated into the COGS.
In the company's financial statements, the COGS is prominently disclosed as a significant expense category, which effectively summarizes the combined costs of direct materials, direct labor, and manufacturing overhead for the manufacturing of the Rolls-Royce Phantom. This critical metric plays a central role in assessing the company's operational profitability. The company's gross profit, which represents the profit derived from the core activities of manufacturing and selling luxury vehicles, is calculated by subtracting the COGS from the total revenue. Detailed and meticulous accounting of these costs ensures a comprehensive understanding of the financial aspects of producing the Rolls-Royce Phantom.
II. Reviewed and forecasted
Reviewed Costs
Over the past decade, Rolls-Royce has maintained an average annual production of 4,000 Phantom VIII. Each and every Rolls-Royce Phantom is meticulously designed and manufactured exclusively at the Rolls-Royce factory located in England. This allows the Brand to control all factories and none is more important than the review process. The production numbers are directly tied with the sales figures as every vehicle is made to order. Therefore, it is easier to accurately forecast production volume.
The manufacturing process of these luxury vehicles is a true testament to craftsmanship and attention to detail. Each model is meticulously handcrafted, with every component being fully customized. This level of customization ensures that each Rolls-Royce is a unique masterpiece. However, such intricacies workmanship requires a significant amount of time, with production taking around 6 months or 450 hours of labor.
The review process of production begins with the arrival of pre-assembled bare bodies from Germany. These bodies have already undergone the initial painting process, which is carried out both manually and by robots. Once in England, the bodies are carefully fitted with their power trains and exterior trimmings.
Within the leather shop, a skilled machinist takes charge of crafting the entire interior of the vehicle. This includes the luxurious leather upholstery, ensuring the utmost comfort and elegance. They also use the same batch of leather to guarantee the same color throughout the interior.
Once the components are assembled, the vehicle undergoes a rigorous series of tests and quality control checks. These tests are conducted to ensure that every Rolls-Royce meets the highest standard of performance, safety, and luxury. Only after passing these meticulous examinations are the vehicles deemed ready for delivery.
In conclusion, the production of a Rolls-Royce Phantom VIII is a labor-intensive and meticulous process that spans several months. From the initial customization to the final quality control checks, every step is made with the utmost care and precision. This unwavering commitment requires an intensive review process to ensure highest quality of craftsmanship.
Forecasted Costs
Cost forecasting is crucial to the financial planning process for producing the Rolls-Royce Phantom VIII. For a business that embodies quality, precision, and elegance, accurate cost forecasting is a strategic necessity as much as a financial one. Cost forecasting is a collaborative process. It is closely linked to the larger picture of industry changes and market circumstances. The luxury car sector is the niche market in which Rolls-Royce competes. This sector's factors might not affect the larger car market (Kong, 2022). For example, movements in the global economy, new technologies, or customer tastes can all greatly impact the luxury car market. Rolls-Royce's cost forecasting methodology must comprehend these market conditions and industry trends. It helps the business to foresee potential external influences on expenses. For instance, choosing eco-friendly features for premium cars is becoming increasingly popular. If so, Rolls-Royce needs to project how much it might cost to add these amenities to the Phantom VIII.
Inflation Rates
An important consideration in cost forecasting is inflation. Rising expenses for goods and services must be taken into consideration by Rolls-Royce since they might have a major effect on manufacturing costs. The corporation can calculate the amount of inflation that will increase the cost of producing Phantom VIII in the upcoming years by taking past inflation rates into account and projecting future inflation. Not only does inflation impact a single production sector, but it impacts all cost components, including labor and materials. Assume, for instance, that inflation will drive up the price of steel and aluminum, which are necessary for the car's structure. Then, Rolls-Royce uses the cost forecasting process to help prepare for these higher costs.
Technological Advancements
The high-end automotive sector is always evolving technologically. Advances in automotive technology affect the Phantom VIII's features and production process. The expenses of implementing these innovations must be considered in cost forecasting. For instance, Rolls-Royce must budget for the price of acquiring and integrating new technologies as it adds sophisticated entertainment or safety features. Another significant cost issue is the research and development (R&D) requirement to maintain a leading position in technological innovation (Manager). The organization may better plan for the financial resources needed to sustain its technological leadership using cost forecasting.
R&D and Machinery Costs
A key component of Rolls-Royce's cost forecasting is estimating the machinery cost, research, and development. The organization must invest in large research and development investments due to its dedication to innovation and technological superiority. For the business to be able to continue creating innovative features and technologies for the Phantom VIII, it is imperative to forecast the financial expenditures for R&D efforts. In addition, a major component of the Phantom VIII's manufacturing is the cost of the machinery (Kong, 2022). Rolls-Royce needs to project the costs of buying and maintaining machinery and consider any prospective upgrades or replacements to keep production processes effective and current.
Customization Trends
Rolls-Royce's clientele frequently demands a high degree of personalization as a luxury car manufacturer. A more complex component of cost forecasting is predicting trends in customization. Changes in consumer preferences for specific materials, colors, interior amenities, or exclusive additions can directly impact material and labor costs. For example, Rolls-Royce needs to account for the increased expense of materials and guarantee their availability if there is a sudden demand for a particular kind of leather or wood veneer for the car's interior. Precise cost estimation enables the business to adapt to changing trends in customization while upholding the high standards of quality and craftsmanship for the Phantom VIII.
III. Managed and controlled
Managing Costs
Managing cost is also one of the important factors in production. Manager’s implementation of the right cost management system to its production can help save operating costs and add value to the products. During the production of Rolls-Royce Phantom VIII, managers must manage the costs of direct materials, direct labors, and manufacturing overhead to maximize value and minimize non-value added activities. Managers need to manage those costs with customers’ satisfaction in mind.
As a luxurious brand, Rolls-Royce’s managers have to provide a product that embodies excellence, luxury, style, and perfection. Maintaining high quality is one of the main focuses in Rolls-Royce production of Phantom VIII. Rolls-Royce would incur more conformance costs for its luxurious products. Conformance cost includes cost of materials inspection that ties to the costs of direct materials. Materials must be inspected to ensure the highest quality materials are delivered and used during the production. Each and every Rolls-Royce is hand-made in its state-of-the-art manufacturing facility. It could take up to six months of hands-on production process to complete a car. Process control and quality training are two important costs in the hand-made aspect of Rolls-Royce Phantom VIII and other cars. Managers must ensure every process during the production is of high quality and ensure a smooth transition from one process to another without any errors or delay. The large amount of time required to complete a car means any errors could affect the value of the product and customer satisfaction. Quality training involves training employees to improve quality. Quality training ties to direct labors. Since each and every Rolls-Royce is handmade, direct labor is one of the most important costs in the production of Rolls-Royce Phantom VIII. Managers must train employees to uphold the idea of excellence and craftsmanship to ensure a product with the best quality. Employee retention is another factor that influences costs of direct labor. Well-trained employees are more efficient in terms of quality and time. Although the cost of maintaining quality is high, a luxurious brand like Rolls-Royce can pass this on to its customers who value excellence, luxury, and perfection.
Rolls-Royce uses activity-based cost allocation to manage its manufacturing overhead. Since each Rolls-Royce is handmade, each process required different skilled employees to perform, so the overhead costs incurred is distinct from one process to another. Activity-based costing is one of the efficient ways to allocate manufacturing overhead to the activities that drive the overhead. Managers get better information about the production costs and costs of activities and processes to facilitate in managing costs.
Controlling Costs
Cost controlling works in hand with cost managing. How we control our costs depends on the type of management systems we decide to implement in our production process. Like many other manufacturing plants in the automobile industry, our company uses activity based cost allocation in order to simplify and organize the cost of producing a Rolls Royce Phantom. By using the activity based cost allocation method, we can group several cost drivers into their respective cost pools in the manufacturing process. In manufacturing the Rolls Royce Phantom, our cost pools can be identified into five major processes: (1) Ordering and receiving, (2) Machining, (3)General Assembly, (4) Inspecting and testing, (5) Painting. Knowing we are using this management technique, we have just accomplished one of the first steps to controlling our costs: identifying and allocating costs. Allocating costs to specific cost pools allows us to effectively track and manage the costs to various activities. With this information in hand, we can view which specific costs associated with a specific activity are increasing the overall manufacturing cost and adjust accordingly. It is also important to note that because we are producing a high end luxury product, quality is one of our greatest values as well as the value of our customers. As a result, we harbor additional conformance and nonconformance costs in our cost pools more than the average automobile manufacturer. Take for example the various quality costs that are associated the cost pools:
Ordering and receiving: This activity involves the ordering, handling, and processing of raw materials (direct materials) that are going to be used in the manufacturing process. The Rolls Royce Phantom utilizes various expensive and often fragile components such as metals, glass, computer chips, and leather upholstery. Before we can begin to process these direct materials into a Rolls Royce we have to inspect each production material as they are being received to ensure their quality (Lanen et. al.).
Machining: When referring to machining we are referring to the machines used for stamping and welding the car parts. We need to make sure that each machinery used in the manufacturing of the vehicle is operating properly and is given regular maintenance to reduce any future malfunctions.
Assembly:The Rolls Royce Phantom is largely renowned for its hand craftsmanship within various parts of its features. In the general assembly of a Rolls Royce, we incur the additional cost of quality training for the employees to properly assemble each car to a high level of standard and quality.
Inspection and Testing: Inspecting and testing for any defects in the Rolls Royce is a conformance (appraisal) cost. At this cost, we need additional time and labor. A group of specialized or trained employees are in charge of inspecting each Rolls Royce Phantom car to ensure they are up to the standard put in place. Inspecting and testing might result in finding defects, as of result, a rework will be required. Rework is an additional nonconformance cost needed to fix any defects before the car can be sold in the market (Lanen et. al.).
Painting: The painting cost pool refers to the final stages of designing the Rolls Royce Phantom before the Rolls Royce Phantom is considered to be a finished product and shipped off into the market. As previously stated, the Rolls Royce Phantom is known for its craftsmanship, and it is in this activity where the craftsmanship is largely used. As of result, quality training is again incurred to train employees to handle the final touches of designing the Rolls Royce Phantom.
After identifying and allocating costs, the next step in controlling costs is to create a budget. Using identified allocated costs, we can set up a budget for each activity that occurs in the manufacturing process. We determine the amount of costs we are willing to spend and the minimum amount of target profit to achieve to give us a good idea of the range of what our budget is going to be. This budget ensures that we stay within the range of our target costs and that we don’t over spend. Using a budget for each activity instead of using an overall budget for the entire manufacturing of a Rolls Royce Phantom also allows us to identify where in the manufacturing process is going over the budget. In this instance, we are able to utilize techniques used in target cost management to help set up the budgets for each cost pool.
Following the creation of each cost pool’s budget, we closely monitor the expenses incurred during a certain period of time, most likely in a span of an accounting period. When we are able to record all costs incurred, and implement them into our financial statements, like the balance sheet and income statement, we then compare them to previous financial statements. Comparing previous financial statements to current financial statements gives us an idea of the profitability of manufacturing the Rolls Royce in that accounting period. If we see that there is a decrease in profitability in our financial statements, then we are overspending on a cost in part of the manufacturing process and we need to identify the costs. Once we have identified the over budgeted cost we need to find solutions to reduce expenses. This is often done by modifying parts of the manufacturing process, and then closely monitoring expenses again until we see an improvement. When viewing an increase in probability, we can still find ways to further reduce costs by involving techniques such as Just-in-time (JIT) manufacturing or lean manufacturing.
Controlling costs are heavily dependent on the form of management used. A luxury product like the Rolls Royce Phantom, follows a similar structure of cost management like other automobile manufacturers. However, a key difference between manufacturing a Rolls Royce Phantom and a regular car is that Rolls Royce prides itself in the quality of its design and manufacturing. As a result, manufacturing a Rolls Royce requires more quality costs that need to be managed and controlled. By using the correct cost management, we are able to reduce costs, therefore increasing profitability in the manufacturing of the Rolls Royce Phantom.
References
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Henderson, Kevin. “Target Costing - Key Features, Advantages and Examples.” Wall Street Oasis, 14 Jan. 2023, www.wallstreetoasis.com/resources/skills/accounting/target-costing .
Lanen, William N., et al. Fundamentals of Cost Accounting. 7th ed., New York, McGraw Hill LLC, 2023.
Rusnak. “Are Rolls-Royce Vehicles Hand-Made? | How Is a Rolls-Royce Made?” Rolls-Royce Motor Cars Pasadena, https://www.rollsroycepasadena.com/rolls-royce-information/rolls-royce-hand-made/. Accessed 30 October 2023.
Whitehouse, Stephen. “6 Useful Cost Control Techniques for Manufacturing Companies.” ERP Software for Manufacturing, Distribution, eCommerce and Retail, WinMan, 5 Aug. 2020, www.winman.com/blog/6-useful-cost-control-techniques-for-manufacturing-companies .