Cost Accounting: Assessment of Controls
SHAWN QIAN
1.docxOther data sources
· Consult with specialists in the field.
· Research the water manufacturing industry.
· Company Website: https://pentawater.com/
Different Equipment Brands:
· https://www.hurstboiler.com/literature
Penta Water is a family-owned company based in Colton, California. Its mission is to “produce the world’s purest bottled water” through its patented thirteen step purification process. The main operation consists of manufacturing, packaging, and distribution of the Penta brand bottled water. Penta Water is a high end water bottle brand which targets its consumers through distributors such as Whole Foods, Vons, Pavilions, and Amazon. A standard case of 24, 16.9 fluid ounce bottles retails for $24 on Amazon. Its largest competitors include Smartwater, Fiji Water, and Dasani.
The bottled water manufacturing industry in the US, according to IBIS World, generates $7.1 billion in annual revenues and consists of approximately 480 businesses. Although largely stable, the industry has shown slight growth due to recent consumer health awareness and decisions to opt for healthier drinking options. Barriers to entry for this industry are moderate due to strong competition of well known brands within the industry. Establishment of brand loyalty with consumers, quality, price, and design also contribute as barriers into the industry. All producers in this industry must adhere to the Environmental Health Protection Agency’s water standards and regulations as well as manufacturing regulations.
Demand in this industry is high, however, societal initiatives, such as the environmentally friendly “go green” initiative, jeopardizes the industry. Awareness of the effects of the production of plastic draws consumers to opt for reusable water bottles and water filters. In order to address this issue, the industry has elected to use recyclable plastics.
The ability to trace and identify costs of raw materials and products used in the production process is important for a company. Having this information available shows them how much they could and should spend on their raw materials or at what price they should be selling their finished products. Costing systems are helpful tools to ensure the costs traced are more accurate and reliable so the company is better able to make effective decisions. These systems also help organizations analyze their profitability and conduct inventory valuation (https://smallbusiness.chron.com/advantages-product-costing-offers-financial-accounting-24883.html) . All of which further aid in deciding whether to accept or reject proposed project proposals or research and developments for expansion.
Currently, Penta uses the QuickBooks accounting software to track their profits, expenses, inventory and such to analyze their financial performance. In addition to QuickBooks, Penta also relies a vast amount of their calculations on the Microsoft Excel program. In this Excel program, Penta has been able to create a Bill of Materials (BOM) which is the closest they have to a costing system.
In order to select the appropriate costing system, a company must first look at their production needs. Penta’s production set-ups and machine runs are solely for water, therefore they have mostly uniform_____________. The only variation within the production is the size of the bottle. Their bottle sizes include 500mL, 1L and a 750mL. Another variation comes from packaging their finished goods, which range from 6, 12 or 24 packs. These individual packs are then packaged on pallets and sold in 60, 50 or 120 cases of water per pallet. Some of these have a mandated regulation which requires extra packing for the water bottles being transported. Therefore a costing system such as the a process costing system or the activity based costing systems would match their production needs (https://www.accountingtools.com/articles/what-is-a-costing-system.html ).
Penta however, does not currently have a production costing system in place, but according to their Accounting Manager, _______________they are looking into adopting one.
Penta in the meantime has been using a set of Bill of Materials (BOM), which are product cost breakdowns of what goes into each finished good. For example, the Exhibit for Product F-1010 is a BOM which breaks down the costs for the bottle and each case on that selected pallet size. The BOM breakdown includes three parts; bottle components, packaging components and freight fees. The bottle components include the bottle, the cap to seal the water into the bottle, a bottle logo, rings to hold the bottles together and pack logo for the budle which add up to $.36205 per bottle or $6.33 per case of 4 6-packs of 500mL water bottles. The second component is the packaging which includes a pallet fee, pallet wrap which add up to $0.00821 per bottle or $0.19703 per case and a freight fee. The Bill of Material breakdown then allows Penta to see the cost of a 500mL bottle is $0.38026 and the cost for a case of 4-6 packs if $6.65006.
There are other associated costs however, that Penta has not been able to pinpoint and accurately tie to profits. This includes costs of their plastic resin, wasted resin, repairs and maintenance fees, glue and other indirect materials and indirect labor costs.
This raw material component, is received from a sister company within the organization. There is a large amount of wasted resin they spend when they are initially trying to head the machines. They also have waste from mishaps. I think they might re-use this, check what Wilson said. They have to store their material in sealed containers and ensure the resin is not exposed to air or outside particles therefore it is connected by a sealed tube directly to the machine leads which go into the molds. They spend on cleaning and sanitizing them the bottles once they have been created and before filled with water. They have facilities where they test their water so they have a lot of additional research and testing expenses incurred. They fill, label, cap and package the bottles. They have resin waste expense and they recycle. They have R&M OH costs which they outsource for their molds (this could cost thousands). They select two bottles? from each production run so they are able to test the water because they have to ensure they meet regulations. The other bottle is kept, sealed within the organization in case of a customer reaction for testing purposes in case they need to recall a trace a specific production run from the market to protect their customers.
Tracking Costs
Penta’s Manager___________ mentioned that adopting a costing system is something they want to do in the near future. They feel this will better aid their costing of all direct and indirect materials and labor hours that go into their products and thus will be better able to cost them. Process costing or Activity Based costing system would be good for them because their products are similar and large batches.
