Assignment 1: Absorption, Variable, and Activity Based Costing

Cost Flows in an Organization

Name:

Institution:

Q1. Describe the company and identify the division you manage.

ABBU Brands manufacturing company is a world-class company which deals manufacturing of Automobiles. This company was founded in the year 2010 with the vision becoming top producer and distributor of office products globally. The headquarters of this company is in Lake Zurich in the United States of America. The area served by this corporation in South America, North America and Europe. My role as a Division manager is to offer managerial skills and coordination in the Production unit. My responsibilities in this division range from assessing the performance of the division, recruiting employees qualified for this section, allocating resources and running the companies programs.

Q2. Costs associated with developing and manufacturing your product.

Making product costs estimates at the beginning enables the developers to wisely manage the company’s resources and be able to evaluate the viability of the product economically. The manufacturing company uses The JD Edwards EnterpriseOne Product Costing System. (Rasheed,2012). With accurate product costing one can evaluate the manufacturing processes and be able to determine how the methods affect the profitability of the company. Manufacturing cost accounting which involves direct labor, overhead and indirect labor costs. Secondly, we have product design and accounting. The importance of this method is to maintain accuracy and complete records of Inventory value. The system enables one to store and retrieve the cost information which helps in managing and plan. Besides, it helps to track the expenditures, report any discrepancies and posts the transactions to the general ledger. (Rasheed, 2012).

Q3. Identify the manufacturing costs involved in producing your product and classify each cost as direct materials, direct labor, or manufacturing overhead.

Manufacturing costs involved in the production of the office products include the direct labor, direct materials and manufacturing overhead. Direct materials refer to the cost of the commodities that are used to form an integral part of any finished product. The raw material variety used in production includes; iron which is converted into steel, glass, aluminum, petroleum products which are used to make rubber, plastics or special fibers. The direct labor cost involved is assembling the automobiles, fixing the windows, rubber, painting, and electrification of the vehicle, interior design, workers’ salaries and many others. Manufacturing overheads costs refer to expenses that business incurs in manufacturing a product but do not fall into the category of direct labor, direct material, administrative or marketing and thus include mechanic repairing an assembly line machinery, equipment maintenance, depreciation, utilities, insurance, warehouse building cost, supervisors who oversee manufacturing of different product in the production process.

Q4. Discuss the most appropriate method for allocating the manufacturing overhead. How would different allocation methods affect the bottom line for your division?

Allocation of manufacturing overhead helps the realization of the cost per unit of the product thus making the right decision which enhances the management of the company. It also helps in promoting efficient use of resources. The reference line should be to ensure that the allocated overhead amount reflects the actual overhead amount used in the automobile production. There should be a correlation between manufacturing overhead and the allocation basis.

The most appropriate method of allocating manufacturing overhead is through departmental machine hours. Basing the manufacturing overheads on the production of the company departments is an improvement over using one rate for the entire company. Some of the products being manufactured require much more machine hours than in another unit while some other goods may have used a different grouping of machine hours. Another method of allocating overhead is through direct labor. Since the company is an automobile company, then direct manual work is minimal compared to the machine hours thus it is not a valid approach in this company. (Hyer & Wemmerlöv, 2002)

References.

Rasheed, K. (2012). Oracle JD Edwards EnterpriseOne 9.0 : supply chain management cookbook. Birmingham, UK: Packt Pub./Enterprise.

Blocher, E., Stout, D., Juras, P., & Cokins, G. (2013). Cost management. New York, NY: McGraw-Hill/Irwin.

Hyer, N., & Wemmerlöv, U. (2002). Reorganizing the factory. Portland, Or.: Productivity Press.