Assignment 1: Absorption, Variable, and Activity Based Costing

Cost Flows in an Organization

Author’s Name

Institutional Affiliation

Cost Flows in an Organization

Costs of products flowing through various inventory accounts in manufacturing organizations are tracked and captured by the organization’s accounting system (Ostwald & McLaren, 2004). The focus of this paper is the Wisconsin Film & Bag (WF&B) manufacturing company whose headquarter is in Shawano. Wisconsin manufactures high quality polyethylene bags and film used in packaging applications such as electronics, food and other manufactured products. The management of the company is divided into divisions and for this paper, the focus is going to be on the production division of the company.

Some of the costs that associated with developing and manufacturing the product are classified under direct material costs which involve the raw materials used to develop the finished product. Direct labor costs which are the costs of workers that are identified easily with the unit of production. Manufacturing overheads are any other manufacturing costs that neither falls under direct material costs nor direct labor costs. It includes those charges that support the manufacturing process (Lanen et al., 2008).

In the manufacture of polyethylene bags and film, the manufacturing costs involved in production; under direct material costs are costs of small plastic pellets, crude oil and natural gas from which polyethylene or polythene is produced. Manufacturing costs associated with direct labor are costs of machine operators and casual workers directly involved in production and the assembly workers. Costs associated with manufacturing overheads are; indirect labor costs which include cost of workers like supervisors and managers as well as material handling team not directly involved in the production; indirect material costs which include cost of water, grease and lubricants that do not form part of raw materials; and other indirect manufacturing costs that include the cost of land rent, depreciation of machine, electricity, property insurance, freight and transportation and other expenses associated with operation of the company.

Process costing is a costing technique used in calculating the cost of every process (Lanen et al., 2008). This process is often used in companies that produce identical products in large quantities. Here, the previous process’ output becomes the latter process’ input and the final product is the product ate the end of the last process. Product costing is the costing meant to determine the cost of a unit of production (Lanen et al., 2008). It obtains the final cost incorporating all the contributing streams. The process of producing polyethylene bags and films involve various stages therefore, the company would use process costing since product costing is not detailed enough. Process costing also has a high scope of cost reduction and ensures standardized production as compared to product costing.

Looking at methods for allocating manufacturing overheads, they include job-order costing, process costing, variable and activity based costing. For this company, the most appropriate method for allocating manufacturing overhead costs to products is the process costing method since the company makes homogenous products. This system assigns overhead costs to products based on processing departments. This method enables the division to use the most suitable allocation base in every part of the manufacturing process.

If other processes were use, they would cause various impacts to the division. Job-order costing would see the management chose an allocation base to divide the total estimated overhead costs for the year. Activity-based costing method may provide information useful for decision making but the process is not suitable for external reporting by the company. Variable costing technique also limits the company’s ability to report externally.

References

Lanen, W.N., Anderson, S. & Maher, M.W. (2008). Fundamentals of Cost Accounting.

McGraw Hill.

Ostwald, P.F., & McLaren, T.S. (2004). Cost Analysis and Estimating for Engineering and

Management. Prentice Hall.