M2A1: Cost Flows in an Organization

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Tamara Marquis posted Oct 13, 2017 3:38 PM

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I am manager for a company that manufactures various baking and confectionery products such as silicone baking mats, digital scales, digital thermometers, and marble & Granite cutting boards. I manage the digital scales division. To develop this product the company uses product costing because this is a standard product and they are all the same each one requires same amount of labor, materials, and also incur the same of the factory overhead. Therefore it is easy for the company to set a standard production cost for each scale that is made.

The direct material costs associated with manufacturing the scales include plastic for backing, microchips, digital motherboards, LCD screens, and tempered glass for scale top.

The direct labor costs associated with producing these scales include the employees that install the microchips digital components, the employees that put the scale body together, and the employees that test the unit before they are sent to the packaging department.

The manufacturing overhead costs associated with making scales include 1/4 of the factory rent, 1/4 of utilities, screws, electrical wires, 1/4 insurance and 1/4 production manager salary.

The most appropriate way for the company to allocate manufacturing overhead would be to use be applied manufacturing overhead which involves increasing the overhead account by documenting our full overhead expenses and decreasing the account when the overhead applied which causes the work in process account to be increased (Argosy University, 2017). This means that the company would increase the overhead account their total costs of manufacturing overhead, and would decrease the account when they apply the overhead such as monthly rent, which in turn increases the amount in work in progress.

If the company use actual manufacturing overhead it could cause the company’s bottom line to be low because costs are continually accounted for throughout the year and are sporadic to be effective as a way to efficiently calculate costs and could mean the company is charging too little the price for their item and are losing money. If they use the estimated manufacturing overhead costs it could cause them to either charging too much for their product individually lose customers or charging too little for the product caused them to lose money.

Argosy University. (2017). 2.2 Accounting for Overhead. Principles of managerial accounting. Retrieved from https://myclasses.argosy.edu/d2l/le/content/10961/viewContent/259220/View