Cost Estimation and Profit Planning
To successfully compete in the modern business environment, “firms need accurate cost
information, regardless of their competitive strategies” (Blocher, Juras & Smith, 2022). Accurate
cost information allows firms to simultaneously manage day-to-day functions and plan for future
opportunities. In doing so, a firm ties its costing practices together with its competitive strategy.
The system with which a firm tracks its costs is driven by three primary characteristics: cost
accumulation method, cost measurement method, and overhead application method. Ultimately,
these characteristics should align a firm either a Job Costing or Process Costing System,
depending on which is “best fit the firm’s operational and strategic goals” (Blocher, Juras &
Smith, 2022). While these systems require an immense level of overhead lift in a firm, Proverbs
21:5 states, “the plans of the diligent surely lead to abundance, but everyone who is hasty comes
to ruin.” Utilization of the proper costing system is essential for a firm to reach its peak
performance.
Job costing systems “[accumulate] costs and [assign] them specific jobs, customers,
projects or contracts” (Blocher, Juras & Smith, 2022). Firms utilizing this method have a need to
track direct costs applied to the manufacturing of product or delivery of service in question. A
prime example of job costing is Lockheed Martin. Lockheed receives its primary income from
United States Department of Defense contracting, which requires independent cost tracking for
each contract won. This requirement stems from a need for “auditability in public procurement”
and tracking of client and internal nonrecurring costs (Rendon, 2016). This type of requirement
also exists for firms like Deloitte, who provides an array of auditory and consulting services to
public and private organizations. While the company does not manufacture individual products,
it does provide individual services to clients. Different from Lockheed however, Deloitte does
have flexibility to charge based on standard rates, as would take place in process costing.
Deloitte may then be an example for a firm requiring flexibility to both job and process costing.
Process costing “accumulates costs according to processes or departments and assigns
them to a large number of nearly identical products” (Blocher, Juras & Smith, 2022). This
requires a firm to aggregate costs into a high-level understanding of their equivalent units, flow
of costs, and process steps. Toyota exemplifies this with their development of the Toyota
Production System. This system focuses on efficiency and quality by breaking the production
process down into efficient sub-processes. With this, the firm is able to track and optimize costs
on a process-basis. In the service industry, firms like UCLA Health in the healthcare industry
have utilized process costing in a different way. Healthcasre costing has historically been base on
“predetermined cost driver or by using a pre-determined percentage rate” (Carroll & Lord,
2016). Interesting to UCLA and the wider industry’s case, is that recent pressure has incentivized
healthcare to bring cost tracking down to the activity level, as customers and insurance firms
push for wider cost visibility by comparing rates between firms (Niñerola, Hernández‐Lara, &
Sánchez‐Rebull, 2021).
References
Blocher, E., Juras, P. E., & Smith, S. D. (2022).BCost management: A strategic emphasis.
McGraw-Hill.
Carroll, N., & Lord, J. C. (2016). The Growing Importance of Cost Accounting for
Hospitals.BJournal of health care finance,B43(2), 172–185.
Niñerola, A., Hernández‐Lara, A., & Sánchez‐Rebull, M. (2021). Improving healthcare
performance through Activity‐Based costing and Time‐Driven Activity‐Based costing.BThe
International Journal of Health Planning and Management,B36(6), 2079-
2093.Bhttps://doi.org/10.1002/hpm.3304.
Rendon, J. M., & Rendon, R. G. (2016). Procurement fraud in the US department of defense:
Implications for contracting processes and internal controls.BManagerial Auditing
Journal,B31(6/7), 748-767.Bhttps://doi.org/10.1108/MAJ-11-2015-1267
Hello Ashley,
I enjoyed reading through your post. ABC Manufacturing is an interesting of process
costing to consider. In my own industry, process costing can be a confusing process, as
customers wish for the pricing advantages of process costing manufacturing and the financial
vulnerability of job costing. Often, this results in an over-extended use of indirect overhead costs
due to issues tracking time and materials. While this can be solved by practical measures such as
“Replacing large overhead cost pools by assigning those costs to processes and work centers,”
practical implementation of removing overhead from process costing has persisting issues
(Vercio, 2018). These issues are not unique, however, to my own industry of engineering and
manufacturing. Recent studies in the healthcare industry have undergone similar pressure as
customers scrutinize financial practices of large health firms to understand pricing models. In
response, healthcare institutes have increased their investment into activity-based costing and
other internal accounting measures to streamline pricing and customer charging practices
(Niñerola, Hernández‐Lara, & Sánchez‐Rebull, 2021).
Activity-based costing presents a potential remedy to historic troubles with process
costing among firms with a wide array of products or services offered. While firms with few
products offered can easily implement process costing without issue, firms multiple very dfferent
products running through the same processes make fundamental process costing systems
inadequate (Blocher, Juras & Smith, 2022). Activity-based costing supports process costing
where products may spend more or less time throughout different production steps and be
batches in a variety of packages. This would be a directly applicable system to Sweet Treats
Bakery, as different pastries will invoke different actions throughout the baking process.
Ultimately, the bakery cannot charge the exact same price for every item that leaves the oven. A
ham and cheese croissant may go through the same or similar processes as a plain croissant, but
the ham and cheese require both more material and time. While pure process costing may subject
these to pricing as entirely equivalent units, activity-based costing allows the bakery to
appropriately price individual items. While it may be easier for the bakery owner to price all
units as equivalent, I would not personal pay the same for a basic pastry as a more special
version.
References
Blocher, E., Juras, P. E., & Smith, S. D. (2022).BCost management: A strategic emphasis.
McGraw-Hill.
Niñerola, A., Hernández‐Lara, A., & Sánchez‐Rebull, M. (2021). Improving healthcare
performance through Activity‐Based costing and Time‐Driven Activity‐Based costing.BThe
International Journal of Health Planning and Management,B36(6), 2079-
2093.Bhttps://doi.org/10.1002/hpm.3304.
Vercio, A. (2018). Process costing: The most important subject in the management accountant's
curriculum.BThe Journal of Corporate Accounting & Finance,29(2), 141-
150. https://doi.org/10.1002/jcaf.22334
Powered by TCPDF (www.tcpdf.org)
