Accounting Assignment #1
jandreg
peer_discussion_posts.Hello, here are 4 peer discussion posts. Choose and respond to one of the peer’s discussion post. A minimum of 150-250 words.
DISCUSSION #1 --Topic: Cost Drivers
A cost driver is any type of event of activity that will cause a business to incur expenses. One way to see it is that the a cost driver is what contributes to the cost of doing business. Businesses are interested in analyzing cost drivers because it provides perspective and an understanding of the connection between the activities of doing business and the cost of those activities, this cost is known as the cost object (Way, 2014). An example of a cost driver would be equipment, or machinery used in a factory. The machinery is a cost drive because the use of the machine in the factory necessitates the business incurs a cost for using it. This cost can be due to labor to pay employees to operate the machine, maintenance of the machine to keep it running properly, and energy consumption due to operating the machine (Investopedia, 2014). For example taking a look at the health care industry, hospitals that are trying to becoming more and more financially efficient have to identify cost drivers that relate to cost of operating. Such cost drivers are beds available as a capacity cost driver, number of services as a complexity cost driver, number of doctors, administration staff, and supporting staff, all as volume cost drivers (Huber & Bernard, 2001).
“Activity-based costing is a type of costing that identifies activities within the business and estimates the resources required to fulfill each activity. An activity cost driver is a factor that affects the costs associated with an activity” (Investopedia, 2014). In using the activity-based costing accounting method it is important to identify the cost drivers within the business. An important aspect of identifying cost drivers is the make sure that the cost object and cost driver directly relate to one another. There are several steps that have to be undertaken to identify the cost drivers, and I will touch on them all briefly. The first step is to identify the target cost object; once this is done the business will be able to focus on determining the cost driver for the particular cost object to interest. The second step is to identify cost drivers that can relate to the target cost object. In this step what we are looking for is a casual relationship between a certain activity and the cost sustained. The third step is to figure out the cost drivers correlations. Looking at the list of cost drivers, now the company must highlight the cost drivers that have been identified which relate closely to the target cost option. By doing this the company will realize the cost drivers that have a heavy influence on the target cost option. The fourth step is to analyze the effect of management control. By identifying the best or correct cost driver management will inevitably realize the cost driver will have a positive affect on management control. The right cost driver will allow management to make decisions which directly involve the cost driver to have a positive impact on how the company does business and in doing so can help to make the business run in an increasingly financially effective way. The fifth and last step in determining the cost drivers is to evaluate the cost measurement and to settle as to whether the measure is accurate and simple to use. In doing so, it potentially may be necessary to make an adjustment and add another element to the measure to further refine the cost measure (Way, 2014).
References
Activity Cost Driver. (n.d.). Investopedia. Retrieved from the World Wide Web on September 03, 2014 from:
http://www.investopedia.com/terms/a/activity-cost-driver.asp
Huber, Z. S., & Morard, B. (2001). Which Cost Drivers Cost In The Hospital Sector? Allied Academics International Conference. Academy of Accounting and Financial Studies. Proceedings, 6.1, 7 – 14. Retrieved from the World Wide Web on September 03, 2014 from:
Way, J. (n.d.) How to Determine Cost Drivers. Chron. Retrieved from the World Wide Web on September 03, 2014 from:
http://smallbusiness.chron.com/determine-cost-drivers-40992.html
DISCUSSION #2 --Management Accounting - Decision Making
Decision is defined as the process of making up your mind through gathering important ideas from multiple sources or a choice or judgment call made by somebody after a period of discussion (Fitsum Kidane). Small business owners face countless decisions to be made every day and managerial accounting information provides data-driven input to these decisions, which helps with improving the decision-making process over the long term.
Management accounting plays an important role in a business and it is fundamental in strategic planning. Management accountants make use of financial information to help a business make vital decisions for a successful future. Management accountants focus on forecasting and decision-making and use information to help with the decision making in how a business should move forward, such as investing in new equipment or technology, acquiring another business or expanding the core business area to untapped markets. Management accountants can use different tools or techniques to assist decision-making such as ratio analysis, budgets and forecasts (Business Case Studies).
Using managerial accounting information, it can be determined what to sell and how to sell it. Small business owners may face difficulty deciding where to focus their efforts in terms of marketing and sales. This is where an accounting manager comes in handy as he/she can help examine the costs that differ between the different alternatives available for each product in terms of advertising. They can determine whether to add new product lines or discontinue a certain operation that may not seem to be working. Once it has been determined what products to sell, the next step is to find out their target customers. Deciding which customers are the most profitable allows organizations to focus their advertising efforts in the right direction (John Freedman). Managerial accounting information is especially helpful in making important manufacturing decisions such as whether it is more feasible to make or produce a particular component required to manufacture the company's primary product or is it better to buy it. These type of decisions help identify the route that would be more profitable in the long run for the business. Managerial accounting information also provides a data-driven look at how to grow a small business through budgeting, balanced scorecards and financial statement projections (John Freedman).
References
John Freedman. Why Management Accounting Is Important in Decision-Making. Retrieved from http://smallbusiness.chron.com/management-accounting-important-decisionmaking-53947.html
Business Case Studies. Financial information in decision making. Retrieved from http://businesscasestudies.co.uk/cima/financial-information-in-decision-making/introduction.html#axzz3CNhx6HQ6
Fitsum Kidane. Decision making and the role of management accounting function. Retrieved from http://www.academia.edu/1819493/DECISION_MAKING_AND_THE_ROLE_OF_MANAGEMENT_ACCOUNTING_FUNCTION-A_REVIEW_OF_EMPIRICAL_LITERATURE
DISCUSSION #3
A business that produces a product and/or services is called a manufacturing firm. A manufacturing firm acquire raw materials that produce the finished good also known as the product. Manufacturing costs are the costs directly involved in manufacturing of products and services. Raw materials are materials that are directly used in the final product; a finished product from one company can be the raw material for another company (Johnston, 2014). An example, would be the plasma final product from a plasma company is the raw material to making medications for another company. Any business that is involved in manufacturing should know the three common manufacturing expenses (Johnston, 2014).
The three common manufacturing expenses are: 1) Direct materials, 2) Direct labor, and 3) Manufacturing overhead.
1. Direct materials are the cost of materials that are directly associated with the product (Jan, 2013). A few examples of direct materials would be the following:fan blades, motor, and fan base would be the direct materials when building a fan. Wood would be a direct material when building a chair (Bush, 2014).
2. Direct labor are the cost of labor that was spent on the product (Jan, 2013). A few examples of direct labor would be the following: the people who perform the work such as construction workers, a sales associate, phlebotomists, and anyone who has direct contact in making or building the product (Bush, 2014). For a plasma facility the direct labor would be the receptionist, phlebotomist, and lab tech. All are in direct contact with the plasma and responsible for the production of the product.
3. Manufacturing overhead are the rest of the production costs excluding direct labor and direct materials (Jan, 2013). A few examples of manufacturing overhead would be the following:
office supplies, rent, human resources, machines, drills, cleaning supplies, tools, etc.(Bush, 2014). For example, for a plasma company a manufacturing overhead could be the machine (PSC 2), harness, bowl, anticoagulant bag, and needle.
One of the most common mistakes business owners make is estimating profits based on only one manufacturing expense instead of all of them, resulting in a surprise when the actual numbers come in. The most important manufacturing expense would be direct labor, direct labor is paying wages to employees. A constant watch on this particular manufacturing expense will let a business know if they are getting enough production versus the money put into labor (Johnston, 2014).
References
Bush, D. (2014). Direct Labor, Direct Materials, and Overhead. Accounting. Retrieved from http://academic.regis.edu/dbush/Accounting/Accounting%20Help/DL%20DM%20OH/acc_dl_dm_o.htm
Jan, O. (2013). Cost Classifications. Accounting Explained. Retrieved from http://accountingexplained.com/managerial/costs/
Johnston, K. (2014). 3 Common Types of Manufacturing Costs. Houston Chronicle. Retrieved from http://smallbusiness.chron.com/3-common-types-manufacturing-costs-24567.html
DISCUSSION #4 --Manufacturing Costs
Companies incur expenses (costs) for conducting business and manufacturing organizations have costs which occur in the process of creating goods for sale. A cost is a sacrifice of resources, in that one resource must be traded to obtain another resource. For manufacturers and organizations, costs are generally money paid to obtain goods, to pay workers, or to pay bills associated with the organization (Maher, Stickney, & Weil, 2012). Manufacturing costs are the costs associated with turning raw materials, such as wool, into a product for sale, such as a sweater. When looking at costs of manufacturing there are three main classifications of costs, including direct materials, direct labor, and manufacturing overhead. These costs not only impact the price of goods produced, but also impact how costs are associated and applied within the company’s accounting (Noreen, Brewer, & Garrison, 2013). Organizations are required to understand and account for these costs and all manufacturing costs must be reported and directly attributed to the units produced for external financial reporting according to accounting laws (Averkamp, 2014).
Direct materials costs refers to the actual cost of raw materials, such as wool, flour, or wood, that becomes part of a finished good. Direct materials are those items or resources that are an actual part of the finished product. To create bread, the direct materials would include yeast, flour, eggs, and salt. Direct materials are therefore any material that is required to make a product and which will become part of the finished product (Maher, Stickney, & Weil, 2012). The second cost is direct labor, or the wages of the employees who are physically involved in the creation of the products. Direct labor is the cost of employment for those who convert the direct materials into finished goods and which can be easily traced to the product. This would include any production workers or craftsman who touch the products during creation (Maher, Stickney, & Weil, 2012). The final cost category is manufacturing overhead which are costs incurred creating finished goods, but not costs that can be directly attributed to the specific units. These costs cover the cost of the machines, which may produce several different goods, or the cost of non-production workers such as janitors. Manufacturing overhead includes things such as light, facility cost, depreciation on equipment, and the cost of security (Noreen, Brewer, & Garrison, 2013). These costs can be significant and must be allocated to production, despite not being easily connected to a single product or process.
Understanding and accounting for manufacturing costs is important for the organization and managers not only because it is required under GAAP, but also because knowing and tracking costs is essential for understanding how to set process for goods and where and when to look to reduce costs. Managers must make many decisions and one decision is maximizing profitability by reducing costs. Being able to clearly articulate and tracks costs allows managers to look for areas of improvement or to understand when prices must rise to ensure profitability (Kaplan, 1990).
References
Averkamp, H. (2014). What are manufacturing costs? Retrieved from Accounting Coach: http://www.accountingcoach.com/blog/what-are-manufacturing-costs
Kaplan, R. (1990). Measures for Manufacturing Excellence. Cambridge, MA: Harvard Business Press.
Maher, M., Stickney, C., & Weil, R. (2012). Managerial Accounting (11e). Mason, OH: South-Western.
Noreen, E., Brewer, P., & Garrison, R. (2013). Managerial Accounting for Managers (3rd). New York, NY: McGraw-Hill/Irwin.
