Accounting Discussion #7 (part B/C)

Respond to all 3 peers' discussion posts. Each response should be a minimum of 150-250 words.

Discussion #1: Job Order Costing and Process Costing

Costs are simply seen as negative in terms of profit and income yet are seen as necessary in the production of goods and services. Costs occur for raw materials, labor, overhead, and for support services. It is vital for the organization to understand costs within an organization because costs take away from organizational profits and understanding costs, how they are derived and what they are associated with, can help decision-making within the organization. By looking at costs and accurately placing costs to services or products is useful in helping to improve the organization and changing the cost structure to maximize profits (Davis & Davis, 2012).

One way to assign costs is job order costing, which assigns manufacturing costs to individual products. Such a cost system is used when the company wants to know the actual costs for a job and thus assigns all costs for that job to determine what the actual bill for the job is. Job order costing thus associates all costs, including materials, labor, and all overhead to a particular job (Davis & Davis, 2012). In order to determine costs the predetermined rates are used for overhead to calculate the cost for the job. Other costs are directly traced and associated with the job. Such a costing system allows the company to understand the costs for a particular job or to determine how much it costs to make a certain product (Davis & Davis, 2012).

While job order costing works when companies do special orders or when multiple products are produced that can be differentiated, process costing is used when companies mass produce nearly identical products. Since the products are very similar and use many of the same processes, it can be hard to really break down costs per product or job. Since it can be hard to set costs to products, companies break down the cost by process. Since it is easier to break down the steps it takes to make products, process costing simply assigns costs per process. Since each step in the process requires different materials and machines, it is possible for the company to calculate the costs in each area and then track costs per process (Warren, Reeve, & Duchac, 2012).

In job order costing the costs are accumulated by product and product costs are transferred with the product when it reaches finished goods. Any unfinished projects will remain as a work in process and issued to the job until complete (Warren, Reeve, & Duchac, 2012). In process costing the cost of the goods are transferred from one process to the next when one process is complete. The cost of the product accumulates along the processes until it reaches finished goods. Costs remain in the department or process until the product moves to the next stage (Warren, Reeve, & Duchac, 2012).

References

Davis, C., & Davis, E. (2012). Managerial Accounting. Hoboken, NJ: John Wiley & Sons.

Warren, C., Reeve, J., & Duchac, J. (2012). Managerial Accounting (11e). Mason, OH: South-Western.

Discussion #2: Target Costing

Target costing according to our textbook is defined as, ‘ the process of determining the maximum allowable cost for a new product and then developing a prototype that can be profitably made for that maximum target cost figure (Noreen, Brewer & Garrison, 2014).’ From an article I read online about this topic of target costing, it lists that many companies use this method approach such as Cummins Engine, Ford, Isuzu Motors, Compaq and Toyota. So target costing for a product is found by:

Target Cost = Anticipated selling price- Desired Profit.

            Therefore, the product development team has to undertake the responsibility of designing the product for no more than the target cost price. Target costing approach was developed with two ideals in mind: costs and markets. The market is the one that determines price of the product. Companies have to take this into consideration, as well as supply and demand. Basically, with target costing things are done in reverse per se. The target cost is established and the then the product is designed around it. One will think in the business world, that the product will be developed first and then a price will be established after, but not in target costing. Take for example; I am currently in the process of writing a series of children books that I plan to publish after my match. If instead of writing the stories first, I figured out how much each book will cost me to produce and then write the children’s books. To me this concept will be too hard to grasp, but I can see a design team making it work.

Then to explain this concept a little better:

Project sales (80,000 books, $20 per book)                $1,6000,000.

Less desired profit (15% of $2,000,000 invested)      $300,000.

Target cost for 80,000 books                                               $ 1,3000,000.

Therefore, the target cost per one book  ($1,3000,000/80 000 books) = $16.25

So target costing is a very interesting topic to me, the whole concept is back to front and it really takes some real inventive people to do this.

            Some advantages of target costing it offers a straightforward approach to cost management. It decreases time to market. Develops partnerships with suppliers. Target cost helps aligns business towards customers. Then the disadvantages are: it entails numerous meeting for coordination. To implement this concept, need everyone on board to progress in the design team. To properly implement this concept, one needs a detailed cost data report. Lastly, the quality of the product might come down depending on if the components are cheap or not.

Reference:

Farid, S. (2014, March 30). Retrieved October 14, 2014, from

http://www.accounting4management.com/target_costing_pricing_products_and_services.htm

Noreen, E.W., & Brewer, P.C. & Garrison, R, H. (2014). Managerial Accounting for

Managers. New York, NY: McGraw- Hill Companies.

Target Costing. (n.d.). Retrieved from http://www.accountingtools.com/target-costing

Discussion #3

Product costs are all costs that are incurred by a company in order to produce the product, or products, that it offers for sale. In order to adequately determine the costs of a product “three elements of cost must be combined” and those elements are raw materials, labor and factory overhead costs (Winicur, 1993). Raw materials are the unfinished elements that the company puts together to form the finished product that will be offered to intended audience. Labor is the physical effort put forth by the employees of the company to put the products together. Overhead costs are “all manufacturing costs except direct materials and direct labor,” (Noreen, Brewer & Garrison, 2014). As mentioned previously, one element of product costs are overhead costs. These include such items as: indirect materials, indirect labor, maintenance, rent and utilities.

Absorption costing is one method that companies around the world use to determine the costs associated with their goods and/or services. Absorption costing is called such because the “units are said to fully absorb manufacturing costs,” (Noreen, Brewer & Garrison, 2014). One method of absorption costing is job order costing. Though it is most predominantly used by organizations that manufacture several different products, it can also be an effective method of costing for service organizations. Simply put job order costing can be defined as knowing and identifying all of the costs of a particular job and applying these costs to that specific job (Greer, 2004).

In a job order costing system each production of a particular unique product or service is considered a job. In order to determine the cost of this one particular job, all the costs for the job are assigned to the job. When the job has been completed the costs are totaled, this is the total cost for the job. To determine what the per unit cost is for the job, the total costs incurred would be divided by the total number of units produced for the job. For example, a particular shirt manufacturer, produces different styles of shirts, one being a short sleeved t-shirt. The total direct materials for this shirt are $10,000.00, the total direct labor for this shirt is $20,000.00 and the total overhead for this shirt is $5,000.00, for a total cost for the job of $35,000.00. This particular job produced 10,000 shirts, resulting in a per unit cost of $3.50.

            One other element to job order costing is the application of overhead. Since overhead cannot generally be traced to one product and it applies to all products produced in the manufacturing environment, it will be applied to all job using a predetermined rate. In order to determine what the predetermined rate should be, the organization should determine “what it is that all products have in common,” and then use this as the “basis on which overhead is allocated,” (Winicur, 1993).

References

Greer, F. (2004). Job costing basics. Painting & Wallcovering Contractor, 66.2. Retrieved from http://search.proquest.com.proxy.davenport.edu/docview/236613657/858FB0B5FBAC4A0CPQ/6?accountid=40195

Noreen, E.W., Brewer, P.C. & Garrison, R.H. (2014). Managerial Accounting for Managers (3rd ed.). New York, NY. McGraw Hill/Irwin

Winicur, B. (1993). Cost accounting essentials. The National Public Accountant, 38.4. Retrieved from http://search.proquest.com.proxy.davenport.edu/docview/232365724/B6CFD6AEE5D94586PQ/5?accountid=40195

Winicur, B. (1993). Job order costing. The National Public Accountant, 38.5. Retrieved from http://search.proquest.com.proxy.davenport.edu/docview/232369587/858FB0B5FBAC4A0CPQ/1?accountid=40195