Cost of Production - Larson & Larson Company - Assignment Example

? Cost of Production – Larson & Larson Company due Cost of Production – Larson & Larson Company There arevarious costs incurred during the production of goods. Consequently there have emerged various methods for determining such costs which in themselves cause variations and lack of accuracy in one way or the other. Some of those methods are the Overhead Absorption Rate and the Activity-Based Costing. Part a For R, 25 hours @ ?12 = ?300 + ?1200 with 560 units produced Rate per unit = ?1500/ 560 = ?2.69/ unit For S, 480 labour hours @ ?12 + ?2900 with 12,800 units produced Rate per unit = ?8660/12800 = ?0.68/unit For T, 50 labour hours @ ?12 + ?1800 for 2,400 Rate per unit = ?2400/2400 = ?1/unit Part b ABC system would be used if the other costs such as run and inspection are actually considered to obtain the true value of the project costs. With the weighted percentages, it can be possible to determine the product value considering each part of the process. In addition to the works on OAR, we calculate according the apportionment of the other expenses such that we will have the calculation that includes all the aspects for ABC as follows: For R, 68 x ? 12 apportioned appropriately in the ratio 3:4:3 then calculated for one unit by dividing by 560, the value is then added to other cost due to material and direct labour hours. = ?1.46/unit The total unit cost of R being ?2.69/ unit ?2.69/ unit1.46/ unit = ?3.15/unit For S, = 50 x ? 12 in the ratio 3:4:3 and calculated for one unit by dividing by 12,800 = 600/12800 = ?0.05/unit Total unit cost being 0.68 + 0.05 = ?0.73/unit For T, would similarly be obtained as 58 x ?12/600 + ?1/unit =?2.26/unit Part c ABC as a method or accpunting model as developed inorder to solve problems related to accounting that has actually evolved over time due to the change in technology as well operations within the industries (Warren, Reeve & Fess 2005). It is clear that overhead costs have been increasing in companies to the point that it may be extremely difficult to use the direct methods which only emphasized on resources as well as the absorbed costs of the out. This assumed at a great expense, the impact of operations and the many intermediaries involved which comprise of the majority of the overhead costs. ABC therefore is the only practical remedy to the inefficiencies of the traditional accounting methods. At the core of ABC there exist very important principles and arguments which contribute to differentiating it from other accounting methods. ABC holds that the cost objects will consume the activities contrary to the principle of other traditional accounting methods which argue that cost objects may only consume the resources (Naidu, Babu & Rajendra 2006). In normal operations, the costs actually will end utilizing the activities in the production line which actually depend on the resources. This aspect makes ABC more realistic and effective in determine the unit cost of production. Whereas other traditional methods base on volume allocation of the production resources, ABC considers the drivers at each level and their effect on production to determine the allocation. The drivers considered include activity drivers as well as the activity drivers which check every other production element and its cause effect relationship to the output. Further difference and principle of ABC comes from the fact that the traditional accounting are developed on the basis of structures while ABC actually depends on the process itself and therefore takes care of the various that may occur in the process. ABC begins from the process as it moves upwards to assess the amount of resources utilized and that might be required. Critically, ABC analyses the activities with the understanding that it is not easy or possible to manage costs but the activities causing the costs are manageable so that in the end, it is the activities that the organization takes or that is taken in the production process which will determine the costs (Pryor 1998). The analysis of the activities enables the production unit or the management identify surplus activities in the process eliminates and eventually, they will be able to manage or actually reduce the costs. This will result into efficiency and effectiveness in production at the right costs. When comparing volume versus the drivers in production, where ABC as a method considers the drivers to the activities as opposed to volume of output, in determining the production costs the method achieves the best possible or accurate costs of production. In this case costs are not only assigned to direct labour but according to what causes the costs and their overall effect on the output (Young 2003). The drivers used in this method occur at various levels and include unit level drivers which arise for every unit of the product that is produced, batch level which occur due to product of one batch of a given product, product level drivers which do not depend on the units produced but every different product that is produced (Anand, Ward and Tatikonda 2010). Further, there are drivers that affect the entire facility and are thus referred to as facility level drivers which actually occur due to the use of the production facility regardless of how many products are produced from the system as well as the corresponding units. This method puts ABC in the forefront in determining production costs since all the costs are included at each level contrary to the other traditional methods which use fixed and variable costs with reference to the volume. Once the levels of drivers are considered, they are categorized into those that act on the activities as well as those which influence the resources hence we have activity drivers and resource drivers which influence the level of activity and resource consumption respectively. The other method of reference to the drivers entail cost drivers which is usually included in the Activity Based Management ABM and will include the causes of costs by activities of non financial performance. There is an evident difference in the structure with regard to ABC and other methods of accounting. This comes about from the over emphasis of organizational charts rather than the actual process by the traditional methods (Cue, McKone and Schroeder 2001). The traditional systems do not depend on what needs to be done but rather what is available in terms of resource allocation. By considering what needs to be done, ABC provides an avenue to determine the resources required for the process while the other methods of accounting tends to allocate the resources without investigating how much is required by the process which leads to under costing or surpluses and either way, losses are incurred. ABC therefore provides valuable detailed information of what needs to be done and how much of the resources should be allocated to specific process because it investigates the process. This is done through the attention directed towards critical success factors which influence the cost objects and the processes. This will enhance a company’s Sustainable competition. Part d JIT as a method involves the aim of reducing business inventory cost and therefore attempts to produce depending on demand. It will focus on the indicators of demand to facilitate production such as anticipated shortages. This enables it use the resources as they are required with the strategy of avoiding to produce more than required. Consequently the costs are reduced as no surplus units are produced. It should be considered that the method has a possibility of turning expensive since most of the people might not be capable of producing exactly to the demands which lead to mitigation in production. It is the aspect of mitigation in production that will lead to increased overhead per unit and so the method develops such disadvantages. Otherwise, the method has numerous benefits in determining the production costs. JIT enables the company to minimize on set up time and therefore eliminate inventory that might occur during changeovers as the flow of goods is sustained from the warehouse to the shelves in the shops where consumers can access them. This is because there is no overproduction beyond consumption rates. This makes it simpler to keep the inventories for the movement of the products and reducing such related costs (Gilliland 2002). The method also maximizes on the utilizes of employees with more than one skill as they can be used at different stages of production since the stages do not need to run continuously at the same time because only demand will necessitate production at each stage. Since the production of some commodities is always halted due to drop in demand, the company is able to save on paying of overtimes as well as using the employees to perform other duties and in effect reduce on inventories. The employees not engaged at the time are free to undergo training to improve their skills and productivity. Further to keep production at levels which will meet demand as it occurs, the supplier relationship and significance is improved. Total Quality Management, TQM, on the other hand emphasizes on improving the product and processes as they occur and depending on the needs (Bongiorni 2004). It holds every person on the process responsible for the quality of the product throughout the stages and therefore calls for assessment of the product at each stage with necessary measures taken to improve it if not improving the process to ensure efficiency and quality production. The operations which involve the management, laborers, suppliers and consumers of the product involve the practices of product design, management, quality in supply, involvement of customer and feedback. The method ensures continued customer satisfaction through production of quality. It also ensures that every person in the production chain meets the set standards and produce quality. Part e By referring to the cost of small batch, the writer is referring to the other numerous costs related to the process which overhead absorption rate do not consider like process runs and quality inspection. Since these are also contributory to the working hours and therefore the entire process of production they need to be considered (Drucker 1999). For Larson & Larson to use the method of ABC they need to understand the significance of such costs in their production like consuming the man hours as well as engaging the equipment and personnel that would be effective elsewhere. References Anand, G., P. T. Ward, and M. V. Tatikonda, 2010, Role of explicit and tacit knowledge in six sigma projects: An empirical examination of differential project success. Journal of Operations Management 28 (4) 303-315. Bongiorni, Sara, 2004, "All in the timing", The Greater Baton Rouge Business Report. Cua, K. O., K. E. McKone, and R. G. Schroeder., 2001, Relationships between implementation of TQM, JIT, and TPM and manufacturing performance. Journal of Operations Management 19 (6) 675-694. Police Service National ABC Model Manual of Guidance Version 2.3 June 2007 Drucker, Peter F., 1999, Management Challenges of the 21st Century. New York:Harper Business. Gilliland, Michael, 2002, "Is Forecasting a Waste of Time?"[ Supply Chain Management Review Naidu, N. V., Babu, K. M., & Rajendra, G., 2006, Total quality management. New Delhi: New Age International. Pryor, T., 1998, Pryor convictions: 31 insights into ABM : explanations, observations and recommendations on Activity Based Costing (ABC) and Activity Based Management (ABM). Arlington, Tex.: ICMS, Inc.. Warren, C. S., Reeve, J. M., & Fess, P. E., 2005, Financial & managerial accounting (8th ed.). Mason, Ohio: Young, D. W., 2003, Techniques of management accounting: an essential guide for managers and financial professionals. New York: McGraw-Hill. Read More