Accounting the Basis For Business Decision Making - Case Study Example

TASK REPORT FOR MERLIN There are two distinct types of cost accounting systems: a job order cost system and a process cost system. Both systems produce the same end results; timely information about manufacturing costs, inventories on hand and unit costs. Under a job order cost system, the company manufactures the product as per the exact specifications and requirements of individual customers. A "job" represents the goods manufactured at one time to fill a particular order. If the job contains more than one unit of product, unit costs are determined by dividing the total costs charged to the job by the number of units manufacture. Job order cost systems are used by Print Shops, Furniture makers, etc. Under a process cost system, the key points in costing are the various departments or processes in the production cycle. In a process cost system, the focal points in accumulating manufacturing costs are the individual production departments (or processes) involved in the production cycle. As a first step, the cost of raw materials, direct labour and factory overhead applicable to each department or process for a given period of time is compiled. Then the average cost of running a unit of product through each department is determined by dividing the total departmental cost by the number of units processed in that department during the period. When a product moves through two or more departments, the total unit cost of finished product is accumulated by tracing the costs of incurred in each department to the product as it moves from process to process. A basic objective of a process cost system is to determine the unit cost of direct materials, direct labour and overhead for each manufacturing process or department. These unit costs become the basis for valuing inventories and for tracing the flows of costs though the departmental work in process accounts and finally to finished goods inventory and to cost of goods sold (Meigs & Meigs, p1022-1033). Objectives for Study of the Process and Procedures in the Joinery Shop The following are some of the main objectives behind this thorough study of the process and procedures in the joinery shop: To analyse the skill and efficiency of labour in carrying out the duties in all the steps of production of different types of doors i.e., the Ajax, the Achilles and the Agamemnon. To evaluate the favorable and unfavorable variances determining labor capacity and efficiency. To inspect the reasons behind the unfavorable labour efficiency variance and total direct labour variance. To assess all the processes through which the production of the three doors passes in order to depict the correct picture of the process of production and the space occupied by joinery business comprising 5 units for every step involved in the production. To critically figure out the causes resulting into the tightening of joinery shop and to examine the existing shop layout. To gather the required data and information necessary to visualize the positioning and placement of machines used in the process of production within the joinery shop. To put forth suggestions for changes in the process and procedures within the joinery shop outlet to make it sufficiently spacious to carry out the process of production in different units of the shop. This study would help the company to reassign space to different units of joinery shop as appropriate and required for the process to be completed properly. Suggestion and Reason for Extending the Study The report has been extended to the study of process and procedures of materials and goods moving between the different estate units in order to give a complete account of the space occupied by different units through which the production of the three doors passes. This analysis has been considered necessary for an investigation into the effectiveness of product management being carried out by the company. The company did not have any provisions for product management at the outset. After having invested in a combined thicknesser and planer, the company just ended up in replacing the existing machines with the new ones. This has led the company to a situation where the management finds itself in a turbulent position to adjust the shop layout to provide necessary space for every single unit in the joinery shop and organize the excess space occupied by any unit to provide it to the requiring unit. The study primarily relates to improving the efficiency of labour in the process of production by introducing a change in the shop outlet to ensure that every step performed with the maximum efficiency in the five units of joinery shop. This is only possible if the study of relevant labour variances occurring in production is combined with the study of current process and procedures carried out in the company during production. Therefore, a study was carried out showing the various steps carried out in the units of joinery shop such as the manufacturing workshop, the storing unit of cut and graded timber, the storing unit for finished products before sale etc. As the management is currently facing problems with managing the space that should be assigned to each unit in the joinery shop, the efficiency of production and storage procedures could only be enhanced if every unit gets proper space required for the purpose to be carried out in the units. Some units of the joinery shops are seen to be occupying more space than required because of poor positioning and placing of machines engaged in the process, thus affecting the labour efficiency resulting into unfavorable variance. The reason for such a positioning is inefficiency from the management's side in product management. Therefore, the reason behind embedding the study of process and procedures with the study of steps involved in the movement of goods and materials from one unit to another is to provide the management with critical analysis of existing utilization of shop space with suitable suggestions to overcome the situation in order to enhance the efficiency in every unit engaged in the process of production. Comparison of Methods for Conducting Both Levels of Study The levels of study are concerned with the assessment of existing structure of units engaged in production, space allocation and the layout of joinery shop i.e., the area facing the problem of space adjustment. The study comprises two levels, firstly an assessment and investigation of different production activities being carried out in the five units of joinery shop and secondly a depiction of complete picture of the existing shop layout and the sequence of different processes engaged in production. The study began with the collection of information regarding the activities of all five units of joinery shops. This information was gathered personally by visiting each unit of the shop separately. Then, by approaching the capable personnel, a map depicting the shop layout was prepared in order to analyse and evaluate the space occupied by each step in the manufacturing process. Both the methods were prepared and used keeping in mind their importance in analysis. Assessment and Judgment of Changes to Process and Procedures The changes that are to be made to the process and procedures carried out during the production process should be assessed and judged on the basis of their capability to bring efficiency in the utilization of shop space and efficiency in terms of improving the current production status. The changes that are to be made are supposed to re-structure the existing shop layout and process and procedure carried out during production of three doors in order to ensure that the required space is sufficiently allocated to each unit of joinery shop, therefore, these should be judged on the basis of how well the shop space is managed to adjust to the needs of various departments in the shop and provide maximum possible space to each unit. Suggestion for a Revised Shop Layout The preliminary suggestion to revise the shop outlet would be to re-position the machineries used in different processes so as to maximize the availability of space within the joinery shop as evident from information gathered; the company did consider this point at the time of introducing new machines in the shop. Once the machines are placed and positioned in an organized manner, the management would be able to allocate more space to the requiring department. Also, the shop layout reflects that there is a plenty of empty and unoccupied space lying between different manufacturing units, which could as well be utilized after the re-positioning and re-placement of machines. This preliminary suggestion would help the management get over this turbulent situation and will act as foundation stone further changes to the shop outlet. TASK 2: LETTER TO SOAMES Greetings, Here's the information compiled along with the necessary details acquired from the relevant department of the company engaged in the process of production. In order to proceed with the analysis, let us discuss and calculate the company's standard hours first: Standard hours are actually "budgeted hours". The standard hour is the hour that should be used to produce a product under normal conditions. If a process or job order hour system is to be of maximum value to management, however, predetermined hour estimates for labour should be introduced into such a system in order to have a bench mark against which actual hours can be compared. These predetermined costs are called "standard hours". Standard hours, therefore, represent the amount of work that is determined to be completed within a certain period of time with a certain number and efficiency of skilled labour force. Labour cost standards are determined by two factors. 1. The hours of labour that should be used in making a unit of product, 2. The wage rate that should be paid for that labour. The Standard Hours or the output hours produced by the company in the period are as follows: Units produced Standard time (per hour) Alex 400 4.0 Achilles 1200 1.2 Agamemnon 200 6.0 The total standard hours will be calculated as: = (400 x 4.0) + (1200 x 1.2) + (200 x 6.0) = 1600 + 1200 + 1200 = 4000 standard hours. Now, having learnt the information on the standard hours, let us discuss and calculate the Direct Labour Variances: The company's Direct Labour Rate Variance is described and the calculations are shown below: The labour rate variance is equal to the actual number of hours worked, multiplied by the difference between the standard and actual hourly wage rates. It shows the difference between actual costs of incurred for the production and the cost that was estimated to be incurred. Whenever the direct labour rate variance occurs in a company, it shows that the company has been using the average wage rate as the standard rate or the management has been using the labour factor effectively and efficiently in the production. The computation of the labour rate variance for PNJ Ltd, during the period is as follows: Labour Rate Variance = Actual Labour Hours x (Standard Hourly Rate - Actual Hourly Rate) = 5600 hours x (10.00 - 9.00) = 5600 hours Favorable The favorable labour rate variance may result from using lower paid employees to perform highly pay scale jobs or from good scheduling of production by the production manger. Therefore, the production manager is responsible for labour rate variance. This favorable situation in the labour rate variance shows that the production manager has been successful in carrying out the production task by efficiently handling the labour factor of production. The Direct Labour Efficiency Variance has also been discussed and calculated as seen below: It is also called labour usage variance. The labour efficiency variance is a measure of workers' productivity. It is computed by multiplying the standard hourly wage rate by the difference between the standard and actual number of direct hours used. The computation of the labour efficiency variance for PNJ Ltd, during the period is as follows: Labour Efficiency Variance = Standard Hourly Rate x (Standard Hours - Actual Hours) = 10.00 x (4000 hours - 5600) = -16000 (or 16000 Unfavorable) An unfavorable labour efficiency variance represents excessive labour costs resulting from wasted time or low levels of hourly productivity. In other words, unfavorable labour efficiency variance clearly indicates that direct workers were not able to complete the scheduled level of production in less time than was allowed in the standard cost estimates. It also indicates that the actual production was not carried out according to the plans of management. After having learnt all the variances for the company, the Total Labour Variance may be calculated as follows: = Labour Rate Variance Labour Efficiency Variance + = 5600 hours Favorable 16000 Unfavorable The Labour Variance = 10400 Unfavorable PNJ Ltd incurred an unfavorable total labour cost variance of 10400. This may have happened due to unskilled labour or inefficiency of labour in performing their duties. As evident from the above calculations, the reason for an unfavorable labour variance has been an unfavorable labour efficiency variance, which shows that the management failed to utilize the labour in the way it had anticipated. Reference Meigs & Meigs (1993), "Accounting: The Basis For Business Decision Making", Mc Graw Hill: New York, p1022-1033 Read More