Managing Production Costs for Order Maximize Profits - Essay Example

? Profit making businesses have to manage their production costs in order to maximize profits and the wealth of their shareholders. Manufacturing firms therefore have to determine the costs of their products and reduce the cost elements using different costing methods. Cost accounting, the branch of accounting that is charged with the determination of costs and analysis of different cost elements is therefore used in achieving this objective. Moreover, organizations have to develop plans that act as guidelines and benchmarks of reviewing performance. With the use of the budgets, businesses will produce different management reports to the various stakeholders. The reports will be important in the evaluation of the business performance and act as a motivation to the employees. Product cost can be defined a s the total costs that is incurred in the manufacturing of goods or the provision of servicers. Various cost elements are involved in the process of producing a product. These include material cost, labor costs, overhead costs, and other expenses (Polimeni, 2000). The sum of these costs constitutes product costs. Material costs are labor costs are direct cost that are associated with the goods and are easy to determine when determining the cost of products (Epstein & Lee, 2001). Material costs can be determined from the purchase receipts that are made. Labor expenses are also determined from the salaries and other allowances that are paid to the workers and other experts that are involved in the production of goods and services. The last component of product costs that includes the overhead expenditure poses a challenge to cost accountants on how to incorporate them in the product costs (Horngren, 2009). There are different cost accounting methods that can be used to allocate these costs to the products to determine the total costs of the products. Product costs are necessary for decision-making and for external purposes. Product costs can be determined using the following methods. First, marginal costing system can be used in calculating the product cost. In this method, only the variable costs are used in arriving at the product prices (Polimeni, 2000). The organization will therefore use these costs to make decisions. Fixed costs and sunk costs are not included in the calculation because they are past costs which cannot influence the future managerial costs. Product costs determined in this manner will only be important in making internal deci9isions and not for external uses. The second cost methodology that can be used is the total costing or absorption costing method. In this method, the prices of products are determined by adding all the costs incurred in production including the fixed costs and other overhead costs (Epstein & Lee, 2001). All the costs are considered relevant because the management incurred the cost in the process of making the product. The method of should be used in determining the selling price that is charged on the products because it incorporates all the costs involved in the process (Lucey, 2002). The prices can therefore be determined by adding a desired margin on the cost of the goods. Moreover, the product costs can also be determined by the use of activity based costing. Activity based costing assists in the allocation of overhead costs that are then summed up to the variable costs to arrive at the total product costs. In this method, the overhead costs are allocated to the various cost centers and using the cost drivers. The method helps in charging costs to the various activities. This method has been used widely to control the costs of activities and make managers do away with non-essential activities that do not add value to the product manufacturing. Through the elimination of the dummy and redundant activities, the management will be in a position to achieve efficiency and effectiveness in the process. The last costing methodology that can be employed is the throughout costing. This method is criticized by the accountants and is not accepted according to the general accounting standards and principles. In this method, only the material costs are included in the determination of the total costs. All the other expenditures are expensed from the revenues of the business. The method is therefore not popular and should not be used in determining and controlling the cost of products. In managing costs, businesses need to plan for their future activities. This is done with a budget. A budget is a business plan expressed in quantitative terms. Through a budget, the management focuses on the expected future income and expenses. From these calculations, the organization will have the ability to get a benchmark on which to evaluate its performance. A budget assists in coordinating the various departments of the business hence ensuring that they focus on the overall organization goals (Lucey, 2002). A budget is also important in ensuring that controls are made so that the actual occurrences are in line with the plans as per the budget. Budgetary control measures are undertaken by businesses to ensure that the organization achieves its objectives. Worplestrop partnership is therefore obligated to introduce budgetary controls that will ensure that the business operates as planned. The three budgetary control techniques include variance analysis, forecasting, and introduction of cost centers. Variance analysis aims at measuring the plans with the actual. In this case, the management of Worplestrop partnership should assiduously and intermittently measure their performance and compare them with the actual as per the budget in order to quantify the amount of deviation. From this, different responsible officers will have the opportunity to take remedial measures. The analysis of variance should be detailed and elaborate to facilitate decision-making. Forecasting as budgetary control technique constitutes the prediction of future performance of the business by the use of the various forecasting tools. This budgetary tool requires close analysis of previous performance and determining the trend, which will be used in making forecasts. Through forecasting the organization will get to concentrate its efforts on the realization of the business objectives hence manage their costs. Lastly, cost centers can be used in making budget operates. In every business, costs are incurred and revenues are earned. Worplestrop partnership management must ensure that they establish cost centers, revenue centers, and profit centers. Cost centers should be minimized to ensure that they remain as low as possible. At the same time, the business should take measures that are aimed at maximizing their revenues either through either increasing their sales and services that generate revenues. Worplestrop has to appoint managers who will take responsibility on their own centers to promote the overall organization goals. An essential characteristic of any costing system is unit’s ability to generate reports that can be used for decision-making. Three levels of management require costing reports. The levels are strategic management, tactical level and operational managers. Strategic managers are those who are in charge of the overall organization goal and mainly focus on the long-term objective of the business (Shim & Siegel, 2005). They require reports to assess the overall performance of the business as they mostly deal with outside parties. The kind of management reports that they require include the organization profit percentage, percentage increase in revenues, business market share, percentage reduction in total costs and the business strength among the competitors. Since the top-level management has little time to analyze the business, the costing system developed should ensure that the reports are summarized and analyzed using the diagrams and pie charts that can be easily understood. The middle level management, tactical level managers, also need costing reports to develop their departmental reports. These level managers are interested in the departmental or unit performance. Examples of reports that are needed include product profitability, reduction in departmental costs, and performance of the product relative to other departments. The departmental managers need to ensure that the business processes of their departments promote the overall objectives of the business. Lastly, operational managers who are obligated with the objective of managing the day-to-day performance of the business and do the actual product production require costing reports (Shim & Siegel, 2005). The kind of report needed include the total quantity of products produced, costs of the unit, reduction in material wastages, productivity of the labor force and the reduction in the overhead costs. Employees too require on demand reports to enable them remain committed and focused towards achieving the organization goals. Employees of Worplestrop partnership should be given strategic, tactical and operation reports when they demand them for ensuring they feel part of the business. Strategic reports on the overall organization performance will ensure that the employees remain aware of the output of their efforts. These reports will motivate employees in continuously working towards the business goals. Tactical reports also enable employees to focus on the departmental contribution and results. Reports on the performance of products together with the reports on the level of efficiency in the departments also play a significant role on employee performance and loyalty. Lastly, employees on demand will require operational reports. The operational reports like the reduction in waste, improvement in employee productivity and the increase in output level all ensure that employees get to know on the management expectation on their performance over time. In summary, determining the costs of products together with the management of the costs is integral part of the management. Control management ensures that the business costs are kempt as low as possible to make Worplestrop partnership products competitive and marketable. In addition, the establishment of effective costing systems and methods enable the product costs to be effectively managed and controlled. Moreover, employees should have access to the reports in order to be acquainted of the performance situation in the company to remain committed towards achieving organizational success. References Epstein, MJ & Lee, JY 2001, Advances in Management Accounting, Emerald Group Pub.: Burlington. Horngren, CT 2009, Cost accounting: a managerial emphasis (13th ed.), Upper Pearson Prentice Hall: Saddle River, NJ. Lucey, T 2002, Costing (6. ed.), Continuum International Publishing Group: London. Polimeni, RS 2000, Product costing: concepts and applications (3rd ed.), McGraw-Hill: New York, N.Y. Shim, JK & Siegel, JG 2005, Budgeting basics and beyond (2nd ed.), J. Wiley & Sons: Hoboken, N.J. Top of Form Bottom of Form Read More