Costs of the Companies in the Manufacturing of Their Products - Essay Example

? Companies in the manufacturing of their products have to control the total costs incurred in order to ensure thatthey maintain their profit margin. Material costs, labor costs, and overheads are some of the cost elements incurred in the manufacturing process. Cost accounting as a branch of accounting is concerned with the determination of costs and controlling of the coasts that are incurred by organization in their daily operations. To realize these objectives, organizations have to develop costing systems to ensure that their processes and costs are controlled and to ensure they plan for the future. Product cost involves the determination of the cost incurred in the manufacturing of goods or provision of services. Manufacturing organizations, just as Worplestrop Partnership has to determine their products costs for two reasons. First is for decision-making and for the reason of external reporting. In manufacturing their products, Worplestrop Partnership would incur material costs, labor costs and other overhead costs that are associated with the manufacturing of the products (Hansen, Mowen & Guan, 2009). In determining the product cots for decision purposes, an organization will only use relevant costs to arrive at the cost of a product. This form of costing method is referred to as direct costing method. In this case, only the variable costs will be included since they are the ones that can influence the management decisions. Management has control on the costs and can formulate and implement decisions that can reduce the cost elements and increase the returns of the company (Baginski & Hassell, 2003). On the other hand, Worplestrop Partnership has to determine the product costs for the purposes of external reporting. Here product costs are determined to help arrive at the best price to charge for the manufactured products. All the costs that are incurred by the company including the overhead costs and other fixed costs are apportioned in order to charge them on the consumers’ of the manufacturing company’s products. This form of costing is referred to as absorption costing or total costing in which all costs direct and indirect, sunk, and future costs are used in settling at the selling price of the products. Absorption costing has the advantage of considering all the costs incurred by the business since even the fixed costs are incurred for the purposes of manufacturing (2002). Worplestrop Partnership should therefore calculate the product costs using the two approaches for the realization of the two different objectives i.e. management use and external decisions. for the purpose of setting the product prices, Worplestrop should use absorption costing because it incorporates all the costs incurred by the business hence elaborate. Apart from the two costing methods, Worplestrop partnership could also use the activity based costing method or throughput method. In activity-based method, the organization will charge the overhead costs to the departments depending on the level of activity and the cost drivers. Here, Worplestrop would determine all the activity that increase the costs and determine the factors that increases the costs of the activities. From there, the management will allocate the overhead costs to the centers. This method will make managers control the costs and eliminate the unnecessary activities that do not add value to the business hence increasing the efficiency and effectiveness of the business (Hansen, Mowen & Guan, 2009). The method has widely been used by many organizations despite the fact that it is complex. The last accounting method is the throughput method in which the product price is determined by adding only the material costs used in the manufacturing of the products. All the other costs are expensed and are not included in the calculation of the final price. This method is easy to simple to use. However, the method is not recommended by the generally accepted accounting principles and should therefore not be employed. This method also risks misleading the management in making of the final decisions. To ensure that they achieve their objectives, businesses often plan for their actions and prepares budgets that acts like a control on their future activities. A budget can be defined as the quantitative plan that is prepared to show future expected income and expenditures of an organization normally for a duration of one year. Through the budget, the organization determines in advance its future incomes, and expenses therefore act as a benchmark on which performance is assessed (Schick, 2009). Budgets are also prepared to act as a control. In control, the business compares actual performance to the planned performance and determines deviations. A budget is also important in the coordination of the various departments. This will ensure the relevant departments communicate and coordinate in time to avoid delays. Moreover, budgets acts as a motivation to the managers reduce the amount of wastages and assists in evaluating managers. Making a budget alone is not sufficient in ensuring that the organization is properly managed. Budgetary control measures must be undertaken to ensure that the budget works and to correct any abnormalities that might be experienced during the financial year. Budgetary control methodologies include analysis of variances, forecasting and control centers. In variance analysis, the organization compares the actual results with the plans as per the budget in order to detect deviations and take measures aimed at correcting the abnormalities. In the process, the management will determine the possible causes of the deviations and institute measures that will ensure that policies and rules are implemented to deter any future occurrences especially where the deviations are adverse. Analysis of variances will simultaneously enable the organization to quantify the magnitude of the variance and assign responsibility to the particular managers who had the obligation (Schick, 2009). This technique would be useful for Worplestrop in controlling excessive costs and wastages that are incurred in the manufacturing process. It will also ensure that the final costs of the products are low hence competitive in the market. In calculating variances, Worplestrop must ensure that it is a continuous process because this is the only possible way in which the deviations will be detected in a timely manner. The second technique was forecasting. In forecasting Worplestrop would be interested in predicting the future revenues, sales, profits by analyzing trend and considering the current information that the business possess. Forecasting ensures the business remain visionary and focused towards realizing future goal and objectives (Horngren, Foster & Datar, 2000). At the same time, forecast will make the business prepared for any eventuality that might arise, as the business will plan for the future expected occurrences. It assists in depicting growth and future prospects of the business. Finally, control centers are also a useful budgetary technique. In this case, Worplestrop management will be interested in establishing the cost, revenue, responsibility, investment, and profit centers. Centers that increase organizations costs have to be controlled and minimized to reduce the amount of resources that are used in the profit. By keeping the costs low, the organization will be increasing the profitability and revenue collection. Revenue centers, profit centers and investment centers are those areas that the business expects to earn its revenues and increase it sales. The management in maximizing returns and increasing organization’s wealth will use these centers. Accounting systems should be able to generate information that can be utilized for the purpose of decision making. Making decision is the most important role that managers must to ensure that the businesses are properly managed. There are three levels of management, strategic level management, tactical level management, and operational level management (Horngren, Foster & Datar, 2000). All these management levels have different information needs and require information output in a form that is best understandable for their purposes. The strategic management level is the top most management level that is concerned with making long-term decisions that are useful for the whole organization. These kinds of managers have to forecast the future business performance and must ensure that their decisions support the general organization goals. The managers also constantly interact with external; parties like suppliers, business partners, regulators and competitors. The information system should output factors like the growth in company’s profit, the returns to the shareholders, the profitability of particular product lines, the adherence to regulations, the increase in the market share, and the forecast in the future performance (Horngren, Foster & Datar, 2000). The top-level managers are busy and will therefore require information that is summarized in tables, charts, percentages that are easy to understand and depict trends. The information system should be able to assure this. The tactical level management is the middle level management that is interested in medium term objective of the business. The managers in this level are too interested in management information to aid making managerial decisions. The level is interested in information as the profitability of the product line or the department, ranking of the department in the organization, sales value of the product line, and trend in the performance over time. The tactical managers are interested in the performance of the departments but must work towards improving the overall organization goals and not the departmental objectives. Finally, the operational level management is interested in the day-to-day functioning of the business. This operational level is interested in information relating to the daily production. They deal entirely with internal information. Some of the information needed by these managers includes increase in the daily production, reduction in material wastages, and improvement in the product quality. Operational managers should be efficient since it determines the overall goals of the business. Factors and conditions that might make operational management inefficient must be avoided as this may halt production and reduce the organization profitability. Performance reports are not only important for the management but also employees who are interested in getting information on the performance of the business. Employees are the most important resource in the organization as they provide stewardship and put their efforts in ensuring that the business goals are realized. Operational reports, tactical reports and strategic reports should all be made available to the employees to make them informed about the organizational plans and achievement. From these reports, the employees would also be in a position to evaluate their performance over time and work towards achieving the managers’ plans. Employees will demand overall profitability reports and performance reports to ensure that they get to learn on the output of their efforts and the achievements of the business. Employees will get to be motivated and feel valued if given these two forms of report on demand. The tactical reports on the departmental performance or on the increase in sales of particular products may also be of interest to the employees. These reports will make the employees get feedback on their performance and the employees in demanding promotion and elavatiomn can use take. From the report the employees will get to learn of the necessary improvements they should make on their products line to ensure they remain competitive in the market. Lastly, employees will also demand operational report like the quantity of products manufactured, amount of sales made, material losses incurred on the day-to-day operations. From these reports, the employees will get to learn of the management expectations on their performance and the targets they need to achieve to ensure success. In conclusion, controlling of costs and managing of business processes is fundamental in ensuring organizational success. Budgeting and other cost accounting systems needs to be developed by the management of Worplestrop to ensure that the product costs are kept as low without compromising on the quality of production. Management reports must also be generated each quarter to assist in the monitoring of the management performance and to act as a tool for initiating corrective action. At the same time, employees should be provided with the reports of Worplestrop performance to ensure they remain committed and focused towards realizing the business objectives. References Baginski, SP & Hassell, JM 2003, Management decisions and financial accounting reports (2nd ed.), Thomson/South-Western: Mason, Ohio. Cost accounting systems (New ed.) 2002, Feltham, Middlesex: Foulks Lynch. Hansen, DR, Mowen, MM & Guan, L 2009, Cost management: accounting & control (6th ed.), South-Western Cengage Learning: Mason, OH Horngren, CT, Foster, G & Datar, SM 2000, Cost accounting: a managerial emphasis (10th ed.), Prentice Hall: Upper Saddle River, NJ. Schick, A 2009, Evolutions in budgetary practice: Allen Schick and the OECD Senior Budget Officials, OECD: Paris. Read More