Cost Classification and Processes - Assignment Example

COST IFICATION AND PROCESSES By of the of the School Task Introduction Ribble Limited need to consider ways aimed at reducing its costs of operation. Outsourcing of plastic components as opposed to manufacturing them has the effect of reducing the overall cost of production that is likely to increase the firm’s profits. Outsourcing will increase flexibility in the manufacturing process of the company. The contract manufacturers to be used in outsourcing have a large production capacity and have all the expertise needed in the production process. It is therefore more flexible than making a one-time capital investment that could sit idle if the increased demand diminishes within the firm. Outsourcing will enable the company to shift its focus on the assembly of the automotive parts. Increased focus on one thing will increase the competency of the company thus enabling it to create its own brand which will later lead to increase in the profit margins (JASCH, 2009, 43). Specific costs to be reduced through outsourcing include labor costs and overhead costs. Labor forms one of the biggest cost in the manufacturing process. The cost of maintaining all the employees in the manufacturing is very high hence outsourcing will offer a better means of lowering the cost of labor. The maintenance includes having to offer health benefits to the workers as well as other motivational incentives that are set to accrue huge costs to the company. Overhead costs occur as a result of operating the manufacturing plant. Such costs include electricity, water, gas and maintenance of such machines. They may also include indirect labor costs such as those that accrue to equipment technicians, material handlers as well as shipping and the receiving personnel (KHAN, 2000, 101-123). Defining the meaning of a cost Cost refers to the price that must be paid for the manufacturing or production process to be accomplished. Ribble Limited is faced with a number of costs that it must pay in order to continue in the business. The costs to be incurred by the company can be generalized as manufacturing costs that are generally divided into three categories. The first category is direct materials which relates to the cost of the materials that are to be converted to finished product. In the case of Ribble, an example of material cost is the cost of purchasing the plastic materials. Direct labor refers to the cost incurred in meeting the wages of individuals who are physically and actively engaged in the process of converting the raw materials into finished products. The final category of manufacturing costs is the factory overheads that gather all other costs incurred in the manufacturing activity and can never be traced directly to the physical units within the economically feasible manner (TRACY, 2013, 56). Classification of costs for effective decision making and control There are several approaches through which the company can classify its costs for effective decision making process in its management of the resources and the manufacturing process. Cost can be classified in a manner aimed at the facilitating the preparation of external financial statements. This category of classification includes manufacturing costs that are incurred in the making of product that the company aims at selling for profit. Manufacturing costs are usually grouped into three main categories: direct materials, direct labor, and manufacturing overhead. Another type of costs that are also recorded under this category is the non-manufacturing costs that include the marketing and administrative costs. The marketing costs include the costs incurred while taking orders to the customers and making deliveries to them while administrative costs include executive as well as organizational costs that the company incurs (VANDERBECK, 2013, 12). Another way through which the company can classify it costs is based on classification aimed at describing the behavior of such costs. This approach to cost classification will enable the managers to predict how costs will change in relation to changes in the activities in the manufacturing process. The activity might be the output of goods or services or it might be some measure of activity internal to the company such as the number of purchase orders processed during a period. In this classification, the company can have variable and fixed costs. The company can adopt an approach that will enable them classify costs based on their ability to influence decision making process. Only those costs and benefits that differ between alternatives are relevant in making the selection. This category includes differential costs that are costs that differ between alternatives. The costs may exist in only one of the alternatives or the total amount of the cost may differ between the alternatives. In the latter case, the differential cost would be the difference between the cost under one alternative and the cost under the other. Differential costs are also called incremental costs. The next example of this category of costs is the opportunity costs that are the potential benefits that are given up by selecting one alternative over another. It is a cost that must be considered in decisions. For example it the company decides to outsource materials it must consider other best alternatives that it will have to forgo in the process. The final type of cost in this category is the sunk costs. These are costs that have already been incurred and that cannot be changed by any decision made at the present time or in the future. These costs must be ignored during the decision making process as they cannot bring much change to the decisions. Distinction and explanation between specific costs i) Variable and fixed costs Variable costs refer a form of cost that is constant per unit of activity but changes in total as the activity level rises and falls. On the other hand, fixed costs are constant in total for changes in activity within the relevant range. They Fixed do not change for changes in activity that fall within the relevant range of production. ii) Direct and indirect costs Indirect costs refer to those expenses that affect the company as a whole and not just the product while direct costs refer to the expenses a company can easily connect to a specific object, or cost object iii) Product and period costs Product costs are the direct materials, direct labor, and manufacturing overhead used in making its products while period costs are not a necessary part of the manufacturing process. Thus they cannot be assigned to the products or to the cost of inventory. Task 2 The activities to control the ordering, delivery and storage of materials and create a flow chart to reflect the sequence. Ribble Limited need to adopt a number of activities so that it can take control of its ordering, delivery as well as storage of its materials. This process is known as material management and it looks into the planning and design considerations needed to support the efficient delivery and removal of goods and services that support occupant activity. The ordering process is the first step in the process of material management. This is undertaken by sending out information to the suppliers regarding the specifications of the materials needed by the company. The process should be taken in advance so as to ensure that the right quantity and quality of materials are actually delivered. The delivery process entails the suppliers bringing the ordered materials to the company premises. The process is marked by a number of activities that includes the use of trucks or service vehicles in the delivery process so as to reduce the conflict that may emerge between the vehicles and the pedestrians. The next step is in the creation of loading docks as well as delivery points by the company in a bid to expand and increase accommodation thus reducing the long queues associated with the delivery process. There is need for the creation of a recycling plant or hazardous waste collection and removal points so as to increase waste diversion thus reducing the company costs. Each stage of the delivery process should have managers who are tasked with the responsibility of ensuring that right quantity and quality of materials have been delivered (HANSEN, 2011, 67). The quality assurance managers should be empowered with the necessary gadgets needed to test the quality of the materials. Once the goods have been delivered, they are set for storage. This is to be done in the company’s warehouse in which the goods are packed according to their various specifications. The process of storage should be undertaken in a manner that ensures the older materials are the first to be picked for the manufacturing process. Proper material control will be of great benefit to the company as it will allow for uninterrupted production process which limit losses to the company. It further ensures requisite quality of materials owing to the fact that the quality of the finished products will largely depend on the quality of the raw materials. The process will ensure less wastages are experienced by the company. The wastages may be occasioned by dust, moisture, and rust as well as careless handling of the materials. The causes responsible for such losses must be brought to light and utmost efforts should be made to minimize the wastage of raw materials. This is possible only by introducing an efficient materials control system. A proper system of materials control also aims at fixing responsibility of operating units and individuals connected with the purchase, storage and handling of materials. Material management process must therefore be carried out with a lot of care and accuracy since the company aims at reducing its costs in the process (FINKLER, 2007, 56). Task 3 Allocation and apportionment table Cutting Assembly Support departments Production machinery power usage (Kwh) 15,000 2,000 Number of employees 4 8 Maintenance 2 Stores 2 Administration 3 Floor area Maintenance 100 Stores 160 Administration 240 Carrying amount of machinery 100,000 40,000 Total Cutting Assembly Depreciation charge for machinery 42,000 Power for production 20,400 Rent and rates for premises 65,000 Light and heat for premises 27,500 Indirect labor costs: Maintenance Stores Administration 38,550 29,850 51,250 28912.50 17910 25625 9637.50 11940 25625 Total 274,550 72,447.50 47,202.50 Bibliography FINKLER, S. A., WARD, D. M., & BAKER, J. J. (2007). Essentials of cost accounting for health care organizations. Sudbury, Mass, Jones and Bartlett Publishers. HANSEN, D. R., & MOWEN, M. M. (2011). Cornerstones of cost accounting. Mason, OH, South-Western, Cengage Learning. JASCH, C. (2009). Environmental and material flow cost accounting: principles and procedures. [New York], Springer. KHAN, M. Y., & JAIN, P. K. (2000). Cost accounting. New Delhi, Tata McGraw-Hill Pub. Co. Ltd. TRACY, J. A. (2013). Accounting workbook for dummies. Hoboken, N.J., John Wiley & Sons. http://rbdigital.oneclickdigital.com. VANDERBECK, E. J. (2013). Principles of cost accounting. Mason, OH, South-Western, Cengage Learning. Read More