Management for Planning and Control - Assignment Example

Management for Planning and Control Name Institutional name Course Date: 18th May, 2011. Question 1 a. Jade Manufacturing currently makes use of percentage of direct material dollar value to allocate its costs in the materials receiving and handling departments. The administrative departments in Jade Manufacturing use the services of the materials receiving and handling departments limited basis. However, when it comes to costing, the costs of the materials receiving and handling departments are not allocated to the administrative departments. In addition, the CEO's salary and headquarters housekeeping costs are not taken into account when allocating costs to the materials receiving and handling departments (Jawahar, 2008). The weakness with this model is that there is a risk of the company that the allocation model increases the costs in the materials receiving and handling departments while reducing costs in the administrative departments. This is because, the costs of the materials receiving and handling departments are not allocated to the administrative department, yet the latter uses the services of the former (Jackson, et-al, 2008). b. Budgeted material handling rate presently used at Jade Manufacturing Total costs for Zantz Direct materials- 3,009,000 Departmental costs- indirect materials- 9,000 -Communication costs- 57,000 -Salaries- 270,000 -Lubricants- 54,000 -Equipments depreciations- 9,000 -Other costs- 33,000 Total costs for Gantz production. 3,441,000 Number of purchases orders= 120,000 Material handling rate= number of purchase orders =120,000/3441000x100 Total costs =3.49% C Direct materials- 1,311,000 Departmental costs- indirect materials- 9,000 -Salaries- 216,000 -Lubricants- 54,000 - Communications costs 54,200 -Equipments depreciations 9,000 -Other costs 33,000 Total costs for Camberta 1,686,200 Number of orders 234,000 Material handling rate= 234,000/1686200x100= 3.52% Q2 a The materials handling rates for Jade Manufacturing i. For Ganzt is 3.49%. Allocating this to 120, 000 units 3.49%x 120,000= $ 418,000 ii. For Camberta is 3.52% Allocating this to 234,000 units 3.52%x234, 000=823,680 b. Material handling costs Using the traditional costing method, Cost per Unit= total costs/ total purchase orders 3,441,000/120,000=28.76/unit For ABC the cost/unit= total activity cost/total number of units for activity. Identifying each particular activity and departments. For the material receiving and handling departments, the activities are the purchase orders. Cost/unit= direct material costs/ purchase orders For Gantz =3,009,000/120,000= 25.075 C 2011 for Gantz current amounts extra costs Direct materials- 3,009,000 1,311,000 Departmental costs- indirect materials- 9,000 9,000 -Communication costs- 57,000 2,800 54,200 -Salaries- 270,000 54,000 216,000 -Lubricants- 54,000 54,000 -Equipments depreciations- 9,000 9,000 -Other costs- 33,000 10800 22,200 Total costs for Gantz production. 3,441,000 1,686,200 Increase in direct material costs 2011 2012 2013 3,009,000= 150450 5%of 3,009,000=150450 5%of3159450=157,972.5 3,159,450 3317422.5 Value of the Gantz material 2011 2012 60%of 3,009,000= 1,805,400 60%of 3,159,450=1,895,670 60% of 3317422.5=1,990,453.5 Increase in purchase orders 2011 2012 2013 120,000 10% of 120,000= 12000 10%132000=13200 132,000 =145200 Question 3 ABC (Activity based costing) is a model of costing, which identifies activities in a firm and assigns the cost of each resource to the products and services depending on the exact consumption by each. Through this method of costing, the firm is able to estimate the costs of specific products more precisely as compared to other costing methods. The firm is also able to identify and eliminate the products that are not profitable and reduce the prices of the overpriced products. Many firms have adopted this costing model due to its merits. Advantages This model provides accurate costing for the products and services in an organization. This is because all the products and services are split into specific activities, and each activity allocated costs depending on how much resources it consumes. This results in accuracy in determining costs for each product. It provides a better understanding of the factors that affect the profitability of the firms like distribution channels, region, consumers, and brands. The method then links the profitability of each activity, and how each activity consumes the firms' resources. Through this, firm is able to determine which activity is profitable than others. It utilizes the unit cost for each product instead of the total cost. This way, the firm is able to how much it costs to produce each product or service. Consequently, the firm is able to know how much resources each product is using, and how much resource to purchase for each product. This reduces wastage of resources. ABC system enables the accounts manager to estimate the cash flows of the business. When the overheads are divided into single activities and costs allocated to each activity, the accounts manager is able to accurately estimate the amount of costs that will be incurred. ABC system allows for continuous improvement in the manufacturing process. This is because, the planning and control of the manufacturing process is focused on the process level. This ensures quality in the end product of the manufacturing process. It also improves effectiveness and efficiency of budgeting. This is because, this model identifies the performance relationship between different service and process levels, and the allocation of the costs done on the basis of consumption of resources. This method can be used in planning future products. This is because all the costs associated with the products can be pre-determined accurately even before the launch of the product. This is useful in price determination and any future associated expenditure for the product (Heisinger, 2009). This models also exposes wastage that would be prevalent in the production process, thus this model can be used as a form of performance evaluation and benchmarking of employees. This also improves the quality of the manufacturing process. Disadvantages One of the limitations of this model is that its implementation requires a lot of resources. It is a costly system to implement. This is because; all the activities require data to be collected, checked and keyed into the system. This requires so much time, efforts and resources. The data used in this model can be misinterpreted. This model requires collection of a lot of data relating to cost allocation to consumers, distribution channels, customers, and other products. This data is not relevant in all decisions that need to be made. The managers therefore need to know which data is necessary in making certain decisions. The reports produced through this system do not match the GAAP (generally accepted accounting principles). For this reason, the companies using this costing model need to have two costing system. The ABC costing system for internal purposes and another costing system for external purposes. ABC costing model is more complex and detailed than the other standard costing systems. The traditional costing models combine costs under few heterogeneous overheads. In ABC costing system, each of the overheads have to be broken down into single activities, which require a lot of time to enquire, identify, and collect information. It also makes use of many statistical measures and multiple cost drivers, making it a very complex and costly model (Kaplan & Anderson, 2005). This model can face a lot of resistance from the employees and supervisors. The employees feel like the system is meant to change the working schedules they are accustomed to. The supervisors resist the model because they feel that the system exposes some wastage that they would not their bosses to see (Hansen & Mowen, 2006). Q4 This is a manufacturing company and for this reason, the company has both the producing and the support departments. Jade has the material receiving and handling departments, which is directly connected to the producing and the administrative departments making up the support department. CEO's salary and the housekeeping, therefore, cannot be allocated in the material receiving and handling departments, since they are not directly related to productions (Crowther, 2004). Q5 In the modern times, performance evaluation and measurements are very crucial in strategic decisions and development of operational policies for manufacturing companies like Jade Manufacturing. One of the methods the above is ABC model. This method will assist Jade Manufacturing to allocate costs based on the amount of resources consumed by each product. This means that the company will be able to tell if it is more profitable to produce for the Gantz, whose purchases are high-dollar low-volume or for Camberta, whose main purchases are low-dollar high-volume items. Using the ABC model, the company will be able to determine the profitable productions to undertake, not just because of the sales values, but also because of the costs associated with the production. ABC will also allow Jade Manufacturing to determine the profitable practices to undertake so that they make the best choices for the most profitable results and consequently, increase their sales levels (Rossing, C. P. & Rohde, C. 2010). Through the use of purchase orders, Jade manufacturing will be able to allocate costs as per the numbers of the orders made. This is based on the actual materials ordered, unlike the percentage of direct materials where the allocations are made based on the budgeted costs of materials. The weakness of this method is that it may result to delays in delivering the products to the customers, if the product requires a long time to manufacture. The solution to this product would be taking advance orders so that by the time the client needs the product, the company will have had enough time to manufacture and deliver it (Baker, 1998). References Baker, J. J., 1998, Activity-based costing and activity-based management for health care, London: Jones & Bartlett Learning. Christian Plesner Rossing and Carsten Rohde, Overhead cost allocation changes in a transfer pricing tax compliant multinational enterprise, management accounting research. 00Volume 21, Issue 3, September 2010, Pages 199-216 Crowther, D., 2004, Managing finance: a socially responsible approach. New York: Butterworth-Heinemann. Hansen, D. R., & Mowen, M. M., 2006, Managerial Accounting, London: Centage learning. Kaplan, R. S., & Anderson, R. A., 2005, Rethinking Activity based Costing. New York: Havard Business Review. Heisinger, K., 2009, Essentials of Managerial Accounting, New York: Cengage Learning. Jawahar, L., 2008, Cost accounting. New York: Tata McGraw-Hill Education. Jackson, R. S., et-al 2008, Managerial Accounting: A Focus on Ethical Decision Making, London: Cengage Learning. Read More