Virtual Organizations - Essay Example

Organizations working in any field have to asscertain the cost correctly as it determines the price which will be charged in the market. Improper cost estimation can be fatal for the business as it might result in losses despite having increased sales. The important of ascertaining increases in case of products as all the different inputs which directly or indirectly is used in the production process has to be included in the cost. Omission of any cost will result in the selling price to be lower than it should actually be and will have an adverse impact on organization. The complexities for ascertaining cost increases in case of virtual organizations. Virtual organizations look to outsource most of their activities to third parties or enter in a liaison where different parties produce different parts. Ascertaning cost becomes important for those organizations as it could create a situation where outsourcing instead of being cheaper becomes expensive. This paper thereby explores the importance of product costing for virtual organizations that looks to outsource their operations. This will help to understand the manner in which the working of virtual organization will get transformed and highlights the mechanism through which efficiency will be achieved in the entire process. Before moving on it is important to understand what virtual organization means? Virtual organization has been defined as one where different organization functions together in the world of e-business. The different organization works on different aspect of the products based on their core strengths and competencies and look towards working in a manner where they are able to produce the goods at a lower cost (Bovet & Martha, 2000). It has also been stated that virtual organizations instead of carrying out all the activities of the organization outsource some of the functions to other organizations. This is done to ensure that outsourcing helps to produce the goods and services at a lower cost and helps to improve the overall efficiency of the organization (Walters, 2002). This makes it important that the different functions which are outsourced helps in the correct estimation of cost as it could otherwise lead towards incorrect pricing. One of the key characteristics of a virtual organization is that it flexible and adapts to the changes quickly which arises due to globalization, changes in the cost structure, changes in customer demands, and other factors which results in changes in business strategy. The most important requirement for a virtual organization is that the employee should use his skills to contribute towards the value chain of the organization by increasing efficiency in product design, production, marketing, and selling of the products so that the bottom line grows (Maurice & Nibbelin, 2002). Virtual organization has an advantage in this regard as they look to outsource the different functions which will ensure the required changes in the skill levels. This will multiply productivity as it will help to carry out the different functions at the cheapest cost possible. This form of organization thereby relies on low cost, high response, better use of resources, low bureaucracy, high staff involvement, and the use of technology to be able to produce the goods and services at the lowest possible cost (Atkinson, 2008). Some of the examples in this direction is amazon.com and ebay.com which functions as virtual organizations and look to provide goods and services at the lowest price. Virtual organizations rely on outsourcing as outsourcing is a process which looks to pass on some of the activities to outside parties and purchasing those products from them instead of producing the same. This happens as the other organizations has specialized knowledge and are able to deliver better performances. This suggests that one of the most strategic reasons for outsourcing production function is that it helps to reduce operating costs. A study in the same direction highlights that outsourcing results in a decrease of 9% in costs (Kaihara, 2001). Virtual organizations instead of not looking the function as a cost reduction tool look to use view it as a strategic tool through which efficiency can be gained. The process of outsourcing has further grown as the functions look to include transportation and warehousing function so that the entire cost can be reduced and the business is able to reduce the shocks which might arise due to changes unforeseen circumstances. Product costing is very important for virtual organizations as product costing helps to ascertain the accounting cost related to a specific product and helps to differentiate the different cost objects which results in the estimation of cost. Being able to ascertain the cost correctly helps to develop a cost effective strategy through which competitive pricing becomes possible. This might not have been the case in case the estimation was incorrect and would have affected the selling price which is being charged by the organization (Shank & Govindarajan, 2003). Product costing has its relevance for virtual and traditional organizations as it is related to the purchase and sells for an organization and will have an impact on the bottom line. It is important that the cost is ascertained for the business so that the selling price can be accurately estimated. Despite, the modern era where the development of e-commerce have allowed virtual organizations to exist still the cost which might have been incurred in batches are incurred by some or the other organization estimating it correctly is important. Estimating the cost correctly will help virtual organization to take decision whether the production function has to be outsourced or in sourced (Horngren, Wynder, Maguire, Tan, Datar, Foster, Rajan and Ittner, 2011). This will help to find whether virtual organizations will be benefitted from outsourcing or producing in house is beneficial as the cost can be compared and the one which helps to improve overall productivity should be accepted. This increases the role of an accountant as it is his responsibility to ascertain the cost through both the process i.e. outsourcing and in sourcing and pass on the information to the management. Virtual organizations as a result will be able to identify the gaps and based on it take decisions which would be beneficial for the business. Virtual organization along with estimating the cost of production should also estimate the cost of distribution. The main emphasis here is to ascertain all the cost correctly so that virtual organizations don’t get cheated and they have a fairly good idea about the different cost structure which will be incurred while selling the product. This will multiply the effectiveness and help to take advantage of the flexibility that virtual organization get due to the possibility of outsourcing the functions. Since, outsourcing provides the flexibility to make changes in the product line quickly, ensuring the correct cost will help to fix correct prices which will thereby provide an opportunity through which new customers are exploited and opportunities of growth for the business magnifies. To ensure maximum efficiency virtual organization have also started to use Just-in-Time technology which helps to reduce the cost of inventories at the same time reduces the chances of loosing due to fluctuations in the price of raw materials which is used. This can be seen from Dell which looks to produce laptops when they get the required order so that the prices charged are according to the prevailing prices of raw materials. This further requires that special empahsis is laid to estimate the cost correctly as fluctuations in the price of raw materials will have an effect on cost and requires proper development of strategies through which price estimation becomes proper. Virtual organization rely on outsourcing to carry out their activities have to understand the importance of identifying the different factors which will result in increased cost for the business. It is imperative that virtual organization are able to find out the different areas which contribute towards the cost structure so that in future in case the organization with whom the outsourcing work is being carried out steps then the virtual organization can carry out the function in house (Innes & Mitchell, 2000). This will also help to provide the required input through which better efficiency can be achieved and the virtual organization will have a fair idea about the different constituents of cost. This will help to improve the forecasting method with respect to pricing and will ensure that the virtual organization will be able to forecast the correct prices and customers will feel satisfied with the prices that is being charged (Croom, Romano & Giannakis, 2000). Virtual organization also need to understand the different cost procedures as it has a role in gaining confidence and being able to persuade the customers better. It is imperative that virtual organization have a complete idea about the different components which contribute towards the final price that is charged for the product as it will help to provide an opportunity through which customers understand about it and will thereby help to improve transparency (Liedtka, 2008). This process will also develop the required structure through which decisions which are taken will help to provide maximum benefit and direct towards proper estimation of cost. The importance of product costing can be determined from the fact that estimating cost correctly will help the virtual organization to determine the different areas where the company looks to incur additional expenses so that they are able to capture a bigger market. Incorrect estimation will result in the competitors gaining a larger market share as they will be able to lure customers towards their product because of low pricing. This will have an adverse impact as it will make customers doubt the authenticity of the virtual organization (Hicks, McGovern & Earl, 2000). This will thereby impact the brand name of the organization and carrying out activities further in the future will become difficult. In addition to it carrying out activities where the company doesn’t have complete knowledge about the proceedings will impact the performance of organization and create an environment where growth for the organization becomes difficult. Estimation of cost further becomes important virtual organizations rely on outsourcing as outsourcing is a process which looks to pass on some of the activities to outside parties and purchasing those products from them instead of producing the same. This happens as the other organizations has specialized knowledge and are able to deliver better performances (Berliner & Brimson, 2008). In case the other party resorts to ways which results in the virtual organization not being able to gain from the process of outsourcing then the purpose of carrying out the activities gets defeated. This will impact the organization in a negative manner and will highlight the different areas which will be of prime concern for the organization. Organizations whether in any form who are able to estimate the cost correctly greatly benefit from it as it helps to bring the required transformation through which business process gains efficiency? Estimating the cost correctly will help virtual organization to take decision whether the production function has to be outsourced or in sourced. This will help to find whether virtual organizations will be benefitted from outsourcing or producing in house is beneficial as the cost can be compared and the one which helps to improve overall productivity should be accepted. This increases the role of an accountant as it is his responsibility to ascertain the cost through both the process i.e. outsourcing and in sourcing and pass on the information to the management (Bovet and Martha, 2000). Virtual organizations as a result will be able to identify the gaps and based on it take decisions which would be beneficial for the business. This will reflect on the performance of virtual organizations and will help to carry out the different activities in the most productive manner. The essay thereby presents the importance of product costing for virtual organizations that looks to outsource their operations. This helps to understand the manner in which the working of virtual organization will get transformed and highlights the mechanism through which efficiency will be achieved in the entire process. Being able to develop the process will multiply the effectiveness for virtual organization and will help to carry out the different functions in the most effective manner. References Atkinson, A. 2008. Strategic performance measurement and incentive compensation. European Management Journal 16 (5), 552–561 Bovet, D. and Martha, J. 2000. Value Nets – Breaking the Supply Chain to Unlock Hidden Profits. John Wiley and Sons Berliner, C. & Brimson, J. 2008. Cost Management for Today’s Advanced Manufacturing—The CAM-I Conceptual Design, Harvard Business School, Boston, MA Croom, S., Romano, P. & Giannakis, M. 2000. Supply chain management: an analytical framework for critical literature review. European Journal of Purchasing & Supply Management 6, 67–83. Hicks, C., McGovern, T. & Earl, C. 2000. Supply chain management: A strategic issue in engineer to order manufacturing. 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