Issues of Product Costing Are Unimportant for Virtual Organizations That Outsource Production Operations - Essay Example

Issues of product costing are unimportant for virtual organizations that outsource production operations Student’s Name: Instructor’s Name: Course Code: Date of Submission: Issues of product costing are unimportant for virtual organizations that outsource production operations The innovation and the recent high global spread of the internet technology have contributed to inspiration of what a virtual organization could be. This approach is the most common understanding about virtual organization. However, internet is just a tool used by virtual organizations. A virtual organization refers to a temporary network of independent institutions, businesses or specialized individuals, which work together in a spontaneous fashion by way of information and communication technology, in order to gain an extant competitive edge. These institutions integrate vertically, unify their core-competencies and function as one organization. Each integrated institution contributes to complementary resources that replicate its strengths, and determines its position in the virtual corporation, very customer oriented organization, which satisfies customer needs in a personal manner by staying much cost and time efficient. Before joining to work together these institutions characteristics and their chances of success are assessed. Virtual organizations are a different way of organizing the relations between employees, managers and customers (Speier et al., 1998; Majchrzak et al., 2000). In the recent times, changes are regularly being experienced taking place in the new economic environment as being medium for the development of the virtual organisation. The increasing globalization and universal connectivity is significantly reducing the costs of assembling information, scheming and coordinating transactions with other economic operators. This reduction in external transaction costs goes together with greater environmental turbulence and a need for flexibility that dents the capacity of large, integrated and diversified companies to endure the growing competitive pressure. At the same time, secluded, small companies are finding it difficult to compete in such an environment as they face financial and human resources limitations necessary to sustain the accelerated rate of innovation. The changes seem to be contributing to the disaggregation of large, integrated and diversified companies, and the better management of the activities of small, autonomous enterprises. As a result, competition progressively takes place between networks (Kumar et al., 2007). A key characteristic for virtual organizations is their capability to change in a fast and flexible response to changing markets’ environments whether these arise as a result of globalization, shifting cost structures, changing client needs and wants, or other comparable reasons. The needs and necessities of virtual organisations call for each employee to have the skills to contribute directly to the value chain of product and service design, production, marketing and distribution. Virtual Organisations are at the very basic with the inventiveness of porous and changing organisational limitations, changing their skills and skill levels through outsourcing and alliances. Therefore, in essence virtual organization is an organisation that has a low cost, high response, efficient in the use of resources, empowerment of staff, low level of bureaucracy and high blend of information technology to support business processes and knowledge of workers. Some of the outstanding examples of cyberspace organisation are Ebay.com and Amazon.com that run its business activity through the Internet (Franke, 2001). Outsourcing is the practice of buying products and services from outside dealers rather than producing the same products or providing the same services in the organisation. The single most chief strategic reason for outsourcing is to cut down or control operating costs. Outsourcing is increasingly becoming a usual development in the current business world; organisations are starting to view outsourcing tactically, as a wider management tactic rather than just as a cost cutback tool. Outsourcings of complex and more essential processes are growing, but are still in its early stages. The marketplace is approaching transportation and logistics suppliers into a world market by the vertical growth of outsourcing manufacturing in various countries so that the cost of transportation and warehousing can be cut down as it can be awarded to specialized agencies that are operating in such business activity. The work is carried out by contract for a fixed figure, whereas these agencies take on all costs concerning to production and other services. Therefore, the organisations should not worry about any other uncertain operating cost during the course of business and due to unpredicted circumstances (Horngren et al., 2011; Mella and Pellicelli, 2008; Kotabe et al., 2008). The outsourcing decision is often called a 'make or buy' decision since they involve a process of decision making of whether to carry on 'making' (manufacturing) a good versus purchasing it from an external source. The 'make' component of the choice is called in-sourcing and the 'buy' component of the decision is called outsourcing. Make or buy decisions can encompass products or services. For example, some companies outsource payroll or internal security services whereas other companies outsource production of entire products (Mowshowitz and Kawaguchi, 2005). Outsourcing decisions can be made using full costing, variable costing, or incremental analysis just like other short term decisions. Full or variable costing encompasses preparation of two side-by-side income statements and weighing against the differences in profit between the two. It is worth noting that incremental analysis is the most effectual method because it can be scrutinized more quickly, and is the simplest and best method because it assists managers’ focus on the pertinent parts of a decision. Outsourcing decisions are tailored on the disparity in the cost of purchasing a product or service from an outside supplier in relation to the cost of producing the item (Speier et al., 1998; Horngren et al., 2011). In the eventual decision to outsource it is should be clear that there are no incremental revenues. The result is whether to use up costs internally to manufacture or pay another organization to produce. It is also notes worthy that outsourcing do not mean that an organization routinely changes its selling prices. The incremental costs will include variable costs of production, avoidable fixed costs (the fixed costs that would not be incurred if the 'buy' decision is made) and cost savings (costs that arise as a consequence of outsourcing versus insourcing). For instance, an organization will save its costs if decides not to make a product, that is direct labor costs (traceable labor production costs of manufacturing a product for instance assembly costs) and direct materials costs. In addition, it would save variable overhead costs (indirect variable costs linked to production) and some of the fixed overhead costs (for instance production overseer’s salary and factory space rent that can be concluded) (Kumar et al., 2007).  Product costing is the process by which the accounting costs associated to a specific product is calculated for a specific purpose and these cost are determined and differentiated. These costs are Direct Costs such as Direct Labour and Direct Materials, while Indirect Costs are Manufacturing Overheads such as Indirect Labour. It is an appropriate process for finding the exact cost in producing a product and can be helpful to management for various decision making purposes such as, produce the product in the organisation or to outsource the production function whichever is cost-effective so as to have a competitive strategy in pricing their product in the market (Kotabe et al., 2008; Horngren et al., 2011). Products costing play an important role in any organisation whether virtual or traditional, each business is related in buying and selling of goods and services. Therefore the cost at which this goods and services are incurred in the company must be calculated and then the price for the outputs must be determined so as to sell them in the market. Even though in the era of e-market virtual organisation are outsourcing their production operation, the cost incurred for this products even though in batches are incurred by the organisation. A company must make a wise decision regarding insourcing or outsourcing its production process. Accountant must determine the true cost to a company that is the dollar cost of performing an activity internally or externally as there involves a differential cost that is the difference in cost between two alternatives which gives rise to a differential revenue that is the difference in revenue between the two alternatives. They must quantify how important the activity is to the company's strategic capability that is how much current costs be reduced if an outside company's price for manufacturing the activity is less and if a reengineering plan could reduce costs to the best outside price, or even clout that price, would it still be worth for a company's to use internal resources to perform that function? The company that outsources their production activity must compare not only production but its distribution cost as well (Kotabe et al., 2008; Horngren et al., 2011). The main emphasis in outsourcing is on the cost, not price that is where costing comes into the picture, the true cost of a company's various business activities must be determined by establishing the value of a specific business potential that includes quantifying the value of contracting out supply chain logistics (Mella and Pellicelli, 2008). For instance, overseas companies account for $3 billion in the Canadian Information Technology outsourced market and it is predicted that their share would reach approximately 20 per cent of the IT industry this year (2013). Offshore companies offer Canadian firms an extensive variety of services, which comprise of call centre services, editing and layout, cheque dispensation coding to management of large databases. The service providing organizations bore the production costs thus unimportant to the virtual organizations (Pellicelli, 2009). India is the leading source of outsourced information technology workers, followed by the Philippines, Eastern Europe and South America. Most of the outsourced service providers are actually North American firms that have set up shop in these countries. It is estimated that by 2016 global outsourcing will be in the regions of $70.8 billion. IT talent providers are up-scaling their business analytics services and experience to help their customers with their efforts to unearth key insights into their business performance (Jed et al., 2012). Since outsourcing gives an organization the chance to change its product line promptly, the flexibility is a precious change to the firm's market position or to take advantage of new customer opportunities (Lei and Hitt, 1995). The expansion of manufacturing outlets that could manufacture special-purpose products and offer services intended for niche markets are the ideal agencies for outsourcing so production could be done swiftly, inexpensively and in high volume (Horngren et al., 2011). Volkswagen and General Motors (GM) are constructing auto assembly plants whose staff are engaged and directed by a few chief suppliers. These auto firms do not assemble cars but only manufacture them. GM is progressing toward becoming a vehicle design and marketing firm in effect, the customer interface. Further, Boeing is heading in a similar direction where partners and contractors do all the manufacturing and assembly. These companies are outsourcing for the main reason that when they outsource their production operations they don’t incur production costs. Virtual organisation have also adopted the Just In Time (JIT) tactic where the manufacture of products takes place only when order are made for the goods and services, for instance Dell Computers that only manufacture its PCs when an order is made by the company, thereby saving the cost of inventories (Franke, 2001; Jed et al., 2012). In essence virtual organizations are potentially very potent structures. The customer would get the product precisely as he wants it and almost right away. They would have the pleasure to obtain high quality and good service thus attaining a competitive edge. The organization outsourcing its production operations (the virtual organization) will not incur production costs and therefore the complexities and challenges of production are done away with. The revenues of the organization continue to flow in and most likely improve because of the efficiency in provision of products and services (Kotabe et al., 2008). Product costing for virtual organization that outsource its production operations is not without its risks as the company depends on suppliers as suppliers could increase the price and scarify quality and delivery performance. Virtual organisation to be successful, the partners must have a shared purpose and shared goals, they must trust one another implicitly and recognise that given the interdependence of their respective fates, fortunes, and any benefit that is derived from their co-alliance virtual organisation, risk must be seen to be, and accepted, as shared amongst the company (Powell et al., 2004). References Mella, P and Pellicelli M 2008, The Origin of Value Based Management: Five Interpretative Models of an Unavoidable Evolution, International Journal of Knowledge, Culture and Change Management, vol. 2, p.23-32. Franke, U 2001, Virtual web organisations and market conditions, Electronic Journal of Organizational Virtualness, vol.3, p. 43-64. 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