Hummer Inc. uses manufacturing cells to produce its products. A manufacturing cell is a manufacturing unit dedicated to the production of subassemblies or products. One manufacturing cell produces small motors for lawn mowers. Suppose that the motor manufacturing cell is the cost object. Assume that all or a portion of the following costs must
be assigned to the cell.
Give one (1) example of process costing in each of a) service industries and b)manufacturing industries.
2. How would process costing for services differ in terms of Work-in Progress from process costing for manufactured goods?
Question 4 [Lecture 4, Chapter 14 Support department cost allocation]
Minlab Ltd tests the mineral content in ore and soil samples for mining companies. It has two support departments, Computing (C) and Engineering (E) with allocation bases of processing time and machine hours, respectively. The two production departments are Mineral Analysis (MA) and Soil Analysis (SA). The data for the support (service) and production departments for the month of May are summarised.
Café Laguna operates at Mindarie Keys. The owner is looking toward improving its inventory practices, as the current inventory costs on bottled drinks are $3,000 per year.The following table summarises details about this inventory item.
Annual demand 40,000 bottles
Delivery time 5 days from date order is placed
Ordering costs per order $100
Carrying costs per bottle per year $0.50
The café is opened 7 days a week over 50 weeks in a year.
- Salary of cell supervisor
- Power to heat and cool the plant in which cell is located
- Material used to produce the motors
- Maintenance of equipment of cells
- Labor used to produce the motors
- Depreciation on plant
- Depreciation on equipment used to produce the motors
- Ordering cost that is incurred by the purchasing department for ordering raw materials
ii)The method of cost assignment for depreciation on equipment to produce the motors and maintenance of equipment cells are driver tracing. Driver tracing method has been used for assigning the cost of depreciation on equipment to produce the motors because it is assumed that the equipments are located in other departments formerly (Christ & Burritt, 2015). Such equipments have been reassigned to other cells that might be dedicated to subassembly or single product. This makes depreciation attributable to the cost of product manufactured.
The method used for assigning cost of maintenance of equipment cells is driver tracing. It is so because equipment in the cell is operated and maintained by the workers for which they are trained. In addition to this, the partial movement of machine from one to another finished part for material handling, maintenance, set ups (Bierer et al., 2015). For all the manufacturing lines, different set of laborers used to perform the support functions. Moreover, the manufacturing cells are assigned with the people with specialized skills. Such support costs are assigned directly to the product using driver tracing because of redeployment of other personnel and multitask assignment.
Direct tracing are defined as the process of identification of costs and assigning such cost to cost subjects that are physically and specifically associated with the cost object.
Diver tracing on other hand is the method of assigning cost to cost objects by using drivers. Drivers are the casual factors that can be observed for measuring the resource consumption of cost object.
Direct tracing constitute of direct cost and indirect cost. Direct costs are those that are accurately and easily traceable to cost object and indirect cost on other hand are cost that cannot be traced accurately.
The drivers are the factors that causes change in usage of resources and the cost that is associated with the cost object has cause and effect relationship.
The cost of service in process costing system is obtained by assigning costs to the similar unit in masses and computation of unit cost is done on average basis. Example of process costing can be explained by giving an illustration of such method of costing in baking organization. Looking at a banking organization say, Canara bank of which several functions are performed by loan department. Such functions are performed in addition to the task of application processing of home loan.
It is estimated that the total percentage of overhead attributable loan department are applicable to the application for processing home loan and say the estimated percentage is assumed to be at 25%. In this case, the total processing cost per home loan application is done by using the method of process costing. If it is assumed that direct professional labor cost stood at $ 80000 and service overhead cost being $ 3000. Therefore, total cost of processing per month comes to $ 83000. Furthermore, it is assumed that total number of applications that is processed per month stood at 100. Then the total processing cost per application of home loan comes to 830.
A manufacturing organization says XYZ International manufacturers purple widgets that requires processing departments of multiple productions. Casting department is the first department in the process where initial creations of widgets are done. Conversion cost of $ 120000 and direct material cost of $ 50000 was incurred during the month of May. However, conversion cost comprised of factory overhead and direct labor. During the month, 10000 widgets were processed by the department and it is indicative of the fact that widgets per unit cost that have been passed through the casting department stood at $ 12 for conversion cost and $ 5 for direct material. Now, for further work, widgets then move through the trimming departments. Per unit cost along the widgets would be carried into that particular department where the addition of costs is done.
Work in process is referred to as the goods that are in production and are yet to be completed. In the process of production flow, these are the goods that are situated between finished goods and raw materials. These include labor, raw materials and overhead costs during the several stages involved in the production process. Therefore, the concept of work in progress is relevant in manufacturing industries as compared to service industries where costing of service is done which are intangible products.
The production and consumption is done at different stages in manufacturing industries as against simultaneous consumption and production between consumer and producers (Rieckhof et al., 2015). In addition to this, work in progress involves the concept of inventory where in service industry such concept may not be material and they are generally virtual. The valuation of work in progress in process costing is done at the end of period for which the preparation of process account is done.
Organization is required to fetch with additional data for ascertaining the value of work in progress (Cusumano et al., 2015). In service industries, the service and consumption is done simultaneously and therefore, no scope is left to perform the valuation of work in progress at the end of period. Therefore, there is a difference between the valuation of work in progress under process costing for service industries and manufacturing industries.
References and Bibliography
Bierer, A., Götze, U., Meynerts, L., & Sygulla, R. (2015). Integrating life cycle costing and life cycle assessment using extended material flow cost accounting. Journal of Cleaner Production, 108, 1289-1301.
Christ, K. L., & Burritt, R. L. (2015). Material flow cost accounting: a review and agenda for future research. Journal of Cleaner Production, 108, 1378-1389.
Cusumano, M. A., Kahl, S. J., & Suarez, F. F. (2015). Services, industry evolution, and the competitive strategies of product firms. Strategic management journal, 36(4), 559-575.
Ellul, A., Jotikasthira, C., Lundblad, C. T., & Wang, Y. (2015). Is historical cost accounting a panacea? Market stress, incentive distortions, and gains trading. The Journal of Finance, 70(6), 2489-2538.
Foerstl, K., Azadegan, A., Leppelt, T., & Hartmann, E. (2015). Drivers of supplier sustainability: Moving beyond compliance to commitment. Journal of Supply Chain Management, 51(1), 67-92.
Maskell, B. H., Baggaley, B., & Grasso, L. (2016). Practical lean accounting: a proven system for measuring and managing the lean enterprise. Productivity Press.
Rieckhof, R., Bergmann, A., & Guenther, E. (2015). Interrelating material flow cost accounting with management control systems to introduce resource efficiency into strategy. Journal of Cleaner Production, 108, 1262-1278.
Wagner, B. (2015). A report on the origins of Material Flow Cost Accounting (MFCA) research activities. Journal of Cleaner Production, 108, 1255-1261.