Direct And Driver Tracing Methods In Cost Assignment Essay.

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.

Azura Company had the following inventory balances at the beginning and end of
November:

• During November, $39,000 in raw materials (all direct materials) were drawn from inventory and used in production.
• The company's predetermined overhead rate was $8 per direct labour-hour, and it paid its direct labour workers $10 per hour.
• Azura incurred $28,000 of actual manufacturing overhead cost during the month and allocated (applied) $26,400 in manufacturing overhead cost.  

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.

Required:
1. Compute the economic order quantity (EOQ) that will minimise inventory costs.
2. Compute the annual inventory costs savings assuming that the quantity ordered per order is equal to the EOQ calculated in part 1.
3. There is a projected increase in visitors to Mindarie Keys, which will increase the demand for bottled drinks to 150 bottles per day. Calculate the new reorder point assuming safety stock is to be held. (Round answers to nearest unit)

Direct tracing

1. Salary of cell supervisor

Direct tracing

1. Power to heat and cool the plant in which cell is located

Allocation

1. Material used to produce the motors

Direct tracing

1. Maintenance of equipment of cells

Driver tracing

1. Labor used to produce the motors

Direct tracing

1. Depreciation on plant

Allocation method

1. Depreciation on equipment used to produce the motors

Driver tracing

1. Ordering cost that is incurred by the purchasing department for ordering raw materials

Allocation

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.

Requirement 2:

            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.

Driver tracing

            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.

Requirement 2:

            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.