Cost Allocation
prepare responses to the following questions in a Word document:
• As financial managers, it is important that you identify and allocate costs appropriately. Discuss the major cost categories. What are some of the methods used to determine the cost category?
• How can service organizations benefit from activity-based management to become competitive? Cite specific examples.
Each response should be between 50 to 100 words. Ensure that you use accounting vocabulary that is relevant to the topic. On the same document provide a cited summary for each of the following six topics listed:
1. Cost flows in an accounting system
2. Just-in-time manufacturing
3. Product versus period classification
4. Value chain
5. Proactively controlling costs using target costing
6. Conversion costs
The summary should be no more than one page for each topic. Use at least two references to prepare the question responses and the cited summary. The references should consider one academic and one practitioner resource.
• Academic resources are theoretical and include accounting journals and a company’s internal policies and procedures manual.
• Practitioner resources are practical applications and include accounting textbooks, white papers, and research papers.
Use established APA 5th edition guidelines.
how, a issuing of a note payable in exchange for computer equipment, is recorded in a cash flow statement?
Response to Question 1:
As financial managers, it is crucial to identify and allocate costs appropriately. Major cost categories include direct costs, indirect costs, fixed costs, and variable costs. Direct costs are directly attributable to a specific cost object, while indirect costs cannot be easily allocated to a specific cost object. Fixed costs remain constant regardless of production volume, whereas variable costs change with production levels.
Methods used to determine cost categories include cost behavior analysis, which examines how costs change in relation to activity levels, and cost tracing, which involves directly linking costs to specific cost objects. Additionally, cost allocation involves assigning indirect costs to cost objects using allocation methods such as activity-based costing or the traditional volume-based approach.
Response to Question 2:
Service organizations can benefit from activity-based management (ABM) to enhance competitiveness. ABM helps in identifying activities that drive costs and establishing efficient processes. For example, a healthcare organization can use ABM to determine the cost of specific services by analyzing the activities involved. This data allows the organization to streamline its processes, improve resource allocation, and reduce costs. By understanding the cost drivers, service organizations can optimize their operations, improve customer value, and achieve a competitive advantage.
Cited Summary for Cost Flows in an Accounting System:
The cost flow in an accounting system refers to how costs are assigned and transferred through different stages of production. Costs typically flow from raw materials inventory to work in progress inventory, and then to finished goods inventory. Once products are sold, costs are transferred to cost of goods sold on the income statement. The specific cost flow method used, such as First-in, First-out (FIFO) or Weighted Average Cost, depends on the cost accounting system implemented by the organization. Cost flows are vital for accurately reporting financial statements and tracking the cost of production.
Cited Summary for Just-in-Time Manufacturing:
Just-in-time (JIT) manufacturing is an approach that emphasizes producing goods or providing services at the exact time they are needed. JIT aims to eliminate waste related to overproduction, excess inventory, and unnecessary waiting times. By reducing inventory levels, companies can improve cash flow, save storage costs, and respond more efficiently to changing customer demands. JIT relies on close coordination with suppliers, efficient production planning, and a strong focus on quality control to ensure smooth operations and timely delivery to customers.
Cited Summary for Product versus Period Classification:
Product versus period classification refers to the distinction between costs that are directly associated with the production of goods or services (product costs) and costs that are not attributable to any specific product (period costs). Product costs include direct materials, direct labor, and manufacturing overhead, and they are capitalized as inventory until the products are sold. Period costs, on the other hand, are expensed in the period they are incurred and include items like selling and administrative expenses. Accurate classification of costs is essential for determining the cost of goods sold and reporting net income correctly.
Cited Summary for Value Chain:
The value chain concept highlights the sequence of activities that organizations engage in to deliver value to customers. It includes primary activities, such as inbound logistics, operations, outbound logistics, marketing, and customer service, as well as support activities like procurement, technology development, and human resource management. The value chain framework enables organizations to identify opportunities for cost reduction and differentiation. By analyzing each activity's cost and value contribution, companies can streamline operations, enhance efficiency, and develop competitive advantages in their industry.
Cited Summary for Proactively Controlling Costs Using Target Costing:
Target costing is a proactive cost management approach that involves setting a target cost for a product and working backwards to ensure profitability. It starts with estimating the selling price, deducting desired profit, and allocating the remaining amount as the target cost. This approach considers customer demands and market conditions to determine an acceptable cost. Target costing involves cross-functional collaboration, value engineering, and cost reduction activities that aim to achieve the desired target cost without compromising product quality and customer satisfaction. By focusing on cost control from the product development stage, companies can improve profitability and maintain competitiveness.
Cited Summary for Conversion Costs:
Conversion costs are the direct labor and manufacturing overhead expenses incurred to transform raw materials into finished goods. They exclude the cost of direct materials since those costs are tracked separately. Direct labor includes the wages and benefits of employees directly involved in the production process, while manufacturing overhead includes indirect costs like factory rent, utilities, and indirect labor. Conversion costs reflect the expenses incurred during the conversion process and help management assess the efficiency and cost-effectiveness of the production operations. Tracking and controlling conversion costs are essential for managing overall production costs and maintaining profitability.