Question

Help, I am not sure where to start with this, I have to prepare a 12-15 page report detailing the information below

The organization you are addressing is ACME Manufacturing. ACME is a new entrant that will start operations in Mexico during the next year with a plant that will manufacture electric cars. The product is expected to be sold in the NAFTA trade zone and the company expects to expand to other locations within a couple of years.

Requirements:

Select Job Order Costing, Process Costing, or a hybrid method as a recommendation for ACME Manufacturing. Justify the choice you made.

Select the accounting method ACME should implement for managing overhead costs. Compare and contrast actual costing, normal costing, and standard costing. Describe the system you have selected and explain why you think it would be the best choice for ACME.

Construct a scenario in which ACME may want to install Activity Based Costing (ABC). Evaluate the advantages and disadvantages of using an ABC system.

Include a recommendation on whether the company should build inventory for resale or whether an activity based management system should be used to pull products through the production system.

Prepare a master budget for one year of operations with supporting schedules for costs you estimate to be associated with the production of electric cars. Use summary level data only for this section.

Prepare a recommendation for appropriate variance analysis procedures that should be used by ACME to manage costs.

Answer 1

Ans to Q-1: The job order cost system is used when products are made based on specific customer orders. Each product produced is considered a job. The job order cost system must capture and track by job the costs of producing each job, which includes materials, labor, and overhead in a manufacturing environment. Job costing or job order costing is a method used when the units manufactured vary significantly from one another.

Process costing is a term used in cost accounting to describe one method for collecting and assigning manufacturing costs to the units produced. Processing cost is used when nearly identical units are mass produced.

A hybrid costing system is a cost accounting system that includes features of both a job costing and process costing system. A hybrid costing system is useful when a production facility handles groups of products in batches and charges the cost of materials to those batches (as in the case in a job costing environment), while also accumulating labor and overhead costs at the departmental or work center level and allocating these costs at the individual unit level (as is the case in a process costing environment). Hybrid costing is most commonly used in situations where there is identical processing of a baseline product, as well as individual modifications that are made beyond the baseline level of processing. For example, this situation arises when identical products are manufactured until they reach the painting operation, after which each product receives a different coating, with each coat having a different cost.

Conclusion:

After going through the above definition we can say that process costing is the ideal method for ACME manufacturing as the car models are identical and it will be more logical and easy to use.

Ans to Q-2:

Normal costing is used to value manufactured products with the actual materials costs, the actual direct labor costs, and manufacturing overhead based on a predetermined manufacturing overhead rate. These three costs are referred to as product costs and are used for the cost of goods sold and for inventory valuation. If there is a difference between 1) the overhead costs assigned or applied to products, and 2) the overhead costs actually incurred, the difference is referred to as a variance. If the amount of the variance is not significant, it will usually be assigned to the cost of goods sold. If the variance is significant, it should be prorated to the cost of goods sold and to the work in process and finished goods inventories.

Standard costing values its manufactured products with a predetermined materials cost, a predetermined direct labor cost, and a predetermined manufacturing overhead cost. These standard costs will be used for valuing the manufacturer's cost of goods sold and inventories. If the actual costs vary only slightly from the standard costs, the resulting variances will be assigned to the cost of goods sold. If the variances are significant, they should be prorated to the cost of goods sold and to the inventories.

Actual costing is the recording of product costs based on the following factors:Actual cost of materials. Actual cost of labor. Actual overhead costs incurred, allocated using the actual quantity of the allocation base experienced during the reporting period.

Conclusion:

Judging by the above definition we can say that standard costing method can be used by ACME manufacturing as they can make budgets and use standard cost calculations to derive product prices. The standard costing provides a benchmark against which management can compare actual performance.

Ans to Q-3:

Activity-based costing (ABC) is an accounting method that identifies and assigns costs to overhead activities and then assigns those costs to products. An activity-based costing (ABC) system recognizes the relationship between costs, overhead activities, and manufactured products, and through this relationship, it assigns indirect costs to products less arbitrarily than traditional methods.Some costs are difficult to assign through this method of cost accounting. Indirect costs, such as management and office staff salaries, are sometimes difficult to assign to a product.

Advantages of ABC:

1. ABC provides a more accurate cost per unit. As a result, pricing, sales strategy, performance management and decision making should be improved.

2. It provides much better insight into what drives overhead costs.

3. ABC recognises that overhead costs are not all related to production and sales volume. In many businesses, overhead costs are a significant proportion of total costs, and management needs to understand the drivers of overhead costs in order to manage the business properly. Overhead costs can be controlled by managing cost drivers.

4. It can be applied to derive realistic costs in a complex business environment.

5. ABC can be applied to all overhead costs, not just production overheads.

6. ABC can be used just as easily in service costing as in product costing.

Disadvantages of ABC:

1. ABC will be of limited benefit if the overhead costs are primarily volume related or if the overhead is a small proportion of the overall cost.

2. It is impossible to allocate all overhead costs to specific activities.

3. The choice of both activities and cost drivers might be inappropriate.

4. ABC can be more complex to explain to the stakeholders of the costing exercise.

5. The benefits obtained from ABC might not justify the costs.

6. Other systems may need to be changed - for example, how variances are calculated.

Ans to Q-4:

Its better to use ABC system as it will create vigilance and strong internal control within the organization.

Ans to Q-5: See attached file.

Ans to Q-6:

1. Material Variance: Price Variance & Usage Variance (Yield & Mix Variance) for direct and indirect materials.

2. Labour Variance: Labour Rate Variance & Labour Efficiency Variance (Yield, Idle time and labour mix).

3. Variable Overhead Cost Variance: Variable Overhead Expenditure Variance and Variable Overhead Efficiency Variance.

4. Sales Variance: Sales price variance & Sales volume Variance (Mix & Quantity Variance).