Selecting a Costing Method
The selection of a cost accounting method is a crucial step in managing company finances. The business type often dictates this choice. Consider three methods of cost accounting and evaluate which is best for the company described.
Scenario
Imagine that the CIO of Cool Air Inc., a ceiling fan company where you have recently been hired as an accountant, has asked you to recommend and justify an appropriate cost accounting system. This is an important opportunity for you. You recognize that the CIO knows the best method but wants to test your understanding of cost accounting and how you articulate your ideas and positions.
Company Background
There are several specific steps to assembling a ceiling fan (this company produces several models) that require machinery, labor, and support from multiple departments. Activities include:
Components:
Blades.
Motor.
Remote control.
Fan housing.
Power switch.
Departments include:
Production scheduling.
Materials receiving.
Research and development.
Machine maintenance.
Product design.
Parts administration.
Final product inspection.
Materials handling.
The CIO identifies three cost accounting method possibilities that you should consider: Activity-based costing (ABC), job costing, and process costing.
Instructions
Write a recommendation to the CIO justifying the costing system that is most appropriate for the company described in the scenario above. Your recommendation should do the following:
- Compare the three costing systems in a way that highlights differences in how they would impact the company’s operations and finances.
- Justify your choice of an appropriate costing system for the company that includes an explanation of the criteria that you considered and clear evidence of why it is chosen over the other methods.
- Identify then analyze the most significant impact of implementing your costing system choice on company finances.
- Analyze the most significant impact of implementing your costing system choice on company operations.
Selecting a Costing Method
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Selecting a Costing Method
Determining the appropriate prices for goods that an organization produces is extremely important. If company managers set too high prices on their businesses' products, potential clients might move to other sellers. On the other hand, when institutions charge meager amounts of money, they may make losses and probably shut down their operations. According to Alami and ElMaraghy (2020), producers apply costing techniques that best suit their businesses to lower their items' costs, hence gaining a competitive advantage over their rivals. There are several methods that Cool Air Inc. can use in manufacturing its products, which include job costing, activity-based costing (ABC), and process costing.
The above three costing systems would impact Cool Air Inc.'s operations and finances in the following ways. Cool Air Inc. may use an activity-based costing (ABC) system to increase profits and overall performance. This technique helps to identify the appropriate overheads and cost drivers, which results in efficient organization processes. Kbelah et al. (2019) posit that businesses use ABC to identify every department's overhead expenditure, allocating them to specific costs. Since the basis of this method is on activities, it would be highly beneficial to Cool Air Inc. in setting up its manufacturing machinery and designing and distributing its ceiling fans.
Process costing might help Cool Air Inc. look at how expenditure flows from one division to another. Therefore, there would be no tracking of expenses for individual products. According to Langfield-Smith et al. (2018), organizations use process costing to produce similar goods in large quantities. Furthermore, firms use this technique if it is impossible to differentiate costs for each unit of finished items. In short, process costing would assist Cool Air Inc. in knowing each ceiling fan's price because once the organization produces one fan, the cost would be the same for other similar fans.
Using job costing, Cool Air Inc. could track the expenses to offer a specific model of ceiling fans. This method is essential as it helps firms ensure that they charge projects at levels that assist them in attaining their income targets. Jasim et al. (2020) assert that job costing breaks down materials, labor, and overhead costs to help look at projects in detail. In addition, this technique assists executives in monitoring costs as they create goods to fill orders for customers. Moreover, workers use this method to complete every item's job-order cost sheet while separating expenditure into manufacturing overheads, direct material, and direct labor (Jasim et al., 2020). Job order costing would be significant to Cool Air Inc.'s managers as it would help them track employees' performance by looking at workers' productivity, expenses, and efficacy control.
The most appropriate costing system for Cool Air Inc. is activity-based costing (ABC).
This technique is suitable because the firm has various cost activities, which include fan housing and blades that Cool Air Inc. would assign to their relevant departments that comprise production scheduling...