Since company allocated fixed manufacturing overhead on each finished unit in absorption costing, until the company sells a unit, the fixed overhead cost would not neither be record as expense nor show in cost of good sold. That, if the company does not sell the entirely finished unit in the current period, fixed overhead incurred would be recorded as an asset in the current accounting period. This leads to an increase in value of inventory, instead of separating as a cost, profits may be manipulated if the manager accumulate and stock up the
This form is usually filled as materials are taken from the raw materials inventory and utilized as part of the job; this is tracked by adding them to work‐in‐process. This is done in order to ensure that materials costs are correctly allocated to jobs in process. And important concept in Job Order Costing is Predetermined Overhead Rate. In order to save time and allocate cost as they are incurred, overhead costs are allocated to jobs in process using a predetermined overhead rate. The predetermined overhead rate is identified as part of the budget and planning process by estimating total factory overhead costs and dividing these total costs by the estimated total cost driver or activity base chosen by the organization, typically this can be something like Direct Labor Hours or Direct Labor
Question: 1 Activity based costing (ABC) is an accounting method which involves identifying the activities of a firm and assigning overhead cost to the products (activity based costing - ABC, 2015). This method is proven to be more accurate than traditional method which uses direct labor hours, machine hours or other volume based measures to assign indirect cost to products (Mowsen, 202). ABC costing allows companies to identify how much profit products are making and to eliminate unproductive activities. It recognizes the real cost associated with a product and thus makes it easier to fix correct price for a particular product. It helps in allocating resources to the products and services which are more profitable hence increase profitability
The reason we say that we need to continue this product is due to the common fixed cost associated with it. A common fixed cost is a fixed cost that supports the operation of more than one segment of an organisation and is not avoidable in whole or part even if we try to eliminate one segment. The general factory overhead which itself has $27,000 associated with will still persist and will incur with other products in their overhead cost reducing the profit from other segments. This will drop the overall net operating income of the company. Hence to see it more clearly before making any decision, the company need to drop the overhead cost of company as it is a common cost to the company.
Cooper and Kaplan (1991) discuss that having an ABC costing system could have a financial gain for companies. Managers decision are critical, especially if the strategy is to earn profit. The ABC-costing system could point managers to decision that would enable the company to make more profit. The price of products should be reconsidered. In some cases, for the company to be copmetitive, prices will have to be dropped for products that are produced in large batches and in other cases the price should be increased for more specialized products that demand more (Cooper & Kaplan, 1991).
There are two major ways in which the costs for manufacturing using the additive manufacturing can be examined: • Comparison with traditional technologies: This examination determines in what way is additive manufacturing is cost-effective as compared to the traditional machining technologies. • Identifying use of resources: This examination aims at identifying the amount of resource used at various steps of the manufacturing processes and hence determines whether a more judicious use of resources is possible or not. In this way it is judged in what ways an steps the cost can be reduced. As discussed by Young (1991), the costs of production can be categorized in two
There are two ways to help ABC maximize profit. The first way is to limit price. It is used to keep the price down and restrict the size of profit to prevent new entrant. According to Figure 2, P (L) is limit price. If ABC charges lower price which means AC monopolist curve below the P (L), the new entrant must have to charge the same price or the lower one or it will not succeed to entrance the industry.
The same concept will apply to overhead and capital expenditures because overheads are directly proportional to the production and if the sales are high, product will automatically are high. Similarly quantity requirement will lead to the requirement of machines. To produce 2 million bikes , 3000 machines were