Decision Making for Services and Manufacturing Sector

Decision Making for Services and Manufacturing Sector

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Decision Making for Services and Manufacturing Sector

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Manage Discussion Entry

After reading the material from the text and doing a little outside work, there are three types of methods to allocate joint cost; they are physical measure output, relative sales value, and net realizable value. Physical measure output is used to determine the value from one product that can be broken down into many using its volume or weight.

The text refers to mineral in this case, but also, I read the making of petroleum fuels as well. This formula may work well with objects that have more than one property that equal a specified weight (2017, Schneider).

Relative sales value takes the overall cost of the material and divides the material into what it will take to get back what the cost spent. An external example mentioned that a future company purchased land in the amount of $800K. Lots were divided up to equal the total amount sold until the 800K was obtained. In this example, this does not include the amount to be made off the sale, only what it takes to break even on the amount spent (2020, Accounting Coach).

Last, we have net realizable value or NRV. This method is the expectation that the company plans on making less unreimbursed costs. The example used in this method is a company is wanting to sell some outdated computers in the amount of $10K. The company will not charge shipping nor the documents needed to write these off. Therefore, the company will not make $10K; it will be the $10K less the expenses it takes to ship and file the additional paperwork.

Reference:

Accounting Coach. (2020). Retrieved 14 May 2020, from https://www.accountingcoach.com/terms/R/relative-sales-value-method-of-allocating-cost

Net Realizable Value (NRV) Definition. (2020). Retrieved 14 May 2020, from https://www.investopedia.com/terms/n/nrv.asp

Schneider, A. (2017).  (2nd ed.) [Electronic version]. Retrieved from https://content.ashford.edu/

Manage Discussion Entry

According to the text, there are three common joint cost allocation methods (Schneider, 2017).  Each method is based on outputs.  With that in mind, we see that there is the physical measure method.  In this method, cost is allocated by the weight, volume, or some sort of measurement of the product.

The physical measure method does not related revenue to expenses.  The joint costs are then allocated in proportion to the product’s output measure.  To find the joint cost allocation, you would multiply the ratio of the product’s total output and multiply it to the ratio of the total overhead costs.

A second method is known as relative sales value. This method allocates joint costs in proportion to the joint products total sales at the spit-off point (Schneider, 2017).  The split-off point being when the costs of separate products can be separately identified.

The formula would be sales value/total sales value multiplied by total joint costs.  Finally, the net realizable value method uses approximations of sales values.  This formula would be net realizable value/total net realizable value multiplied by joint costs.  I would choose net realizable value as the method of allocating joint costs.  This method does a better job at matching the final sales value with costs incurred during production.

Schneider, A. (2017).  (2nd ed.) [Electronic version]. Retrieved from https://content.ashford.edu/

COLLAPSE SUBDISCUSSION Lauren Lombardo

Manage Discussion Entry

Absorption costing and variable costing are two different methods of maintaining records in cost accounting. Absorption costing includes indirect expenses like overhead and direct, while variable costing excludes these.  Although not allowed in GAAP OR IFRS (for lack of reporting fixed costs), variable costing is used more with managers because it is easier to see sales profit and output.

Variable costs are directly related with quantity produced. Variable costing uses material and labor cost. If you can increase production, then fixed cost per unit will come down and usually remains constant unless technology changes this. There are pros including the ability to be able to see the number of units needed to be sold to begin earning a profit  using this method.

These reasons alone would help anyone realize why they should be for instead of against it. Another reason would be that this method helps managers estimate a break-even quantity. The decisions made with this method are endless. To make or buy a product, close down a department or product that is not profiting and the list goes on.

Manage Discussion Entry

Absorption costing is a method whereby you apply part of your fixed overhead costs to the cost of manufacturing products. You do this on a per-unit basis. Simply divide your fixed costs by the number of units you manufactured and sold during the period. The result is a cost per unit for each unit you made and sold.

Variable costing uses fixed overhead as a lump sum, rather than a per-unit, expense. Under this method, you include all your variable costs such as supplies, raw materials and shipping. You add the full cost of fixed overhead for the period and you subtract the expenses from your revenue figure as a lump-sum expense. These 2 methods differ only in how they treat fixed manufacturing overhead costs.

Although both methods have advantages and disadvantages, I would choose absorption costing over variable costing because it is in compliance with generally accepted accounting principles (GAAP), recognizes all costs involved in production (including fixed costs), and does a better job of accurately tracking profit during an accounting period.

Even if a company decides to use variable costing in-house, it is required by law to use absorption costing in any external financial statements it publishes. Absorption costing considers all costs of production, such as fixed costs of operation, factory rent, and cost of utilities in the factory.

It includes direct costs such as direct materials or direct labor and indirect costs such as plant manager’s salary or property taxes. It can be useful in determining an appropriate selling price for products. Absorption costing also provides a company with a more accurate picture of profitability than variable costing if all its products are not sold during the same accounting period when they are manufactured.

Drawbacks of absorption costing include that it can skew the picture of a company’s profitability and is not helpful for analysis to improve operations or to compare product lines. Variable costing is more useful than absorption costing if a company wishes to compare the potential profitability of different product lines.

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On the contrary in absorption costing, fixed manufacturing overheads are included in closing stock valuation and are deferred and recorded as an expense only in the period in which goods are sold. Losses, therefore, will not be reported in absorption costing when sales are nil or quite low and stocks are being built-up. Thus, absorption costing will report correct profit situation than variable costing.

Maverick, J. B. (2019). Absorption Costing vs. Variable Costing: What’s the Difference? Investopedia. Retrieved from:  https://www.investopedia.com/ask/answers/052515/what-are-differences-between-absorption-costing-and-variable-costing.asp (Links to an external site.)

Schneider, A. (2017). Managerial Accounting: Decision making for the service and manufacturing sectors (2nd ed.) [Electronic version]. Retrieved from  https://content.ashford.edu/

Decision Making for Services and Manufacturing Sector

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