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Direct cost and indirect cost in economics
Direct and indirect cost in economics
Direct and indirect cost in economics
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Job costing involves usage of situations where every job is done cost differently, consumers specifications play a bigger picture in this case. Direct and indirect costs are encountered. It is believed that job costing has lots of costs accrued from the production to the consumers (REEVE, J. M., WARREN, C. S., & DUCHAC, J. E. 2012). This involves labor, running of machines, and all the individuals who are involved in the production of a product from raw to the final product, indirect costs are applied in this order. Job costing order is best showcased in a manufacturing company, let’s take coca cola company, company specialized in beverages manufacturing and distribution, usually customers have no say in the final products of this company, but as the trends for consumption of a certain flavor, according to their statistics they will conform with the demands. The special requirements, like name branding on the bottles of the beverages, customization of the containers have had a significant impact in the consumption of coca cola products (Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. 2010). Primary production of homogenous goods and several processes are undertaken for the finished product to be realized is what is called process costing. All stages of processing and costs accrued during manufacturing of a product will be added to the final batch of products. Keenness is …show more content…
As we see that process costing only concentrates on what happens in the departments, unit cost information in this type of cost comes directly from the department accounting office, while in job costing the unit cost information is derived from the job cost sheet (Walther, L. M. & Skousen, C.J.
John Deere Component Works (JDCW), subdivision of John Deere and Co. was in charged specifically of the manufacturing of tractor component parts. The demand for JDCW’s products had problems due to the collapse of farmland value and commodity prices. Numerous and constant failures in JDCW’s competition for bids, alerted top management to start questioning their current costing methods. As an outcome, the analysis has to be guided to research on the current costing methods with the intention of establishing legitimacy and to help the company in adopting a more appropriate costing system.
Unit 3 Discussion 1. Briefly, compare and contrast job costing with process costing. Provide an example of process costing. Job costing and process costing define the costs of the product; they both track how manufacturing costs such as direct material, direct labor, overhead flow through work-in-process to the finished goods, and when goods are sold to the cost of goods sold (Heisinger & Hoyle, 2012, page. 201). In other words, they both use the same manufacturing accounts such as Raw Materials, Work in Process, Overhead, and Finished goods.
The Director of the Human Resources received complaints from several managers and the Senior Manager in Payroll. The complaint was regarding Personnel Actions being processed late in the Human Resources Information Center (HRIC). The Director was urged by the leadership to put the pressure on the on the team who processed these actions, since it was causing issues across the organization. With the knowledge of these concerns, he recognized it was necessary for him to determine why the Personnel Actions were being delayed and causing the issues brought about by the various levels of management.
Also, please take into consideration how these reports are completed. These reports essentially summarize the cost of production activity with a specific reporting period and is a formalized summary of the four main steps that accounting uses to assign a fixed cost to units that are in and out in the final work-in-progress(WIP) inventory, which is inventory that is partially completed(Kimmel, et.al., 2017). In order for accounting to prepare its balance sheet, it is necessary to utilize these four steps to ensure that the production cost report reflects accurate data on inventory(Accounting Coach, 2017). The steps that were performed in creating this report were as
One of the basic parts of cost accounting is to gauge the cost of tangible or intangible product or service. All costing models are attempting to discover the "correct" cost 1.e actual cost without any cost variances for all cost objects, for example, product, profit, segment, and division. costing methodologies all over the world apportion overhead by utilizing volume- driven measure, for example, unit transformed to first gauge a foreordained overhead rate then assign overhead by applying this normal overhead rate to the cost object. Requisition of such models is authentic for offices generating goods with less differing qualities. In any case, as manufactured goods differ, the wide averaging methodology prompts severe cost variations (Johnson and Kaplan, 1987, Cooper and Kaplan, 1988).
The costing system is a system that is used throughout businesses that offer a service. “A standard costing system uses standard costs and quantities of all three types of manufacturing costs: direct materials, direct labor, and factory overhead” (Blocher 2016 p. 97). Companies utilize the costing system to monitor the actual product usage compared to prior usage. Contractor use this system when bidding on jobs; once they collect specific instruction for the requested job they factor in the amount of material, labor, and other overhead costs then provide a quote for the assignment. “Strategic cost management is deliberate decision-making aimed at aligning the firm's cost structure” (Anderson & Sedatole 2003). Red Lobster and Kroger are examples
After the purchasing on materials is made, then it turns to operation part which is transforming the raw material into finished food and services.
While after all the raw materials have been collected, the company will face the processing phase, meaning converting the raw material into finished goods, example: mixing the ingredients. This phase is categorized as working in process inventories.
An organization costing system is a system that helps the management with the strategy planning while the system plays an important role in providing accurate cost information about the products and customers (Curtin, 2006). UPS utilizes the Activity-Based Costing (ABC) system. ABC assumes that activities cause costs and that cost objects create the demand for activities (Marx, 2009). The key to cost allocation under ABC is to identify the activities that are performed to provide a particular service and then aggregate the costs of the activities (Gapenski, 2012). This is a marked departure from the practice of sharing overheads costs equally or overheads becoming part of the overall profit-loss estimate instead of component product pricing (Nayab, 2011).
The cost controlling shouldn’t been confused with the cost accounting. The cost accounting involves the recording of the cash receipts and their disbursements, accounts payable, accounts receivable, inventory and initial investment, and keeping other general and subsidiary ledger accounts. The cost accounting identifies, defines, measures, and reports the various elements of direct and indirect cost associated with producing goods and services. The main objective of the cost accounting is communicating the financial information to management for planning, controlling, and evaluating. Thus, cost accounting is a main means to an end. This research will not focus on the inner workings of any cost accounting system but instead focus on cost control using data provided by a sound cost accounting techniques
Dittmer, P. & Keefe, D., (2009) Principles of Food, Beverage and Labor Cost Controls 9th ed., Hoboken, N.J John Wiley & Sons, Inc. (US).
In costs for stock valuation, all elements related to the production process (Direct and indirec costs) have to be accounted for in getting the accurate cost of a single product. In other words, Direct costs must include all direct materials, labor and other direct costs. Indirect costs must include all production overheads, administrative overheads, selling overheads and distribution overhead costs. All these costs must be included in the stock valuation.
Many organizations do not achieve the profits they anticipate by using incorrect methods or models to determine the true costs of products and services. This failure to correctly assess the costs associated with business not only affects the profit margin, but the organizations competitive advantage as well. In order to asses whether the organization is failing to realize optimum resource allocation, the organization should look at the methodology first popularized by Michael Porter titled the Value Chain Analysis (VCA). "VCA seeks to define the entire chain through which goods are supplied to a customer" (Booth, 1997, 2). The VCA can be a powerful tool in increasing an organization's competitive advantage; by correctly pricing products and assessing the true costs of materials and labor, organizations can align the improvements in efficiency, quality, and profits with its strategic objectives.
The changes made in the accounting system are directly associated to the changes in the quality control system of the division, which results in a need for larger interaction between the two functional areas. Firstly, due to the JIT process, the granularity of accounting analysis is reduced. The cost accounting process has become a much less finely detailed process calculating costs via an ex-post averaging of collective expenditures over produced units instead of the traditional procedure of calculating the cost of specific units or batches of units. Secondly, with the reduction in granularity of accounting calculations, the calculations monitored by the quality assurance information systems have become increasingly fine. Use of cutting-edge information technologies allow for the tracking of individual units and subunits, to answer the question earlier answered with accounting data: what was the deviation between actual production rate and standard production rate. This denotes a change in focus from financial information to non-financial
Direct materials are resources that are used during the production of goods and it is directly linked to the product, while direct material cost is referring to the cost of raw materials used to manufacture a product. Those items which known as direct material is normally included in the file of the bill materials for a product. The bill of materials is the list of standard costs and unit of quantities of all materials used in the product as well as including the allocation of overhead. Direct materials do not take in materials that are used as one of the general overhead in a business. As an example, the air filters that are used in the ventilation system of a production facility are included in production overhead instead of direct materials. Alternatively, the cotton used to produce clothes and fabrics as well as the paper used to produce paper bags are known as direct materials. Referring to the cost classification, direct material is classified under product costs