cost management case analysist deciding on a costing system

Contents A, What type of costing system, job-order or process, is most appropriate for the commodity products and WlhhyŸ2.... What type of costing system, job-order or process, is most

NATIONAL ECONOICS UNIVERSITY FACULTY OF BUSINESS MANAGEMENT

tt 100

COST MANAGEMENT CASE ANALYSIST: DECIDING ON A COSTING SYSTEM

Lecturer: Ph.D Nguyen Thi Hong Tham

Name Student ID Class

Pham Hong Quan 11225396 BM 64

Bui Huy Lam 11223212 BM 64

Le Xuan Lam 11223222 BM 64

Nguyen Khanh An 11220034 BM 64

Nguyen Ngoc Vĩnh 11223062 BM 64

Khanh

Hanoi, ngày 21 tháng 3 năm 2024

Contents

A, What type of costing system, job-order or process, is most appropriate

for the commodity products and WlhhyŸ2 ch nh nh khen, 5

B What type of costing system, job-order or process, is most appropriate

for the differentiated products and whhy? - xnxx, 6

C If you recommended different costing systems for the different types of

products, what problems do you foresee in using two costing systems? 7

D Should Joan use actual or normal costing to assign overhead costs to

commodity products? To differentiated products? Is this decision affected

by the decisions about job-or-der and process costing? Explain your

CS .aậ.a 8

E What problem do you see with Joe's response to Joan's question about

the need for accuracy in unit costs? How should Joan respond to Joe? 10

Lux Electronics is completing a new plant that will begin manufacturing circuit

boards within six months Joan Keyes has just been appointed plant controller and

must decide what type of cost accounting system the plant will use The plant will

manufacture many different models of two basic types of circuit boards: made-for-

inventory boards and made-to-order boards

In discussions with marketing and production managers, Joan learns that all

models of the made-for-inventory circuit boards are commodity products, similar in

design and requiring nearly identical materials, labor, and time in production The

commodity boards are made in very large batches that require long production

periods It is expected that a typical batch of commodity boards will take over a week

to manufacture and result in tens of thousands of boards Batches of commodity

boards will be produced on a continuous basis

The various models of made-to-order boards, on the other hand, are

differentiated prod-ucts Each model is custom designed, and different models require

modifications to the production process and times to manufacture Differentiated

models also require very different materials and varying amounts of labor

Differentiated boards will be manufactured sporadically in small batches of only a few

hundred boards

The two basic types of boards will be made using separate production lines

within the same plant facility Manufacturing overhead will comprise about 60% of

the total manufacturing cost Direct labor, direct materials, most indirect materials,

line supervision, equipment costs, and some electrical costs can be traced directly to

one of the two lines Other manufacturing costs, such as those associated with plant

supervision, personnel department, cafe-teria, and plant office, are common to both

lines Some indirect labor will be shared by both types of boards Further, some plant

overhead costs, such as the cost of heating and air conditioning the plant, are difficult

to assign except on some basis such as the amount of square footage occupied by each

line

Lux management expects that the commodity products will compete mainly on

cost with low profit margins and will be priced based upon established market prices

Company management is therefore very concerned that the costing system accurately

reflect the costof manufacturing for these products If commodity product costs are

not reasonably accu-rate, Lux may experience poor cost control and lose money on

these products

Conversely, the differentiated models generally will be priced at cost plus a

percentage markup over cost Company management is therefore concerned that

inaccurate product costing will lead to low profit margins if the boards are priced too

low or lost sales if the boards are priced too high

While gathering information before deciding on a costing system, Joan recently

sent an e-mail message to Lux's assistant vice president in charge of marketing the

new circuit boards, Joe Bally, asking how accurate the unit costs of the boards need to

be Joan is troubled by Joe's response to her question: "I have always assumed that

unit costs are accurate to the nearest penny Why would that not be the case? That's

the way you accountants report them."

Joan is eager to get off on the right foot with the other managers involved with

the new plant's operations and those engaged in marketing the products it will make

She knows that an inaccurate costing system can lead to poor operating performance

She is concerned that the wrong decisions now will lead to serious problems later

A What type of costing system, job-order or process, is most appropriate for the

commodity products and why?

B What type of costing system, job-order or process, is most appropriate for the

differentiated products and why?

C Ifyou recommended different costing systems for the different types of

products, what problems do you foresee in using two costing systems?

D Should Joan use actual or normal costing to assign overhead costs to

commodity products? To differentiated products? Is this decision affected by

the decisions about job-or-der and process costing? Explain your answers

E What problem do you see with Joe's response to Joan's question about the need

for accuracy in unit costs? How should Joan respond to Joe?

Le Xuan Lam

A What type of costing system, job-order or process, is most appropriate for the

commodity products and why?

For the commodity products (warehouse-made circuit boards) produced by Lux

Electronics, the most appropriate costing system would be the process costing system:

Homogeneous Production: The commodity circuit boards are similar in

design and require nearly the same materials and labor They are produced in

large batches continuously Process costing is well-suited for products that

undergo a continuous production process with little variation in design or

production methods This system allocates costs to each unit based on the

average cost of producing all units in a given period, aligning with the

continuous and repetitive nature of production for commodity products

Cost Accumulation: Process costing allows for the accumulation of costs over

a period, making it suitable for large-scale production of homogeneous

products like commodity circuit boards Costs such as direct materials, direct

labor, and overheads can be accumulated and allocated to each unit based on

the total cost incurred during the production period

Uniform Costing: Process costing ensures uniformity in the cost calculation

for each unit of the commodity product Since all units undergo similar

production processes and use similar resources, averaging the costs over the

entire production run provides a fair representation of the cost per unit This

uniform costing approach is important for commodity products that compete

primarily on cost

Management Focus on Cost Control: Lux's management expects commodity

products to compete primarily on cost with low margins Process costing

provides a detailed breakdown of production costs, enabling management to

closely monitor and control costs Accurate cost information is crucial for

effective cost management and ensuring competitiveness in the market

Ease of Implementation: Process costing is relatively straightforward to

implement, especially in environments where production processes are

continuous and standardized It allows for efficient cost allocation without the

need for individual tracking of costs for each unit, which can be cumbersome

for large-scale production operations

Overall, the process costing system is the most appropriate choice for Lux Electronics'

commodity products due to their homogeneous nature, continuous production process,

and the need for accurate cost control to maintain competitiveness in the market

Bui Huy Lam

B What type of costing system, job-order or process, is most appropriate for the differentiated products and why?

- Based on the information about the differentiated products and their production

requirements, a job-order costing system is most suitable for these products:

1 Characteristics of Differentiated Products: Differentiated circuit board models require customization and modifications during production Each product model has unique designs, materials, and labor requirements This diversity in production

necessitates the tracking of costs for each specific order

2 Cost Specificity: Utilizing a job-order costing system allows Joan to accurately track the specific costs associated with each production order Costs such as materials, labor, and indirect costs can be identified and allocated to individual orders

3 Cost Determination for Pricing: The pricing of differentiated products is often based on production costs plus a desired profit margin A job-order costing system provides precise cost information for reasonable pricing decisions that ensure

adequate profitability

4 Cost Management: A job-order costing system provides detailed cost information for each order, aiding Joan and other managers in effective cost monitoring and

management, especially for products with such unique characteristics

Therefore, employing a job-order costing system will help Lux Electronics effectively manage costs and price-differentiated products accurately and efficiently

Nguyen Khanh An

C If you recommended different costing systems for the different types of

products, what problems do you foresee in using two costing systems?

Implementing different pricing systems for different product types can indeed present some challenges:

1, Complexity in Costing: Managing two separate pricing systems adds complexity to the overall accounting process It requires meticulous tracking of costs associated with each product type, including direct materials, direct labor, and overhead costs

2, Accuracy of Cost Allocation: Allocating indirect costs to each product type

accurately becomes more challenging when using two pricing systems There's a risk

of misallocation, especially for shared resources and overhead costs

3, Difficulty in Cost Control: With separate pricing systems, it's more challenging to control costs effectively across both product types The focus on accurate costing for commodity products might lead to neglect in controlling costs for differentiated

products, and vice versa

4, Potential for Errors and Inconsistencies: Maintaining separate pricing systems

increases the likelihood of errors and inconsistencies in cost calculations and pricing decisions This can result in inaccurate financial reporting and decision-making

5, Customer Perception and Pricing Strategy: Customers may perceive inconsistency

In pricing strategies, which could impact their trust in the company Moreover,

managing different pricing strategies for different product types requires a clear

communication strategy to avoid confusion among customers

6, Operational Challenges: Implementing different pricing systems may require

adjustments to operational processes, such as inventory management, production

scheduling, and sales forecasting It may also necessitate additional training for

employees involved in these processes

7, Strategic Alignment: Ensuring that both pricing systems align with the overall

strategic goals of the company can be challenging There should be coherence

between pricing strategies and the company's objectives, such as profitability, market positioning, and customer satisfaction

To mitigate these challenges, Joan Keyes should work closely with relevant

stakeholders, including marketing, production, and finance departments, to develop a comprehensive pricing and costing strategy that addresses the specific needs of each product type while maintaining overall coherence and accuracy in financial reporting Additionally, leveraging advanced cost accounting techniques and software solutions can help streamline the process and improve accuracy in cost allocation and pricing decisions

Pham Hong Quan

D Should Joan use actual or normal costing to assign overhead costs to

commodity products? To differentiated products? Is this decision affected by the decisions about job-or-der and process costing? Explain your answers

Joan's decision between job order costing and process costing affects the decision of whether to use actual costing or standard costing for overhead costs The following is

an analysis:

Commodity Products:

Process Costing with Normal Costing: Given that commodity products are commonly manufactured in large quantities using comparable procedures, process costing

emerges as the most appropriate approach Normal costing is a suitable approach for process costing due to its utilization of pre-established overhead rates This approach streamlines the allocation procedure for substantial quantities of commodity goods

e Benefits of Normal Costing:

© Simplicity: Standard costing eliminates the necessity of waiting for precise overhead data, hence simplifying management

© Timely Decisions: The utilization of predetermined rates facilitates expedited cost predictions, a critical factor in the determination of pricing and manufacturing strategies for commodity goods

Differentiated Products:

e Job Order Costing with Flexibility: Job order costing is the recommended

method for differentiated products that possess distinct production

requirements Nevertheless, the decision between actual costing and standard costing gets increasingly intricate

e Normal Costing as a Baseline: Standard costing provides a straightforward approach and might serve as a suitable initial reference It offers a uniform overhead rate for every task, making it easier to estimate and compare

e Actual Costing for High Accuracy: Actual costing might be advantageous

when accurate cost information for each distinct product 1s crucial It accurately represents the real expenses associated with each individual task, resulting in more precise cost information Nevertheless, this entails the additional intricacy

of monitoring and distributing real overhead expenses

Impact of Costing Systems:

The selection between job order and process costing has a substantial impact on the determination of whether to use actual or normal costing