ACC 202 Milestone One Operational Costs Data Appendix

Acc 202 Milestone One Operational Costs Data Appendixyou Plan To Open

The assignment involves developing a comprehensive analysis of the operational costs for a small business that manufactures pet collars, leashes, and harnesses. The business uses a specified workshop space of 1,500 square feet divided into three areas. Key costs include start-up costs financed through a loan with an immediate monthly payment of $550, and a modest employee salary of $500 per month. The business will employ workers for manufacturing each product, with specified hourly wages and weekly hours. Additionally, there are various costs associated with raw materials (nylon webbing, ribbons, buckles), equipment depreciation, utilities, insurance, office supplies, and miscellaneous manufacturing supplies. The operational costs are to be allocated based on the square footage of the workspace. Particular attention is paid to understanding the nature of costs—direct materials, direct labor, overhead, and period costs—and classifying fixed versus variable costs for better cost management and decision-making. The analysis will also encompass calculating the costs per item, contribution margins, break-even points for each product line, and targeted profit levels to inform pricing and sales strategies. This detailed financial overview provides a foundation for making informed managerial decisions regarding pricing, production, and cost control.

Paper For Above instruction

The selection of an appropriate costing system plays a crucial role in managing manufacturing overheads and accurately determining product costs. For the small business producing pet collars, leashes, and harnesses, choosing between traditional costing methods—such as job order costing—and activity-based costing (ABC) can significantly influence cost allocation accuracy and managerial decision-making. This paper offers an overview of these costing methods, analyzes their applicability to the business, and recommends the most suitable approach for efficient cost management.

Company Overview

The business in question is a small manufacturing enterprise dedicated to producing pet accessories, specifically collars, leashes, and harnesses. It operates primarily as a manufacturing organization, engaged in transforming raw materials such as nylon webbing, ribbons, and buckles into finished products. The production volume is relatively modest but requires precise costing to ensure profitability. The business aims to control costs, optimize resource utilization, and set competitive yet profitable pricing strategies. Given its focus on manufacturing discrete products, the company needs an effective costing system that accurately captures direct and indirect costs, allowing for detailed product cost analysis and overall financial management.

Costing Methods

Two primary costing methods are relevant: job order costing and process costing. Job order costing assigns costs to specific batches or individual products, making it highly suitable for customized or diverse products, as is typical in manufacturing pet accessories. This method accumulates costs per job, providing detailed cost data for each batch, which supports accurate pricing and profitability analysis. For example, each batch of collars or leashes can be tracked with its own cost record, including direct materials, labor, and allocated overheads.

Alternatively, process costing is appropriate when products are homogeneous and produced in a continuous flow, with costs averaged over units. If the business had mass-produced identical products in a high-volume setting, process costing would simplify cost accumulation. However, because the products (collars, leashes, harnesses) likely vary in design and batch specifications, job order costing offers a more precise approach.

The choice of method impacts cost differences significantly. Job order costing provides detailed, product-specific costs, enabling management to identify the profitability of each product line and adjust operations accordingly. Process costing might result in averaged costs that could obscure cost variations between batches or product types, potentially leading to less accurate pricing decisions. Therefore, for this small, customized manufacturing operation, job order costing typically offers more relevant and actionable cost data.

Factory Overhead and Cost Drivers

Factory overhead includes indirect costs such as equipment depreciation, utilities, insurance, and indirect supplies like scissors, thread, and general maintenance. These costs are not directly traceable to individual products but are essential for the manufacturing process. In traditional costing systems, overhead is often allocated based on a predetermined overhead rate, such as labor hours or machine hours.

In an activity-based costing (ABC) system, overhead allocations are refined further using specific activity bases or cost drivers. For instance, activities such as machine setup, quality inspection, or material handling could serve as cost drivers. For our pet accessory business, potential activity bases include machine hours used in sewing, setup hours for each batch, or quantity of raw materials consumed. ABC provides more accurate cost allocations by aligning overhead costs with the activities that actually drive costs, leading to better insights into cost behavior and profitability.

Implementing ABC would require identifying key activities, measuring the frequency of these activities per product line, and assigning costs based on activity consumption. This approach enhances cost accuracy, especially when overheads are substantial and diverse, by avoiding arbitrary allocation methods inherent in traditional costing systems.

Recommendation

Based on the analysis, the recommended costing method for the pet accessory business is job order costing combined with activity-based costing for overhead management. Job order costing aligns well with the business's production structure, which involves manufacturing discrete batches of varied products. It enables precise tracking of costs per batch, facilitating accurate pricing and profitability evaluation. Incorporating activity-based costing allows for a more refined allocation of overhead costs, especially given the diverse activities involved in sewing, assembly, and finishing of pet accessories.

This integrated approach provides a comprehensive understanding of the cost structure, supports strategic decision-making, and enhances cost control measures. It also allows managers to identify unprofitable products, optimize resource allocation, and improve overall operational efficiency. As the business scales, this system can be further refined to maintain cost accuracy and support continuous improvement initiatives.

In conclusion, adopting job order costing with ABC principles offers the balance of detailed cost information and flexibility needed to manage a small, custom manufacturing operation effectively. This system will support the business's goals of cost management, competitive pricing, and sustainable profitability.

References

• Drury, C. (2018). Management & Cost Accounting (10th ed.). Cengage Learning.
• Horngren, C. T., Datar, S. M., & Rajan, M. (2015). Cost Accounting: A Managerial Emphasis (15th ed.). Pearson.
• Kaplan, R. S., & Cooper, R. (1998). Cost & Effect: Using Integrated Cost System to Drive Profitability and Strategic Success. Harvard Business School Press.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting (16th ed.). McGraw-Hill Education.
• Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2014). Financial Statement Analysis (11th ed.). McGraw-Hill Education.
• Blocher, E., Stout, D., Juras, P., & Cokins, G. (2019). Cost Management: A Strategic Emphasis (8th ed.). McGraw-Hill Education.
• Brealey, R., Myers, S., & Allen, F. (2020). Principles of Corporate Finance (13th ed.). McGraw-Hill Education.
• Hansen, D. R., & Mowen, M. M. (2018). Cost Management: Accounting and Control (7th ed.). Cengage Learning.
• Antony, J., et al. (2016). Advances in Management Accounting. Emerald Group Publishing.
• Kaplan, R. S., & Atkinson, A. A. (1998). Advanced Management Accounting. Prentice Hall.