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One of your best friends has recently learned that you are taking a course in Managerial Accounting. Your friend, who is a guitarist, is contemplating starting a small factory in your town to manufacture and sell custom-made wood guitars. The business, named "Custom Woods Guitars, Inc.," aims to produce guitars with a wide price range, from $500 to over $5,000. Your friend is concerned about properly tracking the costs associated with each guitar to ensure that pricing strategies are both competitive in the market and profitable for the business.

In managing costs, it is essential for Custom to accurately monitor direct material costs, such as wood, guitar strings, frets, tuning pegs, and other components used in each guitar. These costs are directly attributable to each unit produced and should be tracked meticulously to determine the true cost of manufacturing. When it comes to spoilage—waste material or defective items that cannot be sold—Custom should treat these costs as overhead or manufacturing losses, allocating spoilage costs appropriately to each job or classifying them as period expenses if spoilage is common and unavoidable. Supporting documentation, like a job cost sheet, will record the cost of materials like guitar strings assigned to each guitar, ensuring accurate cost allocation and facilitating cost control.

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Regarding direct labor costs, Custom should focus on wages paid to craftsmen or workers directly involved in shaping, assembling, and finishing each guitar. These may include hourly wages for woodworking, finishing, and assembly staff, along with any benefits or payroll taxes attributable to direct labor. Properly recording these costs involves maintaining detailed time-tracking records or job time tickets, which link labor hours spent to specific guitars or batches. This precise tracking allows for determining the direct labor cost per guitar, enabling better pricing strategies and cost control.

Deciding whether to research competitor pricing before or after calculating product costs hinges on strategic positioning. If Custom first investigates what competitors charge, it can set a competitive price point that attracts customers, but this approach might risk underpricing or overpricing if actual production costs are not well understood. Conversely, determining the product cost first ensures that all expenses, including materials and labor, are covered, and then setting a price that includes a desired profit margin guarantees profitability. Job costing and detailed job cost sheets support both approaches by providing accurate data on the real costs incurred for each guitar. This detailed information aids in setting prices that are both competitive and profitable, by revealing the true cost of manufacturing and enabling informed pricing decisions backed by concrete cost data. Overall, a balanced approach—estimating costs first and then adjusting based on market research—may be most effective in establishing a sustainable pricing strategy for Custom Woods Guitars.

References

• Drury, C. (2018). Management and Cost Accounting. Cengage Learning.
• Horngren, C. T., Datar, S. M., & Rajan, M. (2015). Cost Accounting: A Managerial Emphasis. Pearson.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.
• Horngren, C. T., Foster, G., & Datar, S. M. (2009). Cost Accounting: A Managerial Emphasis. Pearson Education.
• Hilton, R. W., & Platt, D. (2013). Managerial Accounting: Creating Value in a Dynamic Business Environment. McGraw-Hill Education.
• Blocher, E., Stout, D., Juras, P., & Cokins, G. (2019). Cost Management: A Strategic Emphasis. McGraw-Hill Education.
• Anthony, R. N., & Govindarajan, V. (2014). Management Control Systems. McGraw-Hill Education.
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• Kaplan, R. S., & Atkinson, A. A. (2015). Advanced Management Accounting. Pearson.
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