Week 6 Discussion
COLLAPSE
Costs
Option 1
Your team has been assigned to design and launch of a new product or service. This could be an external product for sale or an internal service to support other departments. As you prepare for your first team meeting, you know that identifying and classifying costs will be an essential part of the project.
– OR –
Option 2
Consider your current organization, describe how costing is used or could be used to better understand the financial breakdown of products and/or services delivered. Would this information support you in your current role and/or aspired-to role? Have you seen instances where costing is not used effectively or could be better leveraged?
Post your initial response by Wednesday, midnight of your time zone, and reply to at least 2 of your classmates’ initial posts by Sunday, midnight of your time zone.
1st person to respond to
Christopher Berner RE: Week 6 DiscussionCOLLAPSE
Professor and Class,
For this weeks discussion, I have chosen to write about option 2 and the company that I currently work for, Hahn Auto Restoration. We are an antique car restoration company with 12 employees with all different types of automotive skills. The restoration services that we provide are full & partial restoration, repairs and 3D scanning capabilities.
To break our company down with fixed costs, our biggest expenses are: rent (we are actually in the process of purchasing the land and building), insurance for the building and cars, employees salaries, utilities (can also be variable), and depreciation. Our two biggest expenses are the insurance and salaries.
Direct Materials: This is something that we have to be very careful with. We use a lot of different types of materials during the cost of a restoration with prices of those materials changing often. Examples of materials that we use are sanding paper, body filler, tape, wax and grease remover, thinner, brushes, cutting wheels and grinding disks, just to name a few. Prices for these materials have been fluctuating over the pst year due to inflation and supply issues. We have not used this area of cost accounting very well. We have had set prices of these products built into the system and were not updated properly so we were charging less than we were purchasing them for and loosing money.
I would say that a standard costing method would work best for our company because standard costs, rather than actual costs, are used in accounting for materials, labor, and even overhead (1). Materials, labor and overhead are our biggest expenses and it is something that we need to always be on top of.
Reference
s:
1. Gene Siciliano. Finance for Nonfinancial Managers, Second Edition (Briefcase Books Series). Chapter 8
2nd person to respond to
Phi Charles
RE: Week 6 Discussion COLLAPSE
Hi Professor & Classmates,
Option 1
Your team has been assigned to design and launch of a new product or service. This could be an external product for sale or an internal service to support other departments. As you prepare for your first team meeting, you know that identifying and classifying costs will be essential for the project.
Briefly explain what the new offering is (Note: this can be hypothetical or based on your current role at your company; you should not share any proprietary information);
Team Mojo: Food Truck Services (Mobile) offering exotic breakfast menu items for Spring Breakers @ Deerfield Beach Boardwalk, Florida: Egg/Bacon/Cheese naan, Malaysian kaya toast, Japanese egg Sandos.
Identify and describe one fixed and variable cost in your department and explain whether they are controllable or non-controllable.
Identify whether these costs are traceable to direct materials, direct labor, or overhead.
While the cost of Permits is not traceable to direct materials, it is traceable to direct labor and overhead, as someone of the staff has to put in the work to apply both office and person at the government entity. On the other hand, Fuel is traceable to overhead as these costs fluctuate and have to be taken into account.
Phil
Reference
1. Girsch-Bock. 2020. Fixed Cost vs. Variable Cost: How to Tell the Difference. Retrieved from:
Fixed Cost vs. Variable Cost: What’s the Difference? | The Blueprint (fool.com)
JWI530
The Mary Story
DECISION TIME – MAKE OR BUY?
DECISION TIME – MAKE OR BUY?
We watched as Mary participated in a quarterly earnings call. She
was anxious to put some of the information and strategies that she
learned to work – and it wasn’t too long before she found the
opportunity to do just that.
The new Perfume team was looking to take advantage of a short-term
opportunity to make a small batch of special perfume in support of the
upcoming World Cup event. After reviewing a memo from Mike, her
operations manager, Mary learned that the assembly line required to
make the perfume was already operating at full capacity.
Since Mike didn’t want to interrupt his normal production plan, he and
the Purchasing Dept. identified a small supplier who was willing and
able to take on the project and produce the new fragrance for ABC
Perfume. Mary was excited…this would be a one-time effort, and she
could certainly use the incremental profit the order represented!
Mike reminded Mary of the capacity challenge and pointed out that
based on the P&L from Accounting for this product; his cost was
$15.50 per oz. Since the 3rd party was willing to produce it for just
$15.00 per oz., he explained that contracting with the smaller supplier
was cheaper and avoided a conflict with his assembly plan.
This seemed reasonable to Mary, but then she remembered her
discussion with Andrea about fixed and variable cost. She knew that
the $15.50 was the total cost, including both fixed and variable cost.
Further, she also knew that by definition, fixed costs would not
change with changes in the number of units. Therefore, the actual
cost of production would solely be based on the variable cost. She
pulled out a separate report from Accounting and discovered that the
variable cost of producing a similar product was just $10.00 per oz. If
she compared the variable cost of producing to the supplier quote,
then producing in-house would be much more cost effective
Mary paused for a moment and began to consider her options for this
project. She recalled Andrea discussing the need to consider
opportunity cost when at full capacity. She realized that producing
this one new unit would reduce the number of the current units
produced. Therefore, the lost profit (or really contribution) from
selling fewer of the current unit needed to be considered. It was like
a cost from “lost sales”.
She remembered that contribution was the difference between a
unit’s variable revenue and its variable cost. Since the product sold
for $40 per oz., it generated a ton of benefit…or contribution as
Andrea called it. Therefore, she needed to recognize that not
producing 1 oz. of the current perfume would “cost” her $30 per oz. in
lost contribution.
If she added the variable cost and the opportunity cost, she came to a
net cost of $40 per oz. if she chose to produce in-house. Comparing
this to the supplier quote of $15 made this a “no-brainer”. Leveraging
the outside supplier would be the best economic choice.
Mary picked up the phone to call Mike. He was going to be happy
with her answer – even though she was going to have to explain all
the ways his proposal was flawed!
