What did you learn that will help you the most and/or what most broadened your understanding of the topic? How would you now categorize your personal philosophy of performance measurement? Has it evolved with this coursework? Are there authors whose positions you find well-grounded and/or ill-founded? Why? Teams will conclude this section of the class by making a 5 – 10 minute graded summary presentation of your discussions.
We can define cost as the amount of money or resources incurred on purchase/business transactions or any other activity. The method of ascertaining cost of their products depends on and varies industry to industry depending on the nature of the production and the type of output. The cost sheet shows various components of the total cost of a product. It helps us to derive per unit cost in addition to the total cost. The cost sheet is prepared on with help of historical cost and estimated cost.
Basically there are different kinds of costs that are associated with the production or manufacturing of goods and services.
Fixed cost – A fixed cost is an expense or cost that will not change with any increase or decrease in the number of goods or services produced and sold. These expenses that have to be paid by a company whether it is operating or not i.e. even in case no production, the company will incur that cost. For example rent, salary, etc.
Variable cost – A variable cost is an expense that changes in proportion with output. Variable costs increase or decrease with the company’s production volume i.e. they will raise as production increases and falls as production decreases.
Direct cost – A direct cost is a price that can be directly attributed to the production of specific goods or services. The direct cost can be directly traced in relation to the activity. Like raw material is termed as direct raw material cost or direct labor cost.
Indirect Cost – Indirect costs are those costs that cannot be directly attributed to a cost object. These are basically of two types, fixed and variable.
There are different methods of costing used:-
Tradition method of costing – In traditional costing the factory overhead is allocated to products based on the volume of production resources consumed. Basically, overhead is usually allocated based on either the number of direct labor hours consumed or machine hours used. This is easy to apply overhead to the goods sold.
It has its disadvantage, if a firm is producing multiple products as in the case of Wilkerson’s case, the overhead can be applied inappropriately that can actually distort the pricing of the product. The product that may need fewer resources may applied higher costs and vice versa. This severely affects the profitability and sales of the company.
Activity-Based Costing – Activity-based costing (ABC) is an accounting method that identifies and cost object and cost driver and then assigns those costs to products. An activity-based costing (ABC) we tend to recognize the relationship between costs, overhead activities, and manufactured products, and after this, it assigns indirect costs to products. In this system of costing the cost is assigned more rationally to the product as against the traditional method of costing.
It is sometimes difficult to recognize the cost driver of the cost. Indirect costs, such as management and office staff salaries, are sometimes difficult to assign to a product. This method is used mostly in the manufacturing sector.
Different steps in Activity-based costing include:
- Analyze the Activities
- Gather all the Costs
- Trace Costs to the Activities
- Set up Output Measures
- Analyze the Costs
In the case of Wilkerson Company, the cost drivers are machine hour, production runs, number of shipments, and hours of engineering work. The ABC method helped the Wilkerson company to recognize the real cost attributed to its different products such as Valve, Pumps and flow controller.