Fixed Labor
This paper discusses the goals and objectives of the organziation when trying to maintain profitable cost cutting measures in an effort to control manufacturing costs.
Cathy Chaney
BUS: 630 Managerial Accounting
Fixed Labor Assignment
Dr. Scott Shaw
November 2, 2009
Due in large to sky rocketing increase in cost relating to labor and raw materials members of management staff are vastly creating new and improved ways to increase output at the best competitive rates as possible. Even big business is now cracking down on labor by offering other innovative approaches to saving money. Cost managements say exactly that, companies who go above and beyond the call of duties to save and or cut back on unnecessary spending ventures. Rather than face lay- off of dedicated employees on measure is to budget and reorganized spending. There are many ways under which these methods can be achieved. First, and foremost management must remain object rather than subjective in nature. Cost management systems are devised for generating cost estimates that are sturdy enough to match the accurate cost that were initially set in motion by members of management.
Costs for the organization can be categorized in an effective manner by placing them in two categories. Absorption costing is one means of treating manufacturing costs as a product cost, regardless to whether the items are fixed or variable in nature (p. 209). Now when absorption costs are used a portion of the fixed manufacturing overhead can be applied to each unit as a measure for costs. Another reference to absorption costing is direct or marginal costing. A marginal cost approach is necessary when marginal costs are required or recommended for choosing which product to make or to use during decision making.
According to our text, under variable costing this approach offers only those manufacturing costs that are treated as product cost (p. 209). This costing approach includes direct materials, direct labor, and variable portions of manufacturing overhead. A (CVP) or cost-volume-profit analysis is a valuable management tool. This measurable tool provides an analysis of cost behavior and provides a map for management to surmise during tough economic conditions. A cost analysis examination is an accretion and operation of cost data for comparison and projections for the future.
Labor can be determined as fixed or variable cost due most to organizations have an allocated amount of funds set aside to cover the expenses of payroll. Oftentimes, one may hear the sad sounds of management complaints about how payroll was not met for a specified pay period. Even though payroll is dispersed among several entities organizations will typically utilize a budget to maintain cost directly related to labor. Generally, an overage in labor during one pay period will exhibit a shortage in another area. In my opinion labor should be considered as a variable cost. According to our text, variable cost “varies in direct proportion to changes in the levels of activities for the organization (Noreen, Brewer, Garrison, 2008, p. 51). Variable cost depend on the level of production as production increase, the variable cost will increase as well
Variable costs consist of those cost which are not guaranteed for the long-term. When explaining fixed cost vs. variable costs these items include employee’s salaries, mortgages for the business and costs associated with renting equipment things of this nature and usually involve a contractual agreement. Items such as utilities for the organizations are often considered as variable costs. Variable costs results when total dollar amount varies in direct proportion to changes in the activities level (p. 121). Some ethical challenges may result from build up in the organization resulting from sporadically hiring too many employees and there is a change that these individuals may get laid off their jobs. (p. 125). Costs should always be expressed in total rather than per unit measures to alleviate mishaps in accounting. For example the comprehensive problem 6-12 with fixed labor clearly explains where various items should be allocated. Lean manufacturing concepts offer organizations the opportunities to remain productive. The competitive environment can intensify production outputs which deliver market shares. Cost-cutting enables them to compete with lower cost in the global community (Zakuan, N. and Saman, M, 2009). Lean operations offer the cost approach tool by which companies are able to reduce operational costs through cost-cutting measures.
Advance Products, Inc. has just organized a new division to manufacture and sell specially designed tables using select hardwoods for personal computers. The divisions monthly costs are shown the schedule below:
Manufacturing costs:
Variable costs per unit:
Direct materials $86
Variable manufacturing overhead $4
Fixed manufacturing overhead $240,000
Selling and administrative costs:
Variable 15% of sales
Fixed (total) $160,000
Advance Products regards all of its workers as full-time employees and the company has a long standing no-layoff policy. Furthermore, production is highly automated. Accordingly, the company includes its labor costs in its fixed manufacturing overhead. The tables sell for $250 each.
During the first month of operations, the following activity was recorded:
Units produced 4,000
Units sold 3,200
1. Compute the unit product cost under:
a. Absorption costing
Direct materials 86
Variable manufacturing overhead 4
Fixed manufacturing overhead (240,000/4,000 units) 60
150
b. Variable costing
Direct materials 86
Variable manufacturing overhead 4
90
2. Prepare an income statement for the month using absorption costing.
Sales (3,200 units x $250) $800,000
Cost of Goods Sold Expense:
Beginning Inventory 0
Costs of Production
Direct Materials (4,000 units x $86) $344,000
Variable manufacturing overhead (4,000 units x $4) $ 16,000
Fixed manufacturing overhead $240,000
$600,000
Total Costs Available for Sale $600,000
Less: Ending Inventory of Finished Goods (800 units x $150) $120,000
Cost of Goods Sold Expense $480,000
Gross Margin $320,000
Selling Expenses:
Variable selling and administrative (15% x $800,000) $120,000
Fixed selling and administrative $160,000
$280,000
Net Income $ 40,000
3. Prepare a contribution format income statement for the month using variable costing.
Sales (3,200 units x $250) $800,000
Total Variable Costs:
Beginning Inventory 0
Variable Costs of Production
Direct Materials (4,000 units x $86) $344,000
Variable manufacturing overhead (4,000 units x $4) $ 16,000
$360,000
Total Variable Costs Available for Sale $360,000
Less: Ending Inventory of Finished Goods (800 units x $90) $ 72,000
Variable Cost of Goods Sold Expense $288,000
Variable selling and administrative (15% x $800,000) $120,000
Total Variable Expenses $408,000
Total Contribution Margin $392,000
Total Fixed Costs:
Fixed manufacturing overhead $240,000
Fixed selling and administrative $160,000
$400,000
Net Loss ($ 8,000)
4. Assume that the company must obtain additional financing. As a member of top management, which of the statements that you have prepared in (2) and (3) above, would you prefer to take with you as you negotiate with that bank? Why?
Various costing income statement in (2) because these show contribution margins which are met by the organization and they also show operating income which makes financing from a lending institution more viable.
5. Reconcile the absorption costing and variable costing net operating income figures in (2) and (3) above.
Absorption costing would show a higher operating income for the year by the amount of $48,000.
Difference in profits = Difference in units sold and produced x fixed manufacturing overhead per unit.
= (3,200 – 4,000) x ($240,000/4,000 units)
= -800 x $60
= ($48,000)
Advanced Inc. has devised a process of expressing quantified resources in its budgeting requirements. Therefore, in trying to achieve optimal performance within the organization it is in the best interest of the unit to establish an accurate sales budget. Budgets can easily be self- imposed should exemplify the moral and ethical standards of a top level management staff. Self-imposed budget impose a great deal of advantages on both members of staff and the management team the first objective for planning for success is to recognize that all levels of the organization are recognized as members of the team whose views and objects are valuable for the organization, second, budgets give an accurate estimate for members of management who sometimes have limited knowledge of segments markets for the organization, third, motivation is heightened for those participating especially when setting long term goals for the well-being of the organization finally, those managers who are able to meet the set budget guidelines can always suggest unrealistic budgets are unrealistic and therefore discouragement for excuse (p. 301).
Finally, Advance Products exemplified a proactive approach in setting the budget for the organization. By designing a flexible budget planning system a balanced scorecard was established for the organizations venture move. Flexible budget spending allows the organization the opportunity to take into consideration changes which are deemed necessary and affect costs for the organization. Anytime a flexible budget is established actual costs are compared to what the costs should have been had the actual level of activity been taken into consideration?
Reference
Noreen, E. W., Brewer, P. B., and Garrison R. H. (2008). Managerial Accounting for Managers.
New York: McGraw Hill. ISBN: 978-0-07-352697-3.
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ZakuZakuan, N. & Saman, M… (2009). Lean manufacturing concept: the main factor in improving manufacturing Performance – a case study. International Journal of Manufacturing Technology and Management, 17(4), 353. Retrieved October 25, 2009, from ABI/INFORM Global. (Document ID: 1677770571). |
1 Comment
interesting read, thanks for sharing.