Wilson-West Manufacturing Cost Analysis and Reporting

COST ANALYSIS AND REPORTING

BY: SAMYRA RAMIREZ

Being hired as the managerial accountant for Wilson-West Manufacturing's new cabinet division; I will be setting up a cost accounting system to allocate the costs of these. As a managerial accountant, I would partake on a variety of duties necessary to make possible a proper and accurate accounting system.

For example, I will be recording and analyzing the product cost accounting records frequently to make decisions on present and future issues. I will be analyzing the effects on the costs of manufacturing these cabinets. It will be necessary to prepare, analyze, and distribute information related to inventory and costing to make these decisions which will result in reducing the amount of waste, improve the manufacturing process and the labor costs. Lastly, I will calculate, analyze, and report all overhead allocation and other costs necessary (AccountingProfessional.com, 2012).

Initializing a proper cost accounting system consists of determining each individual cost involved in making custom made bamboo cabinets, in other words, the direct, indirect and variable costs. The direct costs include direct materials such as the bamboo wood, nails, varnish, wood glue, rollers, and etcetera. Direct labor also falls under a direct cost which would be the wages paid to the workers that are responsible for the production of the cabinets.

Indirect costs would include things like the advertising of the product. The depreciation of the machinery used, indirect materials such as cleaning and office supplies, and indirect labor such as manager salaries. Finally, variable costs would include all raw materials, workers labor, COGS, sales commissions, delivery charges, shipping charges (Ramji Balakrishman, 2009). These are considered variable because these vary according to the amount produced and sold.

Variable costing, also referred to as marginal or direct costing is a method which includes only those variable costs in manufacturing. This method is used to evaluate inventory and determine the income, it provides relevant cost analysis, break-even analysis, and Cost-Volume-Profit analysis making internal decision-making easier (Variable Costing, 1999 - 2012 ).

Product costing is the process of tracing and analyzing all the various costs that are accrued in the production and sale of the cabinets, from raw materials purchases to costs associated with transporting the final product to retail establishments. Its intent is to obtain an accurate final cost to the creation of the product as a whole (Product Costing Law & Legal Definition, 2001-2012). This enables managers to develop budgets, establish prices and set sales goals.

The manner for utilizing the product costing system would begin by applying the following steps:

* Identifying the cost object;

* Identifying the direct costs related to the cost object;

* Identifying the overhead costs;

* Selecting a cost allocation base for the assigning of overhead costs to the cost object;

* Developing the overhead rate for allocating overhead to the cost object (Caplan, n.d.).

There are two basic types of product costing systems, the job order costing system and the process costing system. The costing system that I believe would best fit this department is that of the job order costing system. This is because this method focuses specifically on assigning costs to individual work orders. A job order costing system traces the costs of direct materials, direct labor, and overhead to individual or specific custom products. On the other hand, a process costing system suits more an organization that continuously produces like or similar products in mass quantities (Thakur, 2011). The ABC method, although a commonly preferred method, is best used for business with a great quantity of overhead. Being that this is a custom making cabinet dept. which provides for specific customers utilizing the ABC method for allocating overhead is more work need necessary (Nelson, 2012).

The contribution margin is the remaining balance from sales revenue after deducting variable expenses. With this balance you then cover your fixed expenses and from the remaining of that is your profit (Contribution Margin and Basics of Cost Volume Profit Analysis, 2012). The formula for contribution margin is as follows:

* Sales revenue − Variable cost = Contribution Margin

* Contribution margin − Fixed cost = Net operating Income or Loss

Being that the information needed to conclude the contribution margin is based on the revenues and expenses, it is quite clear that the proper document to utilize is the income statement.

The absorption costing method is required by the GAAP from all manufacturing companies. Under this method, fixed overhead is charged to the inventory. Using the absorption method costs are grouped in the following manner: all manufacturing costs together, regardless of they are fixed or variable, and the costs of sales and administration together. This is a functional classification of costs in the income statement (Myers, 2011).

The variable costing method, unlike absorption, only considers variable costs as product costs. For the most part, this would include all direct materials, direct labor, and variable portions of overhead. The fixed overhead, selling and administrative costs are treated as period costs and are expensed in its entirety each period. Therefore, within the inventory or cost of goods sold using this method, there are no fixed overhead costs (Variable Costing: A Tool for Management, n.d.).

Throughput costing focuses on capacity utilization. Under this method the only direct costs are direct materials. Its intention is to define which products should be manufactured before the other, which in turn would have an impact on profitability. Although this method could provide an excellent short-term incremental profit, it could also result in a delay of production due to production mixes (Putra, 2011 ).

Joint Product Costing is a little tricky, so I will begin by defining what joint products are. Joint products refer to the production of two or more products as a result of an interrelated production activity. This process has a split-off stage where the joint products become one. The joint production costs are those that are incurred in the production activities that partake up to the split-off stage.

The purpose of this costing method is to charge