Accounting Accounting

ACCOUNTING 5

Accounting

Accounting

Anyexpensesincurredby a companyin theproductionof servicesorgoodsarefrequentlyreferredto as productioncost.Thesecostsare in varioustypes:variablecostis theexpensesof suppliesto thecompanythat will largelydepend on howmuchproductionis churnedout. Whentheoutputis low,thensuppliesare in smallquantity.However,thischangeswhenproductionincreasesconsequently directmaterialcostbecomesvariable.Fixedcostsare like rental expensesoranyothercoststhat donot changein volumerelativeto thebusinessof thecompany.Asan example,a supermarket will payrent plus utilitybillsregardlessof salesmade.

Directcostsare thosethat are in relationto a particularcostobjectthereforenot allvariablecostsare definitelydirectcosts.Indirectcostsare thosethat may arisebecauseof overheadsespeciallyin manufacturingcompanies.Opportunitycostis theoptionpricethat has to be forgoneto followa particularaction.Thebalancebetween thechoseninvestmentandtheoneoverlooked.Sunk costsare expensesthat havebeenmetalreadythereforeirrecoverable.Subsequentlytheseexpendituresare not joinedto anyfutureevent. Inadditionto everydayaccounting matters,companiesthat are manufacturingproductsencountermoreaccounting problemsthan distributorsandretailers. Thisnecessitatestheseparationof manufacturingandnon-manufacturing costs.Two examplesof variablecostsare directlaborandrawmaterialsexpenses.Employeesareneededfora manufacturingcompanyto dovariousjobswhich may includemovingrawmaterialsfrom thewarehouseto theplantthenthefinishedproductto thesaleorstorageawaitingsaleblock.

Operatingof theproductionlinealsoneedshumancapitalmeaningall theseinvolvementsin theproductionprocesscoststhecompanyin salariesandwagesincludingothermonetarybenefits,which addup to direct,laborexpenses(Tracy 2011).

Rawmaterialsfollowthesameprinciple.Whenthemanufacturingplantproductionis small,rawmaterialscostsare low.However,whenproductionvolumeincreasesrawmaterialsalsoincreases.Thesetwo examplesare variablecoststhat increasesordecreasesdepending on theproductionvolumeof thecompany.Moneyto employeesandmoneyto sourcefortherawmaterialsvaryall thetimewith their determiningfactorbeingthevolumeof thefinishedproductsrequired.One exampleof thefixedcostsis interestpaymentof plantandequipmentacquisition,whichis considereddespite thefactorynot operating.Thisfinancialpactismadewith theintentionof working,andalthoughnoworkis done,obligationmust be metto avoidcertainpunitivemeasures.

Thesecondfixedcostis thesalariesof employeeswhodonot workin themanufacturingplant.Thesecould be executiveemployeeswhosesalariesmust bepaid.Theseexpensesare fixedover a certainperiodof timesince thecompanymay expandin thenearfuturerequiringan increasein its financialcostorseekingfurthercapitalto dothesameaffectingtherepaymentperiodincludinginterestrate.Directcostsarecommonlyknownas primecostsandare readilytraceableto theparticularobject.Thisis thesignificantcomponentof a finishedproductencompassingtherequisitelaborrequired..Therefore,theskillmight be specialized.Afurthersubdivisionof directcostsis directlaborexpensesanddirectrawmaterialsexpenses.Thesetwo examplesshowhowthevalueis spoton in an applicationresultingto easytraceability in rawandalsoworkcostsdirectlytyingthepaymentsup without muchado.

Indirectcostsin a manufacturingplantare wideexpensesthat are incurredfortheutilization of electricityandfixedcapital,althoughthismay encompassusagesof minorcomponents,forexample,glueorsolder. Theidealcircumstanceis thatallexpensesought to be traceableto theparticularobjects.Thedeterminant hereis thecosteffectiveness of theentireaccounting managementprocessapplicablein a givenmanufacturingplant.Due to thedifficultyin trackingtheseexpensesan umbrellatermnamelyoverheadcostsisusuallyappliedhere.In somemanufacturingplants,costeffectivewayshavebe introducedto manageelectricitycostsbuttheefficacyof somemethodsare not easilyproven.Minorcomponentsmanagementis not easyalthoughwastage could besignificantly reducedwhenthestaffmoraleis highbecausethisincreasesresponsiblebehavior.

Opportunitycostsought to belookedat in two ways,forexample,whena manufacturingcompanycould possibleoutsource a componentof its finishedproductto anotherplantat a cheapercostthenitought to be utilized.Thischoicewill freeup spacefortheoutsourcing companyto useitin a moreprofitablemanner.Theavailability of a cost-effective alternativeis thedeterminant herebecausethedecisionwill be madebased on that(Kinney M &amp Raiborn C, p. 399). Costreductionin expensesthereforeincreasingprofitis thewholepointin opportunitycostmanagement.

Sunkcostsin manufacturingplantsare a factorin decision-making andat thispointare eitherignoredas alreadydoneexpenses,howeverthismay changeifthecompanyis thinkingof expandingproduction.Thisoccurrenceis viable ifthesunkcostsare in termsof machinerythat could beutilizedin thefuture,anditis ignored.All thesecostare necessaryforthemakingof thedecisionto managea manufacturingcompanyin its day-to-day operationbe itin recessionorboomtime.Theentiremanagementprocessis completewhenthewholecostsarefactored.

References

Kinney,M., &amp Raiborn, C. (2012). Costaccounting: Foundations and evolutions.Cengage Learning.

Tracy,J. A. (2011). Accountingfor dummies.John Wiley &amp Sons.