Volumetrica, a producer of audio equipment for large computer systems, is review
ID: 2449477 • Letter: V
Question
Volumetrica, a producer of audio equipment for large computer systems, is reviewing its policies as part of a biannual self-examination of the company. As part of this process, all managers have been asked to carefully examine costs and determine as closely as possible which costs are direct and which are indirect.
Linda Bedard and Sam Hilton, managers of different manufacturing departments in the same building, have been working together. They found the following four costs that could be economically traced to the products, but have historically been a part of overhead:
Cost of setting up the machinery for a different production run.
Cost of minor assembly components such as knobs and switches.
Cost of packaging, which is quite different for each model.
Cost of inspecting and testing each model.
None of the costs is significant by itself, but together these four costs make up between 10 and 15% of the total cost of the product. Linda favors "leaving well enough alone," as she puts it, and leaving these costs in overhead. She is afraid that her volunteering to trace these costs will result in her having to trace many more costs in the future. Sam, on the other hand, prefers to have the product cost as accurate as possible. He points out that these costs are already known, and the process would require little extra work.
You have been called on in your function as accounting manager to resolve the dispute. Write a response to Linda and Sam, supporting one or the other position. Be sure to adequately defend your position
Explanation / Answer
Solution:
The intention of Sam is correct. We have to note that the said four cost make up between 10% to 15% of the total cost of the product, which is significant and this will result in calculating the product cost more accuratly. It enables the company to fix selling rate for different poducts correctly, thus enabling the company to concentrate more on high profit products than the products which yild low profits or losses.
Not only by above significance factor, we have to analyse these four cost as direct or indirect as below:
Direct Cost & Indirect Cost meaning: All cost which are easily identifiable or traceable to specific cost centre are termed as direct cost and all cost which are not easily identifiable or traceable to specific cost centre are termed as indirect cost.
Cost of settng up machinery for different production run: This cost can be easily traceable to specific machinery and should be considered as direct cost.
Cost of minor assembly products such as knobs and switches: Eventhough this cost of assembling small products is traceable, this will have very low significance on cost. Normally companies will assign these kind of minor assembling jobs to their in-plant mechanic or serviceman. So it can be treated as indirect cost.
Cost of packing: This cost is direct cost and should be added to product cost. Packing will be different for each products, so this cost need to be added to each product separatly.
Cost of inspecting and testing each model: For electronics industries, inspection and testing cost forms part of product cost. This cost is mandatory before selling each product. so this cost is direct cost and should be added to product cost.
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