Samuel Miliken\'s company has reported losses from operations for several years.

Question

Samuel Miliken's company has reported losses from operations for several years. Industry standards indicate that prices are normally set at 30 percent above manufacturing cost, which is where Miliken has set them. Assuming that his other costs are aligned with industry norms and the company uses a process cost system, how could Miliken continue to lose money while his competitors earn a profit? Imagine you have been hired, based on your considerable experience in the cost accounting field, to gather the necessary information to recommend a course of action to the company's manufacturing managers. Explain where you would begin gathering pertinent information to share. Identify process manufacturing costs that may be causing this situation. Lastly, recommend a course of action to follow.

Explanation / Answer

Answer:

It is given in the question that Samuel Miliken's Company has set the prices as per industry norms and except for manufacturing costs its, all other costs are aligned with industry norms. This clearly means that there must be some issue in ascertainment or recognition of manufacturing costs. There may be a situation that the Company is incurring losses as per accounting that is its books of accounts and might be earning profits as per cost accounts. This may be due to charging of fixed overheads and other non operating expenses to the manufacturing costs. If this is a situation then we advice that the Company shall practice activity based costing instead of applying blanket rate for all the fixed overheads and other incidental costs. Also, we advice that the Company shall differentiate between the cost of production from the overall costs of the business. Also, the Company shall calculate the contribution from its sales units and make decisions accordingly.

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