Allocation: What is it and How Does it Work?

Pricing and costing are important processes that must be executed ideally by a business owner to ensure the success of the manufactured or processed products in the market. The concept of pricing defines the process that is followed in the determination of the price at which various products should be sold in the market. Contrary, costing is the procedure of formulating all costs or expenses that are incurred in the production and manufacturing of products meant for sale to the targeted customers. To make a profit, a set selling price of a product must be reasonably above the total cost incurred in the production or manufacturing of the product. 

Company and Product Description 

Gen-link is a corporation that produces designer watches for high-end clients situated in the United States. Additionally, the corporation was established in 2013 and it has been in operation since. Today, the company is among the top designers of customized special order prestigious watches in the nation, with a market share volume of approximately 85%. Moreover, the company has six subsidiaries in the United States and it employs 75 staff members. Up to date, the company has remained private and it does not have any plans of going public in the oncoming years. 

There are six forms of customized watches that are produced by Gen-link. Moreover, the prices of the watches are dependent on the materials used in their designing. The stainless steel watch costs $4,350, while the ceramic watch costs $7,350. Furthermore, the Titanium watch costs $15,350 and white gold watch at $26,350. Lastly, the yellow gold watch costs $45,000 while the rose gold watch costs $75,000. Ultimately, all products by Gen-link are made upon customers’ request. Nevertheless, the customers must pay at least 60% of the products’ as a down payment before the company can manufacture the watches. 

List of Inputs and Associated Costs 

The chart above illustrates the summary of the costs incurred by Gen-link in the manufacturing of different forms of watches. Moreover, the costs are broken down into four parts namely labor, materials, overhead and non-manufacturing costs. Labor costs are all expenses incurred by Gen-link in paying off professionals involved in the manufacturing of the watches. Contrary, material costs are all expenses associated with the acquiring of the raw materials essential for the creation of the luxury watches. Lastly, the non-manufacturing costs are all the expenses that are not directly associated with the manufacturing process of the watches. Examples of the non-manufacturing costs include the costs of advertising or sales promotion. 

The selling prices of the watches are outlined in the products’ description section whereas the total costs incurred in the manufacturing of different watches are outlined in the chart above. In the computation of the selling price of different watches, a consideration of the total costs incurred for each watch was made. In this case, Gen-link wanted to retain a profit margin of 30% for all watches they manufactured for sale. As such, the cumulative costs for each form of the luxurious watch was done and a 30% markup on the total costs of the watches was made to determine the final selling price of the watches. The process has been summarized in the chart below. 

Items That Should Be Produced To Meet the Preset Selling Prices 

From the cost and price analysis of the products produced by Gen-link above, it is evident that every product from each luxury category will need to be produced to meet its selling price. In addition, this phenomenon has been computed based on two primary factors. First, Gen-link deals with the manufacture and retail of luxurious products engineered for a luxury buyer. As such, the selling price of the product is not based on economies of scale but on a preset standardized cost developed as a markup of the total costs incurred in the products’ manufacturing process. Second, Gen-link’s products are high-end products that are only created upon customers’ request. As such, clients are required to pay the set selling price of such products and the manufacturing of the products can only occur when 60% of the selling price has been settled by the client. 

Costing Systems That Can Be Good in Formulating the Products’ Selling Price 

The job order costing method is the best costing system that should be employed for setting the selling price of Gen-link’s luxurious products. Additionally, this method is appropriate because it accumulates all cost incurred in the developing of each product separately in the manufacturing process (Taschner & Charifzadeh, 2016) . As such, it is appropriate for corporations like Gen-link that manufactures unique products based on special orders. 

Costing Systems That Are Not Food the Corporation 

Process costing is suitable for products that undergo through a series of manufacturing or processing process. In such a case, the costs incurred in each process can be computed separately and then summed up to determine the final cost (Drury, 2008) . In this case, the costing system will not be appropriate for Gen-link’s products because the manufacturing process of the watches is not segmented into multiple channels. 

Also, the activity-based costing system is not appropriate in the pricing of Gen-link’s products because costs are calculated on the activity rate as well as the application of overhead expenses on products. That is based on their levels of activity usage. In this case, Gen-link’s watches are only consumed once they have been fully manufactured and so this form of costing system cannot be appropriate for the corporation. 

Lastly, the traditional costing system cannot be appropriate for the Gen-link’s corporation because it allocates a single overhead rate for every activity executed in the manufacturing process. However, in Gen-link’s case, the process of manufacturing watches is not differentiated but it is a single process mostly executed by machines in the development of the final product. As such, the traditional costing system will not be appropriate for the Gen-link’s corporation. 

Conclusion 

In conclusion, to make a profit, a set selling price of a product must be reasonably above the total cost incurred in the production or manufacturing of the product. Moreover, the job order costing method is the best costing system that should be employed for setting the selling price of luxurious products. Also, the method is appropriate because it accumulates all costs incurred in the developing of each product separately in the manufacturing process. As such, it is appropriate for corporations that manufacture unique products based on special orders. 

References  

Drury, C. (2008). Management and Cost Accounting. Boston: Cengage Learning EMEA. 

Taschner, A., & Charifzadeh, M. (2016). Management and Cost Accounting. New York: John Wiley & Sons.