Cost Accounting: A Managerial Emphasis

Production 

Nexus System is a manufacturing company that is involved in the designing, manufacturing, and marketing of widgets used as part of the entertainment industry. The company engages in special-order manufacturing of the widgets depending on the type of event that the customer intends to host. Additionally, it is also expected that the customer will provide information on the specific type of widget that he or she intends to purchase to determine the manufacturing process taken up. Widgets are especially essential products in lighting and sound equipment used as part of the industry, especially during concerts, in theatres, and other avenues of entertainment.

Selling Price for the Product 

The main cost inputs that the Nexus System considers as part of its production process of the widgets are materials, labor, and overhead. The consideration of these inputs is essential, as it helps towards determining the projected selling price that the company seeks to consider for each of the products that it delivers to consumers. The following is the costing method that is considered in determining the selling price for a single widget:

While considering that the profit margin that the company seeks to get from a single unit manufactured is $800, the estimated selling price for the widget produced is $1,000. That is a 400% markup concerning the pricing of the widget from wholesale to retail.

Number of Products 

Nexus Systems has a monthly sales target of $60,000 in its bid towards ensuring that it remains competitive within the markets when compared to some of the other companies involved in the manufacturing of this product. Consequently, this means that the company expects to sell approximately 60 units monthly as a way of ensuring that it can meet its price projection. The following is a calculation of the number of products that the company is expected to sell monthly:

From the calculations above, Nexus Systems will have a total cost of production of $11,400 to aid in the production of 60 widgets, which will be sold at a price markup of $1,000. That means that from the sale of the 60 widgets, the company is likely to get a profit margin of $48,600, which highlights that, indeed, the production of 60 widgets would be sufficient for the company monthly.

Chosen Costing System 

The costing system that would be most appropriate for Nexus Systems in its selling of the widgets is the job-order costing system. Weygandt, Kimmel, & Kieso (2009) indicate that the job-order costing system is much more effective when dealing with the manufacturing of products that are made based on specific orders from the customer. When evaluating the widgets found on customer demands, one of the key aspects to note is that they are expected to be manufactured in a manner that meets specific customer expectations. That creates the need for having to adopt a costing system that would aid in minimizing the overall costs of production regardless of the differentiation in product specifications. The appropriateness of the costing system can be seen from the fact that it allows for the accumulation of manufacturing costs for all products to help in minimizing the damage to the individual products that are delivered to the consumers.

Rejected Costing Systems 

Although Nexus Systems considered other costing methods, the three main approaches that were found as not being appropriate for the product that the company is offering are process costing, activity-based costing, and variable costing. In process costing, it is expected that the company would embark on a process of having to trace and accumulate all direct costs, as well as allocate indirect costs associated with the manufacturing process (Drury, 2006). Activity-based costing (ABC) is an approach that seeks to identify all activities, which are then assigned cost concerning the products being delivered to the consumers. Variable costing is an approach that seeks to ensure that variable costs are assigned to inventory to determine the pricing of products offered to consumers (Kimmel, Weygandt, & Kieso, 2010). Each of the costing systems considered failed to create a front through which to ensure that the cost margins are minimized with the aim being towards creating a much better connection to the customers.

Ethical Considerations 

The primary ethical consideration associated with costing that can relate to the case of Nexus Systems is the fact that it may focus on an absorption costing method. Although the technique is not illegal, it is not ethical, taking into consideration that it creates a front through which the company appears as being much more profitable when compared to its actual status. That means that for the company to maintain its ethical standards, it needs to enhance its usage of the job-order costing system with the sole focus being towards minimizing the cost margins that it is experiencing with regard to meeting some of its profitability projections.

Capital Budgeting 

The use of capital budgeting within Nexus Systems will be important towards evaluating the inflows, which are the total costs of manufacturing, and the outflow, the expected earnings from the sale of the widgets. By evaluating the inflows and outflows, it will be much easier for the company to determine whether the expected returns from the sale of the widgets meets the set benchmark. In this case, the evaluation will seek to determine whether the company is able to sell at least 60 widgets monthly to meet its sales targets. In the event that the company is not able to meet the set outflow of 60 widgets, that would mean that investment in the product may not be as viable as may be expected.

Decision Using IRR 

The use of internal rate of return (IRR) will help in making a decision on whether to proceed with the production of the widgets. The use of the IRR will help in determining the rate of return associated with production and sale of widgets. The rate of return will be compared to the minimum required rate of return, which is approximately 60 widgets monthly. The expectation is that this will help in determining whether Nexus Systems would be able to sustain the manufacturing and sale of the widgets. In case the IRR is lower than the minimum, Nexus Systems would make the decision to focus its investments on other products that would have greater impacts on the company’s financial performance.

References

Drury, C. (2006).  Cost and management accounting: an introduction . Cengage Learning EMEA.

Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2010).  Accounting: Tools for business decision-makers . John Wiley & Sons.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2009).  Managerial accounting: tools for business decision making . John Wiley & Sons.