Introduction
The two most astounding and important types of accounting are financial accounting and cost accounting. By Definition, it is clear that financial accounting is the name or branch of accounting deals with the financial functions or day to day transactions, while cost accounting is the name or branch of the accounting specifically deals with the cost of the material and manufacture the goods are concerned .
There are certain pre-requisites that associated specifically with the cost management functions of an organization, known as Labor, Materials and Overheads. All of these elements are essential for the analytical functions of the company . In this assignment, it is required to develop a hypothetical company that manufactures a product. It is also required to compute a perfect selling price accordingly, with the analysis of the labor, material and overhead cost. There are certain decisions that needed to be taken accordingly for the selling prices and costing functions. Apart from that, the application of Capital Budgeting would also be used in this particular assignment in order to get the hypothetical company a perfect match to retain in the industry. The name of the company is Electrical Vehicle Manufacturing, and the company is in the business of manufacturing and selling of Electric Vehicles. The company found a special order to deliver 30,000 units.
Analysis and Findings
Determining of Selling Price
Selling price is the most important aspect from the viewpoint of an organization, and it is equally beneficial for the customers as well. Customers of an organization attracts towards a specific product of a company merely due to its pricing structure in particular. Most of the times, high selling price would not create effectiveness for the company, therefore proper research is required before reaching over the decision of selling price .
Variable Cost: Variable Cost is the cost that associated with the raw material, labor and factory overhead that will be taken into account for the analysis purpose. It is the most important aspect that used by the companies to reach on a basic decision of costing. The variable cost that includes the raw material cost, labor cost and overhead cost is $ 90,000 per unit. The decision of variable cost based on the pure play method, in which the variable cost has been analyzed with the similar companies operating in the same line of business
Fixed Cost: Fixed cost is the cost that can never be neglected and mitigated. It will be same, no matter the company manufactures one unit or thousands of units . The Fixed Cost of the company is $ 400,000. This particular cost should have been taken into consideration for the analysis. The contribution margin based on the aforementioned variable and fixed cost analysis are as follows
The decision of selling price based upon the variable cost and fixed cost. In order to analyze that the company should be come up with effective manufacturing that will create economic benefits for the company in the near future. With the help of this particular analysis, it is clear that the Electric Vehicle Manufacturing would get certain added advantage from this particular aspect in the future as well.
Producing of Units to meet the selling Price
This particular part is associated with the Break Even Units of the company. It is associated with how many units should be manufactured by the company to meet with its selling price, and no profit is there. The formulas for Break Even Units are as follows
Units = Fixed Cost / Selling Price – Variable Cost
= 400,000 / 135,000 – 90,000
= 8.88 or 9 units
The analysis of the same is as follows
It means that the company has to manufacture at least 9 cars to have a net profit of ZERO, and to comply with the Selling Price accordingly.
Costing System best for the Company
It is not necessary that all of the manufacturing units would be sold in the market, and the desired or computed revenues can be attained. The decision of reaching over the revenue recognition function based specifically upon the research of demand and supply. In order to prevent the organization in having high cost, the best method that can work wonderfully well for Electric Vehicle Manufacturing is Activity Based Costing (ABC) Method. The main reason behind the same aspect is that through this particular method, organizations would manufacture the product according to its requirement. The decision may be based upon the demand and supply function of the company; however special emphasize will be associated with the requirements of the client.
Why Not Chosen
There are three other inventory costing function that will not work for Electric Vehicle Manufacturing in particular, and the names of the same are as follows
- First in First out Inventory Costing Method
- Last in First Out Inventory Costing Method
- Weighted Average Cost Method
All of the costing system are essential, and prescribed to use under specific laws of International Accounting Standards (IAS) and US-Generally Accepted Accounting Principles (US-GAAP), however it will not work for the hypothetical company, because there is not association of demand and supply function. The level of wear and tear would be on a higher scale while using any of the inventories costing function that will lead to minimize the financial belongings of the company. Therefore, this particular method should not be applied on Electric Vehicle Manufacturing Company.
Ethical Consideration of Costing Method and Capital Budgeting Example
The stance of ethical consideration is found in almost every part of the world, in fact in every field of the world. It is equally applied on the scenario of cost accounting and cost method as well . One of the basic ethical considerations that associated with the costing method is the association of labor cost with it. The variable cost analysis should be done in an ethical manner, and then make the selling price. Labors should be compensated according to the work they are doing or producing for the company. Capital Budgeting is an important aspect from the viewpoint of an organization, as it will analyze the future aspect of a company. In this hypothetical scenario, assume that the discount rate of 10% with below mentioned cash flow and initial outlay for the company
Initial Outlay = $ 1,200,000
Net Present Value (NPV), Internal Rate of Return (IRR) and Payback period would be used to assess the project. The computation of the same is as follows
The analysis is showing that the project will be in the favor of the company, and the company should proceed with the project, as the project has positive NPV and high IRR. The company has also a good payback period both with discounted cash flow and undiscounted cash flow. Hence, it is recommended to accept the project for the future consequences.
Conclusion
Cost Accounting techniques and methods have been used and examine in this particular assignment with the utilization of capital budgeting techniques. From this analysis, it is computed that Electric Vehicle Manufacturing should use the same selling price for their products, and should also accept the project because all the capital budgeting techniques are in the favor of the company, both in terms of dollar values and in terms of proportional as well.
References
G. S. Le Roux, . A. (2003). Basic Principles of Cost and Management Accounting. New York: McGraw Hill.
Hoque, Z. (2005). Handbook of Cost and Management Accounting. Chicago: Adventure Works.
Riahi-Belkaoui, A. (2001). Advanced Management Accounting. Chicago: Saga.
