Financial and Management Accounting

Ralph Kern, controller of Bennett Body Company, received a memorandum from Paul Bennett, the company’s president, suggesting that Kern review a magazine article and comment on it at the next committee meeting. The article described the Conley Corporation’s cost accounting system. Bennett Body was a custom manufacturer of truck bodies. Occasionally, a customer would reorder an exact duplicate of earlier body, but most of the time some modifications caused changes in design and hence cost.

Which system is better at controlling cost?

Conley adopted a standard cost system for the measurement of cost in its accounting costing system. Standard costs are based on carefully predetermined amounts. These amounts are calculated from the historical data or from the newly devised estimates. These amounts are then used to prepare the budget for the product costing. Besides that, the purpose of standard costs is also used to plan for the labor cost, material requirements and overhead estimates. These three elements are all crucial in the calculation of the total production costs for Conley.

Standard costs can be used as the expected performance for the production department so that a benchmark on how the operation should go about can be determined. This is crucial for the management so that they can measure the performance as well as a means to revise the standard set before hand. If the standard that has been set before is too high, perhaps the management can use the performance result to revise back the standard.

Top management will gain benefit from using the standard cost as it helps in their tasks in planning, controlling, coordinating, organizing and motivating. Standard cost helps them to plan for the future operation of the production, coordinate the resources to achieve the objectives of the company as well as organizing the resources. This can lead to a better control of the cost of operation in the company. Besides that, standard cost can also help the management to achieve the standard that has been set.

In comparison between standard and budget cost, standard cost is focused on the unit of production, emphasizes more on the cost reduction and is used mainly for controlling.

Since Conley incorporated the standard cost system in their company and Bennett do not incorporate any standard cost system, Conley has the advantage over the Bennett in terms of controlling the cost of the production.

How, if at all, should Bennett modify its present system?

Since Bennett main operation concentrates on manufacturing customized trucks, they could still maintain using its job costing. This is because each model that they produce may not be applicable for future demands and they occasionally receive orders that require changes on previous model.

But, in order for them to improve its costing system, perhaps they should incorporate standard job costing. This would greatly reduce their recordkeeping and paperwork costs and gives the management a proper measure of performance, since they can compare the actual cost of production against the standard cost that has been established. Standard job costing allows the incorporation of variances, and this would make a better measure for operation control, as the management may be able to make thorough investigation into the operation of the company. Besides that, the management could also prepare estimates of the production costs for the purpose of future planning.

Bennett could also incorporate a mixture of costing standard, between process and job costing. Some parts of the custom trucks that they produced may have the same size and shape and thus are standard across all models. For instance, the tyres and the side and rear mirrors could have the standard size and shape. In measuring the production of these standard parts, perhaps they could adopt the standard process cost. This would greatly improve their current cost system and provide a means for the management to better estimates the production cost.

Besides that, Bennett should also benchmark against other custom manufacturers, as this will give a true reflection of the performance of the company.

With the advent of technology, perhaps the use of IT system could eliminate some of the manual operations that have been used to keep record of the actual production costs. The usage of IT system for costing could greatly enhance the process of keeping track of the records and helps the management to get statistics in a timely manner, thus leads to better decision making as well as more effective operations.

The Bennett costing system is based on the absorption costing compared to the Conley cost system where it is based on the variable costing. As such, Bennett included the fixed overhead cost into the calculation of product cost. With regard to the variable overhead costs, perhaps Bennett should consider external factors that may affect the overall overhead costs. Factors such as minimal standard wages might affect the efficiency variance. If the standard wages that is used not applicable to the current economic situation, the employees may not perform up to the maximum capacity, thus contribute to reducing the efficiency rate.

With respect to the fixed overhead cost, factor such as the price of diesel or petrol, which is beyond the control of the company may also affect the budgeted fixed overhead. A sudden rise in price may increase the cost of operating the machines, thus resulting in higher variance in capacity.