Write about Samantha Shoes
Samantha Shoes is a company that deals in the manufacture and distribution of ladies
shoes. It deals in both retail and wholesale. Various shoes require different kinds of production
processes which incur different costs. These costs are classified in different ways . These
classifications and calculations have different impacts on both sales and income.
Cost accounting involves the procedure of collecting, tabulating, analyzing and
reorganizing the information in a way that gives various options to the management to choose
from. The firms and decision makers are mostly in need of information on the most efficient and
convenient way of production. The information is needed to control the costs of production and
other costs related to the production of goods. These costs can be fixed or variable.
There are several ways of costing techniques used in costing products from a
manufacturing firm. The following are the ways of costing products from a manufacturing
industry.
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Activity based method of costing involves the identification of selected activities in an
industry and attaches the cost of selected activity with materials of all items and services in
accordance with the real intake by each. This method attaches more costs which are indirect to
costs which are direct. (Velmurugan, Manivannan , 2010).This may explain the high cost of
Alicia shoes which retail at 139.96 dollars.Traditional ways of costing concentrated only on the
cost of producing a product while ABC method of costed and valued the cost of failing to
produce a product on time i.e. the cost of waiting for a particular part needed in the production
of the unit. This explains why some products may be valued less than others. ( Drucker, 1999)
Process costing is a system that follows and combines direct products costs and assigns indirect
cost of a manufacturing process. It attaches average costs to units of production and it’s contrary
to job costing which gauges individual costs of manufacturing a unit. (Jae, Joel, Siegel, 2009,
2000, 1997) Process costing uses averages in production cost, this gives an average cost per unit
and the incomes, sales and cost per unit are relatively uniform. The diverse prices of Samantha
shoes rules out the use of process costing in production costing.
Variable costing is also known as the direct cost method or marginal cost method. It’s a
stock valuation that uses production costs as costs of product. It mostly involves calculations of
direct labor, direct material and variable part of production overhead. Fixed production overhead
is not treated as part of manufacturing cost. The cost of a unit does not include the cost of fixed
overhead. This creates excessive profits and gives rise to differences in sales and selling prices.
Absorption costing is a valuation system that includes all the production costs i.e. it
includes the fixed production expenses. Absorption costing assigns part of fixed production
overhead costs to each unit produced together with the variable cost of production. It includes all
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production cost. Under absorption method of costing, profits are lower and costs per unit are
higher because of the calculations in product costs.
The major difference between absorption costing and variable costing is the way cost is
absorbed in the units produced. In variable costing, fixed cost is not absorbed in the unit
produced This undervalues the real cost of producing the unit and it gives more profit.
Absorption costing includes all costs including the fixed cost. Due to the inclusion of all costs,
the value of producing a single unit increases and the profit margin decreases.
References
Velmurugan, Manivannan, S. (2010) “The Success and Failure of Activity-Based Costing
Systems.” Journal of Performance Management 23.2 (2010): 3-33. Business Source Complete.
Web. 15 Mar. 2012.
Drucker, P. (1999) F.Management Challenges of the 21st Century. New York: Harper Business,
Jae, K., Joel, G. Siegel (2009, 2000, 1992). Modern Cost Management and Analysis 3rd Ed.
Barron’s Education Series, Inc. ISBN 978-0-7641-4103-4
