ACC202-33-2 Assignment- Costing Methods

ACC202-33-2 Assignment- Costing Methods

Company Overview

Companies select their costing methods based on the process and business activities. The costing method adopted by a company further depends on whether the company is a manufacturing, merchandising, or service organization. For the discussion of this paper, Amazon Inc. is the selected company. The company is an American multinational company that focuses on artificial intelligence, digital streaming, e-commerce, and cloud computing (Türegün, 2019). The company handles many products, and thus, it is possible that the company can apply all costing methods at a given point. It manufactures some products and at the same time merchandises products from other companies and those produced by the company. As a merchandiser, the company retails discounted products over the internet.

The retail section targets four primary user groups: content creators, businesses, merchants, and consumers. Customers convene at the company’s online platform to make orders on various products through which they are served with convenience and variety. The company’s online platform allows transactions between customers and third parties. As a manufacturer, Amazon Inc. produces and sells the Kindle e-reader and tries to offer customers the best value from the products through free shipping packages and low prices. The costing methods applicable to the company’s merchandising and manufacturing functions are below.

Costing Methods

The products manufactured by Amazon Inc. are subjected to job order costing. Notably, the company manufactures some products based on customer specifications and special orders. Job order costing is different from process costing in that it does not involve providing costs for each process or manufacturing department. As already mentioned, Amazon Inc. engages in both manufacturing and merchandising and in that course, both process and job order costing methods are used. Job order costing is used in their manufacturing plant, where costs associated with raw materials, labor, and other expenses are taken down (Ives et al., 2019). On the other hand, the company utilizes process costing for its product categorization, merchandising events on its website, and selling products externally.

The selection between job order costing and process costing in Amazon Inc. is influenced by the required documentation. For instance, the process costing approach is applied when commodities under production are identical and produced in large quantities in their manufacturing department (Kunath & Winkler, 2018). Mainly, the production of Amazon Essentials and Mama Bear, their two brands of baby wipes, are subject to process costing. The products have distinct market audiences, implying that they can be customized for each market. In such an instance, job order costing can be considered to enhance the customization of the products. However, it is challenging and inefficient to use job-order costing because more steps could be used for many relatively identical products in the cost accounting process. For instance, the use of job order costing to record the dealings associated with MacBook Air, a product manufactured by Apple but retailed by Amazon Inc., under job costing will result in the following. They will have to source for cost aspects associated with the product from Apple company, which will lead to conflicts with Apple, which may think the company is pursuing competing with them.

Factory Overhead

Amazon Inc. engages all three classifications subject to this discussion of service organizing, merchandising, and manufacturing. Therefore, there is a need to track factory overheads across all these three dimensions. There should be an accounting of overhead costs for products offered by the company irrespective of whether they are merchandise or manufactured items. It is worth noting that proper accounting for factory overheads also requires accounting for direct labor, direct materials, and other expenses associated with the products (Baker & Davè, 2021). Amazon Inc.’s factory overhead assessment is made for the basic wipes that the company manufactures. The factory overheads associated with these products include packaging, shipping costs, and branding.

Additionally, the factory overheads are supplemented by employee remuneration and rental space for assemblage. The company is obliged to track all these factory overheads and classify them for proper accounting. For instance, the floor space used in the production of baby wipes in the manufacturing sector is used in apportioning assemblage costs to the baby wipes produced. The allocation of costs is also based on the number of hours workers spend in the manufacturing section to allocate the remuneration costs to the product. Thus, factory overheads are assigned to various sections in Amazon Inc., be it manufacturing, merchandising, or service departments, based on pre-determined criteria such as floor space and time spent.

Different methods are used to account for factory overheads. One major criterion used is Activity Based Costing (ABC), whereby an overhead rate allocates factory overheads to different activities (Quesado & Silva, 2021). Amazon has incorporated ABC costing into its plant-wide production overhead rate strategy. It is worth noting that this strategy plays a critical role in the company in ensuring the manufacturing section is efficient. The strategy captures all the expenses incurred by the company while manufacturing products and allocates them to necessary activities, making the costing process simple. Further, the method is applicable for multiple productions of items in which the final product costs are assigned to different factory departments. For example, the fabrication department is responsible for making products, while the assembly department is responsible for putting together the product. Notably, the company’s factory overheads are shown in these two departments under the strategy.

Recommendation

Amazon Inc. is a big multinational company that performs well in the market, including making it to the top five multinational companies in the U.S. The company offers different business models and a wide range of products. It operates merchandising, manufacturing, and service functions to enhance its profitability. Despite the excellence that is shown by the company based on this analysis, there is still more room to improve its profitability even further. Thus, recommendations are made herein on enhancing their agility by focusing on costing methods.

First, the company should consider adopting different costing approaches for different company functions. Currently, the company uses a company-wide cost strategy under one control. Despite saving costs for the company, especially in the manufacturing department, the strategy could be inefficient in other parts, such as retailing and service. Thus, the ABC costing technique is recommended only for the manufacturing section. The other two functions do not incur factory overheads, and incorporating them into the overall costing strategy could increase inefficiencies. Second, the current approach of a single plant-wide strategy should be used for the merchandising and service functions. A single method has already proven to be effective; it is no doubt that the company’s success will be enhanced through this recommendation.

References

Baker, W. M., & Davè, D. (2021). Using Financial Accounting Throughout Supply Chain  Management: Now Is the Time. IUP Journal of Accounting Research & Audit  Practices, 20(1).

Ives, B., Cossick, K., & Adams, D. (2019). Amazon Go: disrupting retail? Journal of  Information Technology Teaching Cases, 9(1), 2-12.

Kunath, M., & Winkler, H. (2018). Integrating the Digital Twin of the manufacturing system into  A decision support system for improving the order management process. Procedia  Cirp, 72, 225-231.

Quesado, P., & Silva, R. (2021). Activity-based costing (ABC) and its implication for Open Innovation. Journal of Open Innovation: Technology, Market, and Complexity, 7(1), 41.

Türegün, N. (2019). Impact of technology in financial reporting: The case of Amazon Go. Journal of Corporate Accounting & Finance, 30(3), 90-95.

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Think about a company you know. This could be a current or past employer or a company you admire. Consider its business activities and the type of products and services offered. Based on what you have learned so far, write a short paper that reflects on the different costing methods and speculates on how they might apply to your selected company.

Specifically, you must address the following rubric criteria:
• Company Overview: Identify the company you selected and provide a brief overview of its business.
o Is it a manufacturing, merchandising, or service organization?
• Costing Methods: Compare the job order and process costing methods and explain how each of these can be applied to the company.
o How could the costs differ if one method is chosen over the other?
• Factory Overhead: Outline possible indirect or overhead costs the company may need to account for and identify the type of costing the company might use for these costs.
o If the company decides to use activity-based costing (ABC), what are some activity bases (cost drivers) it might use to allocate these costs?
• Recommendation: Based on your analysis, recommend a costing method for the company and explain why you think this method will work best for the business.

Guidelines for Submission
Submit your assignment as a 2- to 4-page Word document. Sources should be cited according to APA style.