What type of company would use a process costing system

Running head: COST FLOWS IN AN ORGANIZATION 1

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COST FLOWS IN AN ORGANIZATION

Cost Flows in an Organization

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Cost Flows in an Organization

Company Description

The Wrigley Company operates in the manufacturing industry. Wrigley produces chewing gums that are sold throughout the world. The company owns 14 factories located in different countries. Each factory implements six distinct manufacturing processes in the production of gum. I am a divisional manager at the manufacturing department in one of the factories. The main role of a divisional manager is to oversee the implementation of the six manufacturing processes. The first process is known as melting, and it involves melting the gum base. After that, the mixing process is conducted, where the gum base is mixed with sweeteners and flavors. The third process is known as rolling, and it entails reducing gum thickness to the appropriate size. The scoring process is then implemented, and the gum is cut into the desired shape. After that, the gum undergoes the conditioning process that entails cooling it to ensure consistency. The last process involves packaging the gum and preparing it for shipping to different regions (Heisinger, 2009).

Cost Accounting Process Used

Wrigley’s Company would use process costing as it attributes costs to each process of production. This way, the management would be able to analyze resource utilization in each process, which would result in specific strategies to improve performance in each process. The process costing system is a technique in cost accounting that collects and assigns manufacturing costs to the units produced. The process costing method is applied when the products are identical in nature (Fisher & Krumwiede, 2015). In the manufacturing process, products may pass through different processing operations, each occurring within a different organization. The process costing system attributes costs to each process by taking the total cost of production and averaging it over the units of production to get the cost per unit.

Manufacturing Costs involved in Production

There are various costs incurred in the manufacture or Wrigley gums, and they are categorized into direct materials, direct labor, and manufacturing overhead. Direct materials costs are incurred in the mixing, rolling, and packaging department, and they comprise of the raw materials used in the creation of the product. They include the cost of gum base, sweeteners, flavors, conditioners, and packaging materials. Direct labor costs refer to specific wages incurred to produce goods. Direct wages are incurred in each of the six steps of production at Wrigley. In order to determine direct wages in a process costing environment, direct wages is allocated equally to all the products. Manufacturing overhead costs refer to indirect costs accrued during the manufacturing process. Examples of manufacturing overhead entail staff salaries for maintenance personnel, managers, quality control personnel, materials, management, and janitorial staff (Weygandt, Kimmel, & Kieso, 2015). The staff salaries are considered to be manufacturing overhead as labor hours are incurred at a constant rate regardless of production levels. Other examples include supplies no related to the production of the gum, utilities, rent, property taxes, and depreciation on equipment.

Ideal Method for Allocating Manufacturing Overhead

Various techniques may be applied in allocating manufacturing overhead. They include allocating overhead through the direct labor hours against a product or the number of machine hours used in the manufacture of a product (Weygandt, Kimmel, & Kieso, 2015). In this case, allocating overhead via machine hours is more appropriate as they form a significant proportion of total costs. For instance, if Wrigley Company has indirect costs amounting to $200,000, and incurs 40,000 in machine time usage, the overhead rate would be $5 per machine hour. The overhead rate is used consistently to determine manufacturing overhead for various processes.

References

Fisher, J. G., & Krumwiede, K. (2015). Product costing systems: finding the right approach. Journal of Corporate Accounting & Finance, 26(4), 13-21.

Heisinger, K. (2009). Essentials of managerial accounting. Cengage Learning.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Managerial accounting. Wiley.