Recognition in the Market for Qualityâ€Free Samples for Students

Question: Discuss About the Recognition in the Market for Quality? Answer: Introduction The company Cravings for Cakes Pty ltd. has recognition in the market for the quality manufacturing of cakes and pastries that delights the taste buds of the customers. Initially, which marks to be a period that is twenty years ago, the company just has the capability of offering only three ranges of the products which were pies, finger buns and lamingtons. Large volumes of these product lines were being produced with immense hard work. Twenty years ago, the company was not technological advanced and therefore, focused more on being labor intensive and adopted the usage of simple machineries that were not technologically advanced. However, talking about the current scenario, along with the production of the pies, finger buns and lamingtons, the company has excelled in the manufacturing of the food products such as Danish pastries, donuts and vanilla slices. Over the past twenty years, the company had undergone various changes in terms of accounting, management, production process and technology. There is an increased emphasis on the quality and delivery performance. This is the reason that the company now witnesses technological advancements in the term of installing of computer-controlled mixing machines and ovens that has shifted the focus of the company from being labor intensive to capital intensive. However, the company faces certain issues as the profits are being declining, over the years. There is a sudden need for the company to enhance the sales volume, in particular for those products that ensures high marginality Over the last twenty years, the company has witnessed changes in various aspects related to the cost structure, accounting, management, production processes and technology. The cost structure of the company has changed majorly as the company has shifted its focus from being labor intensive to capital intensive. The cost structure of a company refers to the part of fixed as well as variable costs that occurs during the operations of a business (University of California, 2016). It comprises of fixed cost as well as variable costs. Fixed cost refers to those cost that shall be generated irrespective of the sales volume and profit margins. On the other hand, the variable cost is the one that differs or varies on the basis of the level of the output produced. For the company Craving for Cakes Pty Ltd. the costing structure constitutes of fixed and variable costs. The fixed cost of the company constitutes of the rent as well as the salary of the employees on monthly basis. No matter what t he output level of the company is, the company has to incur these cost for the continuity of the business(Grayson, 2017). Talking about the variable cost, there are certain cost that constitutes to be the one which includes the cost for direct material, overheads, period cost, sunk cost, transaction cost and direct labor. The variable cost of the company Cravings for Cakes depends upon the level of output that is being produced. For the production purpose the variable cost is related to the ingredients (sugar, wheat, spices, wheat, eggs, flavors, salt), supplies and packaging materials which includes packing paper, ribbons, containers, tape etc., transaction cost that is incurred while procuring the raw materials and also when the final delivery has to be made to the customers (Keythman, 2017). The reasons for the change in the cost structure of the company Cravings for Cakes Pty ltd. were: Growing Automation: The growth of automation in the past few years have been a major reason in the change of the cost structure. This is so because the control systems for the sake of managing the machineries and production related equipments have been upgraded and have become advanced to such an extent that now the company has shifted its focus from labor intensive to become capital intensive(Autogrow, 2017). Earlier, the company was labor intensive and was not involved in heavy usage of the machineries. but, with the change in time, and growth in the automation, the company installed computer-controlled mixing machines as well as the ovens that replaced a lot of direct labor operations. With the installation of new and upgraded technological devices the company witnessed a change in the cost structure. Greater Product Diversity: With the increase in the product lines of a company, the cost structure of a company changes. Same is the case with the company Cravings for Cakes, as twenty years ago, the company was only involved in the production of three food products which were pies, finger buns and lamingtons. These products were being produced at large volumes. But gradually after years, the company has added more products in its range which are Danish cookies, donuts and vanilla slices. As the product line increases, the need for raw material such as ingredients, packing materials, electricity etc. also increases, which contributes in the change of the cost structure (Sschoute, 2011). Investment in Downstream Activities: downstream activities refers to the activities that the company is engaged in after the production of the final desired product. The aim is to assist the sales of the product produced. In order to stimulate and increase the sales volume, the Company Cravings for Cakes, invested in the downstream activities. For designing such activities, the sale steam was welcomed to give their viewpoints as they have an idea about the demand and preferences of the customers. The company is now focusing on enhancing its performance and quality and desires to offer value in return of the money of the customers. The company has engaged its resources in promotional activities in order to get an estimate that whether the customers are ready to pay higher prices for their products or not and about the taste and preference of the customers that shall result in increased sales in the future. hence, the cost incurred for promotional and downstream activities has changed the cost structure (Thompson, 2017). The Company Cravings for Cakes produces a large volume of Lamington and Danish pastries. Whether the current costing system understates or overstates the cost of Lamington and Danish pastries can be ascertained through the following factors: Cost Assignment: The cost is being assigned to each product through the way of direct and indirect cost. These direct and indirect cost includes various other costs such as cost of ingredients, depreciation or repairing of the equipment used for production, electricity, and direct labor cost. The cost per unit of each of the food product can be calculated by adding the material used, the direct cost of labor and the overhead expenses. Overhead expenses are not direct expenses but are incurred in the process of carrying out the production. It depends on the demand of the particular product (BusinessDictionary, 2017). Comparison of Overheads: Overhead expenses includes the cost that is incurred while doing the business. It refers to the expenses that are categorized as non-labor expenses (Amelia, 2015). In comparison to the Danish pastries, the overhead expenses of the food product Lamington are higher under present costing system. Distribution of Overhead: The overhead rate consists of two types which are plant wide overhead rate and departmental overhead rate. The plant wide overhead rates are preferred mostly by the small sized organizations as it enables the company to apportion the overhead product cost for manufacturing. It is calculated by dividing the manufacturing overhead expenses with the cost driver level (Averkamp, 2017). On the other hand, departmental overhead rate is preferred when the company is engaged in the various product lines, as it is depended on the direct as well the indirect overhead costs of the department. It is calculated by dividing the departmental manufacturing overhead with the departmental cost of driver (AccountingTools, 2017). The company is using traditional costing system. In this costing system, total cost of production is calculated based on the volume of production of different products. This system does not consider the actual amount of resources that are being used for manufacturing any product. The system allocates resources equally to all types of products irrespective of difference in manufacturing process. Lamington: Based on current costing system used by company, overhead cost of Lamington is greater as it is produced in large quantities. It can be said that company is overstating cost of Lamington. This is because current costing system fails to consider saving in machine setup and material handling cost owing to large volume. Danish Pastry: The company is understating the cost of Danish Pastry. This is because traditional costing system used by company does not take into consideration cost incurred due to complex procedure and large machineries setup cost needed for production of Danish Pastry. Activity based accounting refers to a framework that enables the organization to allocate the different activities as well as assign the production cost that is related with the activities. This type of accounting also enables to allocate the resources which are required for the production of the products and services depending up on the definite utilization (Investopedia, 2017). There are certain ways through which the activity based accounting is able to overcome the deficiencies of the existing costing systems, which are as follows: Accurate Product Cost: the activity based costing emphasizes on the cause and effect relationship and hence, enables the organization to have an accurate and reliable result regarding the cost of its product. When compared with the existing costing systems, the ABC system ensures the organization that the increased number of activities, increases the cost. In the case of the company Cravings for Cakes, the existing accounting system is overstating the product Lamington and is understating Danish pastries. In such case, the adoption of the ABC system shall help in knowing the accurate cost for each product. Information About Cost Behavior: the ABC system helps in identifying the area of increasing costs and helps in reduction of the costs which results in no product value addition. The managers involved in the ABC system has the skills and authority to manage the overhead cost by limiting the fixed overhead costs. For the company, the ABC system will help in creating a balance with the overhead costs of the products being produced, especially the Lamington and Danish pastries of which the overhead cost of is overstating and understating. Optimum Utilization: the ABC system ensures the optimum utilization of resources. For the company, the ABC system is beneficial as it will ensure maximum output with the use of minimum output and that too with a decreased cost. The system allocated the required resources and identifies the action plan activities that reduces ambiguity and ensures a reduction in prices as well (Agarwal, 2017). The factors influencing the choice of Activity Based Costing are (Maelah Ibrahim, 2007): Overheads: overheads refer to the indirect expenses incurred while doing the business. The ABC system must be adopted when the overheads are higher as well as the company or organization is involved in offering various product lines. Business Type: If the company is involved in the business of making customized products for the customers, then the ABC system shall not be effective as the business process is simple and the simple job costing can be used. Cost Drivers: Cost Drivers refers to the factors that drives the fixed and variable costs for a production process. These cost drivers increase with the increase in the number of activities involved in the production process. If the number of production activities is low, then ABC system is not favorable, as simple accounting methods shall serve the purpose (Nelson, 2017). References AccountingTools. (2017). Departmental Overhead Rate . Retrieved from https://www.accountingtools.com/departmental-overhead-rate Agarwal, R. (2017). Advantages and Demerits of Activity Based Costing (ABC). Retrieved from Yourarticlelibrary.com: https://www.yourarticlelibrary.com/accounting/costing/advantages-and-demerits-of-activity-based-costing-abc/52617/ Amelia, S. (2015, February 6). 6 Easy Steps to Determine Your Baking Overhead Costs. Retrieved from Bakecalc.com: https://www.bakecalc.com/blog/6-easy-steps-to-determine-your-baking-overhead-costs/ Autogrow. (2017). Intelligent Automation . Retrieved from https://www.autogrow.com/ Averkamp, H. (2017). AC. Retrieved from https://www.accountingcoach.com: https://www.accountingcoach.com/blog/what-is-a-plant-wide-overhead-rate BusinessDictionary. (2017). Cost assignment . Retrieved from https://www.businessdictionary.com: https://www.businessdictionary.com/definition/cost-assignment.html Grayson, L. (2017). What Impact Does a Fixed Cost Have on a Company's Operating Leverage? Retrieved from Smallbusiness.chron.com: https://smallbusiness.chron.com/impact-fixed-cost-companys-operating-leverage-36124.html Investopedia. (2017). Activity-Based Costing - ABC . Retrieved from https://www.investopedia.com/terms/a/abc.asp Keythman, B. (2017). List of Variable Costs for a Bakery. Retrieved from Yourbusiness.azcentral.com: https://yourbusiness.azcentral.com/list-variable-costs-bakery-24210.html Maelah, R., Ibrahim, D. N. (2007). Factors Influencing The Activity Based Costing (ABC) Adoption In Manufacturing Industry. Investment Management and Financial Innovations. Nelson, S. L. (2017). Should You Use Activity-Based Costing In A Small Business? Retrieved from Dummies.com: https://www.dummies.com/business/accounting/should-you-use-activity-based-costing-in-a-small-business/ Sschoute, M. (2011). The relationship between product diversity, usage of advanced manufacturing technologies and activity-based costing adoption. The British Accounting Review, 120-134. Thompson, S. (2017). Upstream and Downstream Activities for a Marketing Director. Retrieved from Chron: https://smallbusiness.chron.com/upstream-downstream-activities-marketing-director-74470.html University of California. (2016). Cost Structure. Retrieved from https://gsvc.org/wp-content/uploads/2016/10/Cost-Structure_Business-Model-Generation.pdf