Southern Comfort is a small manufacturer of bedroom furnishing. Presently, the c

Question

Southern Comfort is a small manufacturer of bedroom furnishing. Presently, the company uses a job order costing system and full absorption accounting method for cost accumulation. Factory overhead is applied based on direct labor hours. The manufacturer produces canopy, platform, sleigh, day beds, and triple dressers. Southern Comfort has hired Mr. Jones, a management accounting consultant. His job is to advise the manufacturer’s owners on the accounting changes that would occur if the processes to manufacture the furniture were to be reengineered to a hybrid product costing system. What factors should he review in his analysis? What accounting changes would occur? Do you think that manufacturers are always successful in making such a conversion? Why or why not?

Explanation / Answer

Going by the type of products , it appears that a hybrid product costing system may be a better option for Southern Comfort instead of Job order costing system.

The company is at present producing 5 types of prodcuts. Mr Jones need to first understand how much of these products are custim made and how much are homogeneous . He also needs to analyze the various Direct costs and overhead costs the products are consuming and the major cost driver of the resources consumed as Overhead.

If the customization of prodcuts is less , Mt Jones can opt for Job costing for the custome made orders and Process Costing for the homogeneous products. This will make the work of collection, tracking and reviewing costs is a much easier and effective way in place of the current detailed job costing for each job.

As the products are of varies nature, it is unlikely that the overhead allocation on Direct Labor hours is justifiable. Instead ABC costing methodology to Allocate overheads dased on actual resources or activites consumed from supporting departments will be a much better proposition. Mr Jones needs to revamp this rea after thoroughly reviewing the Overheads and the Activities.

It is true that Manufcturers may not always be successful in such conversion. Success in such conversion depends a lot on correct costing process analysis, consideration of practical aspects of implementing a new system, the change management capability of the management, the acceptance of change by the management itself and the management willingness to invest in new technology (IT or other) required for such conversion. If all the factors work favorable, there is no reason for failure of such conversion.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.