Making Decisions With Cost Systems

Differentiated between different costs and analyzed their relationships. Evaluate a scenario in which standard cost systems are in use by using direct labor and the materials’ variances calculations.

Imagine meeting David Baker, the owner of a T-shirt manufacturer, whose business produces T-shirts for local businesses and organizations where you live. David wants his business to grow considerably, though he knows that with growth comes many different costs, including increased labor costs, material costs, and maintenance on his building. He needs to know if there are ways he can continue to grow his company while cutting costs in the process. David knows that there are four main costs to consider (product costs, direct material cost, direct labor cost, and manufacturing overhead), and he knows that he must also consider his costs over time. But he is not sure if all of these costs are equally important, or if he should prioritize some costs over others. David has come to you for advice on how to facilitate the optimal growth of his company.

Consider how the classification of manufacturing costs will provide David with a better understanding of the current state of his business, and how it can inform effective financial decision making.

Categorize each of the following Cost Varieties by placing them within the Product Cost or Period Cost column/system.

Cost Variety

Product Cost

Period Cost

Advertising expenses for T-shirts

Depreciation on PCs in marketing department

Fire insurance on corporate headquarters

Fire insurance on plant

Overtime premium paid assembly workers

Factory building maintenance department

Factory security guards

Property taxes paid on corporate headquarters

Salaries of public relations staff

Salary of corporate controller

Wages of engineers in quality control

Wages paid to assembly-line employees

Wages paid to employees in finished goods warehouse

Once you have divided the Cost Varieties between the Product Cost and Period Cost systems, identify each product cost within the following appropriate sections: Direct Materials, Direct Labor, or Manufacturing Overhead.

Product Cost

Direct Materials

Direct Labor

Manufacturing Overhead

Finally, in a 1- to 2-page paper, provide at least two recommendations for which types of costs David should pay the most attention to in order to reduce costs. Include a rationale for each recommendation.