Dream Chocolate Costing System, Case Study Example

Dream Chocolate (D.C.) is in dire need of a costing system. This costing system is crucial in enabling management identify and monitor areas that increase the company’s expenditures. However, before identifying the most ideal costing system that D.C. can employ, it must first understand the competitive environment, identify the current company strategy and products that it produces, the types of cost information that the company requires and what kind of information that the most ideal costing system should be able to provide.

Competitive Environment

D.C. receives considerable pressure from all the new and existing large chocolate companies. Some of the competition is based online, where competitors offer their custom services to the client online. D.C. has failed to capitalize on this new market segment. The big companies offer more competition in the market. However, owing to their bulk production, they are able to save on costs and as such have a lower-priced standard-quality chocolate bar. This makes D.C.’s price uncompetitive in a harsh market.

Production Strategy

D.C. has been performing below its capacity. This is depicted in the manner in which the company has the potential to execute large orders so as to maximize its profit. The company has opted to diversify its product so as to capture as many segments of the market as they possibly can. The company has managed to execute their plan by employing a strategy that targets different segments of the market based on the variety of their products.

Response to the Changing Environment

The company has realized the need to employ more staff so as to be able to meet the growing demand and increase in the size of orders. The company seeks to employee specialized labour which will be achieved by training of the new prospects, a process that will take 4 months. This would enable DC produce its products in bulk while still maintaining high quality standards observed within the company. This is achieved by producing 3 distinct sizes of bars, which vary between organic and non-organic depending on the size and the customer’s requests and specifications.

Information Needs

In order for D.C. to implement an efficient costing plan, then they first have to identify the kind of costing information that may be helpful in determining the cost of production. It is important that D.C. identifies the cost of all the ingredients required to produce the different types of chocolate bars. It is also important to know the costs associated with the different sizes of the chocolate bars. The costs of labour are also direct costs that need to be considered. The overhead costs also add up the cost of production.

A New Costing System

A new costing system should ideally provide management with all the operational costs as well as the performance costs. All the expenditures that are directly or indirectly associated with the production of the merchandise should be identified by the costing system. Performance costs, such as marketing, sales efforts and public relations should also be identified by the new costing system. This should allow the manager to control the costs so as to achieve a desired outcome.

Costing Systems; Pros and Cons

D.C. can choose from a variety of costing systems that are generally used in production costing. They are five, and they include;

Pros

This kind of costing system assigns overhead costs to the different products in production based on pools f costs. This costing system calculates overhead rates as per each activity pool, as opposed to using the whole factory. This means that specific actions can be analysed to help predetermine the overhead rates.

It also allows D.C. to eliminate costs that are not relevant to the decision-making process. It allows the manager to have information that may affect the decision making process. Organization-sustaining costs are not reflected on the production cost per unit of product produced.

Cons

The implementation of such an elaborate system is time consuming. This is also a costly undertaking.

These systems are not required by the law. As such, the costs of designing, implementing and maintaining such a system would be an unneeded cost to the company.

Process Costing

This is a costing system where costs are allocated based on homogenously produced items. These items are defined by their similarity.

Pros

In the case where there are homogenous products, then this kind of costing system is easier to implement. This is done by counting the number of processes that a particular product has gone through.

It allows the creation of a flexible production process. This is done by the addition and/or removal of a process as desired by management.

Cons

It may aloe for the inclusion of non-production costs in the costing process, leading to costing errors.

There has to be the extra identification and calculation of equivalent units that appear as ‘Work-in-Progress’ in the companies accounts.

Job-order Costing

This costing system allocates and records the actual costs of material and labour that has been incurred in the course of executing a specific job. This is the used to create a pre-determined rate that is assigned as overhead to consecutive jobs.

Pros

The manager can determine the amount of profit or loss that has been realized on an individual job. This is most ideal for businesses that handle custom services and goods.

The manager has the ability of keeping track of all his employees and measure performance in the form of productivity, cost-control and efficiency.

This cost system is adequate in the determination of the average costs for each unit produced. It employs the following formula in calculation:

Unit Cost = Total Cost of the Job / the total number of units produced in the job

Cons

Employees have to keep track of all the materials and labour that is employed during the specific job. This provides for difficult record keeping.

Recommended Costing Approach

In order for D.C. to implement a proper costing system, it has to identify and keep track of all the material that is used in every job or order. This is important in the identification of the cost-pushers associated with the client’s custom product. This ensures that each job is properly evaluated in terms of costs and an adequate price is quoted for the client, ensuring profitability on every order taken in. As such, the recommended costing system to be adopted would be the Job-Order Costing

This costing system is ideal for D.C. owing to the nature of its business. D.C.’s production is mainly dependent on incoming orders by clients. As such, it is prudent to evaluate the cost of production for a given client, based on their specifications which determine the type and amount of ingredients to be used in the production of their order.

This costing system is also important is helping identify and keep track of costs incurred in production, helping management control them.

This costing system is also vital in tracking performance. This will help keep track of efficiency and effectiveness of both the structural and human resources. This means that resources can be better managed to realize maximum output and potential.

Special Ingredients

Owing to the fact that special ingredients are not part of the general production costs and are specific to a client’s orders, these ingredients will be identified and their costs added to the specific client’s job. This ensures that such costs are applied only where they are truly incurred.

Summary and Implementation

It is recommended that D.C. implement a Job-Order Costing system. It is also recommended that the special ingredients be identified and their costs added to the specific client’s job or order. This would help Kay keep track of all his materials and resources, even the human resource. By keeping track of all the resources, he will be able to adequately allocate them as required by the given order or job.

Kay has to implement the following steps

• Identify all the material used in production and their associated costs
• Create a database of the required combination of materials and labour as per the give order or job
• Create an analysis software that can calculate and return the cost of producing 1 unit of a given product. This will also help in identifying the amount of profit realized per job or order.