Three companies and describe what they do

Please select three companies and describe what they do. Select a major component of their production process and speculate on how to calculate unit costs.  Identify what you think are their variable, fixed, and mixed costs of each.

 

I would like to talk about following 3 companies (all are based out in the USA)

  1. My Pillow – This company’s primary product is bed pillow, although they offer other products we will focus on the pillow (https://www.mypillow.com/)

 

  1. Chipotle Mexican Grill – This is a fast-casual Mexican restaurant (https://www.chipotle.com/)

 

 

  1. Oral B – They offer many oral care products, but we will primarily focus on manual toothbrush (https://oralb.com/en-us)

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For My Pillow – they sell retail and online. Broadly they have 4 cost components

Raw Materials – Cotton and fabric – I would assume this should be variable

Operating expenses – Utilities, machine expenses – This should be variable

Rent and employee cost – salaries and benefits for Permanent employees and rent should be fixed expense

Shipping – Shipping to retail store and shipping directly to the customer – this should be mixed cost

 

My Pillow should use process costing – since it obtains raw materials, makes the pillow and then ships them out. Lots of homogeneous products are manufactured, hence I believe they use process costing.

Raw material which is cotton and fabric may vary in price based on the season or supply in the market, hence I believe, the cost is variable.

Rent for the factory and employees working in it should be fixed, at least for a year, so I think this cost is fixed.

Operating expenses would include any maintenance for the machines and utilities cost such as electricity and water, based on the usage the cost would vary.

Another expense is shipping cost, this is mixed because the products being shipped to retails must be going in bulk and in the truck, but most probably the products which are being shipped directly to customers, are being shipped via UPS, so the cost is mixed in nature.

Now to calculate the cost we need to add up the following

(Total raw material cost + Operating expenses + Rent + wages for permanent employees) and then divide by total number of units (in this case pillows) produced = pillow cost without shipping cost

Then we can add the shipping cost separately. Price for Units being delivered to retail stores can be calculated as

= (total shipping cost (that is transport + any other cost) / number of units transported) + Pillow cost without shipping cost

And any online order where the product is being shipped directly to the customer via UPS. For those case, we need to add the UPS Shipping Cost + pillow cost without shipping cost

 

In case of Chipotle, it is a casual Mexican restaurant, that serves quick take outs, and I think we can apply job cost to calculate unit pricing.

They have raw materials (such as lettuce, rice, tortilla, chips and whatever else they use) – these expenses are variable based on the ingredients being used

Operational expenses or overhead that includes rent, cutlery etc, this can be considered to be fixed

Employee expenses can be considered to be fixed expenses, permanent or not, Chipotle opening hours are fixed, and the number of employees at the restaurant is fixed, hence this is fixed cost.

Now how do we calculate the cost of any order?

Rental, utilities, and salary for employees these are fixed cost, and overhead expenses and ingredients expenses would be specific for the order and these are variable costs for a specific order.

Now say we place an order this is how we would calculate the cost –

Ingredient cost + (total fixed cost / time required to prepare the order) + (overhead expenses / number of order served)

 

 

The oral B manual toothbrush manufacturing process can use process costing. Since the raw material needs to be molded and then packed before those could be shipped.

So there are 3 components – raw material, packaging and shipping

Raw material should be fixed cost

Rental, machinery, and wages for employees – these costs should be fixed

Packaging material cost also should be fixed

Maintenance for machines and utility cost might be variable

Shipping cost should be fixed, considering products would be shipped to retail only

We can use process costing to calculate the cost of one unit because in this case many toothbrushes would be produced together. And the calculation would be –

(Raw materials cost + rental + utilities + wages + shipping + maintenance cost) / Number of units produced = cost of one tooth brush

 

 

 

References

Retrieved February 18, 2018, from https://www.mypillow.com/faq

Retrieved February 18, 2018, from https://www.chipotle.com/

Retrieved February 18, 2018, from https://oralb.com/en-us

 

Job Order Costing and Process Costing

Job Order Costing and Process Costing

 

Job order costing and process costing are two different methods of cost calculation. Job order costing is mainly used for customized services or products, say you want a portrait done or you want some plumbing work done at your home, you are going to get a job order costing. But when you go shopping and buy your mobile phone or TV – those prices are based on process pricing. We are going to discuss the benefits, similarities, and differences between these two methods. 

Keywords – job order costing, process costing

 

 

 

 

 

 

 

 

 

 

Job costing is used when a direct order for a product or service is received from the customer. And the goods or service is produced per customer instructions the job costing method would be used to determine the cost.

Any custom order from the customer, say companies building custom yachts or custom private jets, even custom furniture or car servicing companies can use job costing method. Here is one example –  I take my car to Jiffy Lube for the oil change and I request synthetic oil. The quantity of oil costs $15 and the labor to change the oil costs $20 – they have other overhead expenses too. Such as the rent of the garage, utilities, the cost for the person handling the billing.

Let us make some assumptions to make this easier to calculate –Say the person who changes the oil – takes 30 mins to handle one request

So in a whole day, he would be able to handle 14 jobs ( 1 hr lunch, so effectively he works 7 hrs)

Rent of the garage is $80 per day, so $10 / hr and Electricity costs -$5 / HR. And the accountant’s labor cost say $2.5

The job cost sheet will look like for this 30 mins oil change job –

Direct Labor Material Cost Overhead Grand Total
Time Rate Total Qty Cost Total Total  
30 mins $20 $10          
      1 $15 $15    
            $10  
              $35

Benefits of job costing can be used when it is easier to quantify direct material cost, direct labor cost, and overhead cost. Although it is important to remember it is easier to calculate direct material and direct labor costs for most of the jobs but the overhead cost cannot be calculated accurately for a specific job. The labor cost and material cost is usually the bigger component than the overhead cost component. The job costing sheet is easier to produce and maintain.

According to David Ingram, job costing has following benefits –

Assigning costs – since business owners can easily calculate how much profit business earns from each job, it is easy to determine to do more of the profitable jobs

Reporting – for job order since all the costs for labor material and overhead are recorded it is easier to track the performance of the individual and team.

 Process Costing is used for products with long production cycle. Products such as Pepsi or Coke or steel from iron ore are good examples of products for which companies could use process costing method.

For example, to make coke the plant has to get the raw materials, bring them to bottling plant, and then bottle them up in the correct ratio. So, before the final product comes out there are long processes.

Here is another example – Vedanta has many mines globally, let us talk about one specific one in India. It operates one Zinc mine. First, it had to bid for the mining rights. So first they paid money to obtain rights to extract the metal ore. They have labor cost and another overhead cost such as their machines and transport vehicles to operate the mine. And then they transport the ore to plant and extract/process the final material from the ore.

Each step of the process of obtaining final metal from the ore consists small jobs and each job has material cost, labor cost and overhead cost associated with them.

It is possible to create job cost sheet for each step of the process and then add them up to get the process cost.

To produce a process cost for Vedanta, we will need to do a job cost for extracting ore out of mine, the second job costing would be for transporting the ore to plant, then processing the ore and producing metal could be another job cost. When we add all these job costs, we will get final process cost.

According to Osmond Vitez there are two benefits of using process costing

Easy to use – In process costing the business owners can allocate the overhead costs equally between the different processes along with the labor and material cost and obtain the total cost to produce the homogeneous product. Then it becomes easy to calculate the cost of one unit.

Flexible – process costing is flexible because it is easier to calculate which step (in a process) costs how much. So business owner can add or subtract a process out and easily find out a way to increase profitability.

 

The job costing and process costing are different in a sense that process costing could be sliced into multiple jobs costing since each long process to produce the homogeneous products has steps which could use job costing.

 

 

The difference between these job costing and process cost –

 

 

Job Costing Process Costing
For job costing it is possible for business owners to get break up of labor, material and overhead for each job For process costing the manager or business owner can get cost for a part of process or a group or department, and this is mainly used in continuous manufacturing settings
For job ordering costing it could be required to keep track of exact material, labor and overhead But for process costing it is not required and that makes it easy to keep records
With job costing it is easier for business owner or managers to track individuals performance With process order costing managers or business owners can track department or workgroups performance

 

 

 

 

 

 

 

 

 

 

References

Ingram, D. Advantages & Disadvantages of Job Order Costing & Process Costing.

Retrieved from http://smallbusiness.chron.com/advantages-disadvantages-job-order-costing-process-costing-3082.html

Vitez, O. What Are the Advantages & Disadvantages of Process Costing?

. Retrieved from http://smallbusiness.chron.com/advantages-disadvantages-process-costing-4098.html

Example of companies using job order costing, process costing and activity based costing

Please identify a company that you believe would use job order costing and another company that you believe would use process costing.  Identify a third company that uses activity-based costing allocations.  Discuss why each might use the method you identified with them. Compare and discuss the similarities and differences you see in the companies.

 

 

I believe Firestone or jiffy Lube are the types of companies which might use job order coasting. In case you are not familiar with these companies, these are essentially workshop or service centers for your vehicle. You can take your car there for the oil change or tire change and other automotive needs.

Vedanta is basically an Indian mining company that has mine all over could be described as a company that uses process-based costing. Since this is a mining company that extracts ore for different metals and then process those ores to get the metal out of the ore, cost allocation for such a company is the perfect example for process-based costing.

Cognizant Technology Solutions is an IT services company, they do not have any product, they customize software for their clients, and I think they can use activity-based costing.

To begin with, the reason why  Jiffy Lube can use job order based costing because say I take my car to Jiffy Lube for oil change and I request synthetic oil. The quantity of oil costs $15 and the labor to change the oil costs $20 – they have other overhead expenses too. Such as the rent of the garage, utilities, cost for the person handling the billing.

Let us make some assumptions to make this easier to calculate –

Say the person who changes the oil – takes 30 mins to handle one request

So in a whole day, he would be able to handle 14 jobs ( 1 hr lunch, so effectively he works 7 hrs)

Rent of the garage is $80 per day, so $10 / hr

Electricity costs -$5 / HR

And the accountant’s labor cost say $2.5

The job cost sheet will look like for this 30 mins oil change job –

Direct Labor Material Cost Overhead Grand Total
Time Rate Total Qty Cost Total Total
30 mins $20 $10
1 $15 $15
$10
$35

Vedanta has many mines globally, let us talk about one specific one in India. It operates one Zinc mine. First, it had to bid for the mining rights. So first they paid money to obtain rights to extract the metal ore. They have labor cost and another overhead cost such as their machines and transport vehicles to operate the mine. And then they transport the ore to plant and extract/process the final material from the ore.

Each step of the process of obtaining final metal from the ore consists small jobs and each job has material cost, labor cost and overhead cost associated with them.

It is possible to create job cost sheet for each step of the process and then add them up to get the process cost.

Cognizant might use activity-based costing because for a project it uses consultants from different geographic locations. Some of the consultants have travel expenses, some do not. While billing to the customer, Cognizant cannot quantify how much money is spent on training resources or on the travel of each resource ( one might be coming from NYC to Miami FL and another might be coming from Jacksonville FL, so the expenses are different) and then billing rate for the consultants might be different. It is much easier for Cognizant to add up all overhead expenses and expenses for resources and then bill client. So once these consultants travel, the stay at a place, so we can see the overhead is really big in this situation to build a custom software solution. Hence a business model like Cognizant can use activity-based costing.

Vedanta the mining company and Jiffy Lube the oil changing company are vastly different in terms of their end product. Jiffy Lube works with readily available product, so their man input is the labor. But a company like Vedanta, where machines and the factory workers are equally important goes thru many steps to get the final product. But each step such as transporting the ore to the plant or extracting ore from the mine could be calculated using job-based costing.

On the other hand, Cognizant mostly does not have any product related cost, it has overhead which is huge, that includes travel, food, relocation, accommodation expenses, training expenses and on top of that the billing of the consultants, which is very different than prior 2 businesses.

Balance Sheet and Income Statement

The balance sheet and the income statement have some missing numbers and we are going to find calculate those. Before we start just wanted to clarify what a balance sheet is – A Balance Sheet is a statement of the financial position of a business which states the assets, liabilities, and owners’ equity at a particular point in time (Ward, 2017). And according to the Motley Fool an Income Statement measures a company’s financial performance over a specified period of time. Also known as a profit and loss (P&L) statement, statement of operations, or statement of income, it is one of three major financial statements used by companies to track revenues and expenses. In following pages we are going to find out the missing values and then the following page will contain the explanation and calculation, how I found the value.

Keywords: balance sheet, account statement

 

 

Balance Sheet and Account Statement

ASSETS  
CURRENT ASSETS    
Cash   225,971
Contracts receivables   505,050 A=Total Current Assets – ( Cash+ Other Assets)
Other assets   162,847  
Total current assets   893,868
LONG TERM ASSETS    
Equipment   286,792  B= Total assets – Total current assets
TOTAL ASSETS   1,180,660  
LIABILITIES AND STOCKHOLDERS’ EQUITY    
CURRENT LIABILITIES    
Accounts payable   257,335  C= Total Current Liabilities – ( Line of Credit + Accrued Expenses + Income Tax Payable + Deferred income taxes)
Line of credit   85,000  
Accrued expenses   72,495
Income tax payable   46,660
Current portion of notes payable   31,747
Deferred income taxes   78,460
Total current liabilities   571,697
LONG TERM LIABILITIES    
Notes payable (long term)   172,467
TOTAL LIABILITIES   744,164
STOCKHOLDERS’ EQUITY    
Common stock 62,000  
Additional paid-in capital 63,862  
Retained Earnings 310,634    D= Total Stockholders equity – ( Common Stock + Additional paid in capital)
Total stockholders’ equity   436,496  
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY   1,180,660  E= (Total liabilities + Stockholders equity)

Definition and Explanation of Each Account Line 

  1. Current asset is an item on an entity’s balance sheetthat is either cash, a cash equivalent, or which can be converted into cash within one year (Bragg, 2018). In the given situation. “Total Current Assets” is given and that include “Cash”, “Contracts receivables” and “Other assets”.  Hence “Contracts Receivables” (A) = Total Current Assets – (Cash + Other Assets)
  2. Total Assets include “Total currents assets” and “Long Term Assets” in this case Equipment is only long term assets. Hence , Equipment(B) = Total Assets – Total current assets
  3. Current Liabilities are supposed to be paid off within 1 year, and this includes “Accounts Payable”, “Line of Credit” , “Accrued expenses”, “Income Tax payable”, “Current portion of notes payable” and “Deferred income taxes”. Hence Total Current Liabilities = “Accounts Payable” + “Line of Credit” + “Accrued expenses” +”Income Tax payable” +”Current portion of notes payable” + “Deferred income taxes”.

Therefore : Accounts Payable ( C) = “Total current liabilities – (“Line of Credit” + “Accrued expenses” +”Income Tax payable” +”Current portion of notes payable” + “Deferred income taxes”)

  1. Stockholders Equity = “Common Stock” + Paid in Capital + Retained Earnings

Therefore Retained Earnings (D) = Stockholders Equity – (Common Stock + Paid in Capital)

 

  1. Now for the last point TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (E) , we get the figure by adding “Total Liabilities” which is total of “Current liabilities” and long term liabilities and Total stockholders’ equity

In short TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (E)=  Total Liabilities + Total stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Statement
     
Contract Revenues 5,146,862
   
Contract Costs 4,532,519  Contract Costs ( F) = Contract Revenues – Gross Profit
     
Gross Profit 614,343
   
General and Administrative Expenses 322,356
   
Operating Income 291,987
   
Other Expense 25,770
   
Income Before Provision for Income Taxes 266,217
Provision for Income Taxes 115,450 Provision for Income Taxes (G) = Income Before Provision for Income Taxes – Net Income
     
Net Income 150,767  

Retained Earnings, Beginning Balance (H) = Retained Earning, Ending Balance – Net Income

   
Retained Earnings, Beginning Balance 159,867
     
Net Income 150,767  
     
Retained Earnings, Ending Balance 310,634
   

 

 

 

Definition and Explanation of Each Account Line of Income Statement –

  1. We can calculate, Gross Profit = Contract Revenues – Contract Costs. Hence, Contract Costs ( F) = Contract Revenues – Gross Profit
  2. We can calculate “Net Income” = “Income before Provision for Income Taxes” – “Provision for Income Taxes”(G). Hence, Provision for Income Taxes (G) = Income before Provision for Income Taxes – Net Income
  3. And for the last point the Retained Earnings, Ending Balance = Retained Earnings, Beginning Balance (H) + Net Income. Hence , Retained Earning, Beginning Balance (H) = Retained Earning, Ending Balance – Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

Ward, S. (2017, October). Balance Sheet Definition and Examples.

Retrieved from https://www.thebalance.com/balance-sheet-definition-2946947

The Motley Fool. What Is an Income Statement?. Retrieved from https://www.fool.com/knowledge-center/income-statement.aspx

 

Bragg, S. (2018. February). Current Asset. Retrieved from https://www.accountingtools.com/articles/2017/5/4/current-asset

 

Differentiate Balance Sheet and Income statement of 2 retail companies

I am going to compare JC Penny and Macy’s. If you are in USA probably you already know they are in retail business, although Macy’s has a way better balance sheet than JC Penny’s.

I got the data from MSN Money. To obtain Macy’s financial here at https://www.msn.com/en-us/money/stockdetails/financials/fi-126.1.M.NYS

And for JC Penny’s financials can be found at https://www.msn.com/en-us/money/stockdetails/financials/fi-126.1.JCP.NYS

 

I will attach a spreadsheet with information of Income Statement, Balance Sheet and cash flow for Macys and JC Pennys. Please check.

Now let us compare the important financial figures from these 2 companies –

From Income statement we can see – Macy has gross Revenue of 25778 and gross profit of 10157 while JC Penny’s gross revenue is 12547 and gross profit is 4476

 

From Balance sheet, we can see –

Macy has short-term or current asset worth of 7626 in form of inventories and cash. And total current liabilities or payments to be made within 1 year is worth 5647. Hence the current ratio is 7626 / 5647 =

 

For JC Penny the current asset is 4097 and that includes cash on balance sheet and inventories mainly. And the current liabilities is 2419. Hence the current ratio is 4097/2419 =

 

Macy has long-term asset worth of 1225 and long-term liabilities worth 9882

JC Penny has 5217 worth of long-term assets and 5541 worth of long-term liabilities

 

From the Cash flow statement, we can see Macy has added 188 worth cash end of the financial year but JC Penny has actually lost 13 from existing cash reserve.

 

All these figures are in Billions as provided in the MSN money.