Question
Think about a company you know. This could be an employer now or in the past or a company you admire. Consider its business activities and the type of products and services offered. Based on what you have learned so far, write a short paper that reflects on the different costing methods and speculates on how they might apply to your selected company.
Specifically, you must address the following rubric criteria:
Company Overview: Identify the company you selected and provide a brief overview of its business.
Is it a manufacturing, merchandising, or service organization?
Costing Methods: Compare the job order and process costing methods and explain how each of these can be applied to the company.
How could the costs differ if one method is chosen over the other?
Factory Overhead: Outline possible indirect or overhead costs the company may need to account for and identify the type of costing the company might use for these costs.
If the company decides to use activity-based costing (ABC), what are some activity bases (cost drivers) it might use to allocate these costs?
Recommendation: Based on your analysis, recommend a costing method for the company, and explain why you think this method will work best for the business.
What to Submit
Submit your assignment as a 2- to 4-page Microsoft Word document. Sources should be cited according to APA style.
Specifically, you must address the following rubric criteria:
Company Overview: Identify the company you selected and provide a brief overview of its business.
Is it a manufacturing, merchandising, or service organization?
Costing Methods: Compare the job order and process costing methods and explain how each of these can be applied to the company.
How could the costs differ if one method is chosen over the other?
Factory Overhead: Outline possible indirect or overhead costs the company may need to account for and identify the type of costing the company might use for these costs.
If the company decides to use activity-based costing (ABC), what are some activity bases (cost drivers) it might use to allocate these costs?
Recommendation: Based on your analysis, recommend a costing method for the company, and explain why you think this method will work best for the business.
What to Submit
Submit your assignment as a 2- to 4-page Microsoft Word document. Sources should be cited according to APA style.
Answers
Answered by
GPT-4o mini
# Company Overview: Nike, Inc.
Nike, Inc. is a globally recognized leader in the design, development, manufacturing, and marketing of athletic footwear, apparel, equipment, and accessories. Founded in 1964 as Blue Ribbon Sports and officially becoming Nike, Inc. in 1971, the company is headquartered in Beaverton, Oregon. Nike operates primarily as a merchandising organization, relying heavily on partnerships with various manufacturers worldwide for producing its goods before marketing them through a vast retail network. With a mission to "bring inspiration and innovation to every athlete in the world," Nike emphasizes quality, performance, and cutting-edge designs in its products, catering to both professional athletes and everyday consumers.
## Costing Methods: Job Order vs. Process Costing
When analyzing costing methods, we can categorize them primarily into **job order costing** and **process costing**.
### Job Order Costing
Job order costing is used when products are manufactured based on specific customer orders, and each order can be distinctly identified. Nike could apply job order costing in situations where they produce customized products, such as limited-edition footwear or specialized team uniforms. The costs involved, such as direct materials, direct labor, and overhead, can be tracked precisely for each job.
### Process Costing
In contrast, process costing is appropriate for companies that produce goods in large quantities that are homogeneous. Nike, despite being known for custom products, predominantly benefits from process costing when it comes to mass-produced items, such as standard shoes or apparel lines. Costs are averaged over all units produced, which simplifies cost tracking for production runs.
### Cost Differences
The choice between job order and process costing can have a significant impact on the reported costs. Under job order costing, Nike would see specific cost tracking for unique orders, which could lead to higher apparent costs per item due to the individualized materials and labor. By contrast, process costing would typically provide a lower average cost per unit due to the distribution of the total costs across a larger number of units. This could enable Nike to price products more competitively in their mass-market offerings.
## Factory Overhead Costs
Factory overhead includes indirect costs associated with the production environment that cannot be traced directly to individual products. For Nike, these may encompass:
- **Depreciation of manufacturing equipment**
- **Utilities for production facilities**
- **Salaries of supervisory staff**
- **Maintenance costs of production machinery**
Given Nike’s extensive manufacturing network, overhead costs could be significant. In terms of costing methods for these overhead expenses, Nike might choose to allocate them based on labor hours, machine hours, or overall production volume, depending on the chosen costing method.
### Activity-Based Costing (ABC)
If Nike opts for activity-based costing (ABC), it could allocate overhead costs based on specific activity drivers to achieve a more accurate product cost. Some potential activity bases could include:
- **Machine hours used in production**
- **Number of production runs**
- **Labor hours devoted to design and development**
- **Materials handling operations**
- **Quality control tests performed on batches**
Using ABC can help Nike achieve a more granular understanding of costs, allowing for better pricing strategies and profitability analysis.
## Recommendation
Based on the analysis, I recommend that Nike ultimately adopt a **hybrid costing model** that combines elements of both job order costing and process costing. Given Nike's extensive product range that includes both mass-produced lines and custom orders, utilizing job order costing for specialized products and process costing for their standard offerings could provide a comprehensive view of cost allocations across their diverse portfolio.
In addition, integrating activity-based costing would enhance accuracy, providing insight into how various activities impact overall costs. This approach supports strategic decision-making, particularly in product pricing, budgeting, and resource allocation – essential for maintaining Nike’s competitive edge in the ever-evolving athletic market.
By leveraging a hybrid model, Nike can cater to both its customized merchandise's unique requirements while also streamlining costs associated with its high-volume production, ultimately contributing to better operational efficiency and profitability.
Nike, Inc. is a globally recognized leader in the design, development, manufacturing, and marketing of athletic footwear, apparel, equipment, and accessories. Founded in 1964 as Blue Ribbon Sports and officially becoming Nike, Inc. in 1971, the company is headquartered in Beaverton, Oregon. Nike operates primarily as a merchandising organization, relying heavily on partnerships with various manufacturers worldwide for producing its goods before marketing them through a vast retail network. With a mission to "bring inspiration and innovation to every athlete in the world," Nike emphasizes quality, performance, and cutting-edge designs in its products, catering to both professional athletes and everyday consumers.
## Costing Methods: Job Order vs. Process Costing
When analyzing costing methods, we can categorize them primarily into **job order costing** and **process costing**.
### Job Order Costing
Job order costing is used when products are manufactured based on specific customer orders, and each order can be distinctly identified. Nike could apply job order costing in situations where they produce customized products, such as limited-edition footwear or specialized team uniforms. The costs involved, such as direct materials, direct labor, and overhead, can be tracked precisely for each job.
### Process Costing
In contrast, process costing is appropriate for companies that produce goods in large quantities that are homogeneous. Nike, despite being known for custom products, predominantly benefits from process costing when it comes to mass-produced items, such as standard shoes or apparel lines. Costs are averaged over all units produced, which simplifies cost tracking for production runs.
### Cost Differences
The choice between job order and process costing can have a significant impact on the reported costs. Under job order costing, Nike would see specific cost tracking for unique orders, which could lead to higher apparent costs per item due to the individualized materials and labor. By contrast, process costing would typically provide a lower average cost per unit due to the distribution of the total costs across a larger number of units. This could enable Nike to price products more competitively in their mass-market offerings.
## Factory Overhead Costs
Factory overhead includes indirect costs associated with the production environment that cannot be traced directly to individual products. For Nike, these may encompass:
- **Depreciation of manufacturing equipment**
- **Utilities for production facilities**
- **Salaries of supervisory staff**
- **Maintenance costs of production machinery**
Given Nike’s extensive manufacturing network, overhead costs could be significant. In terms of costing methods for these overhead expenses, Nike might choose to allocate them based on labor hours, machine hours, or overall production volume, depending on the chosen costing method.
### Activity-Based Costing (ABC)
If Nike opts for activity-based costing (ABC), it could allocate overhead costs based on specific activity drivers to achieve a more accurate product cost. Some potential activity bases could include:
- **Machine hours used in production**
- **Number of production runs**
- **Labor hours devoted to design and development**
- **Materials handling operations**
- **Quality control tests performed on batches**
Using ABC can help Nike achieve a more granular understanding of costs, allowing for better pricing strategies and profitability analysis.
## Recommendation
Based on the analysis, I recommend that Nike ultimately adopt a **hybrid costing model** that combines elements of both job order costing and process costing. Given Nike's extensive product range that includes both mass-produced lines and custom orders, utilizing job order costing for specialized products and process costing for their standard offerings could provide a comprehensive view of cost allocations across their diverse portfolio.
In addition, integrating activity-based costing would enhance accuracy, providing insight into how various activities impact overall costs. This approach supports strategic decision-making, particularly in product pricing, budgeting, and resource allocation – essential for maintaining Nike’s competitive edge in the ever-evolving athletic market.
By leveraging a hybrid model, Nike can cater to both its customized merchandise's unique requirements while also streamlining costs associated with its high-volume production, ultimately contributing to better operational efficiency and profitability.