Aunt Connie’s Cookies Firm’s Cost Accounting Systems

Subject: Accounting
Pages: 3
Words: 781
Reading time:
3 min
Study level: College

Aunt Connie’s Cookies can use cost accounting in various ways. Costs are applied to each product based on the extent to which that product causes cost to be incurred. In their production process costs is applied to product using a single predetermined rate based on a single activity measure. Multiple activities are identified in the production process that is associated with costs.

One of the most important operating decisions that Aunt Connie’s Cookies must make is the costing decision. Costing refers to the assignment of a cost to a product provided by the company. A company’s long range survival depends on its costing. In the long run, the firm’s costing must be minimum, adequate to reward the investors. If the firm’s revenue consistently fails to cover costs and provide a satisfactory profit, the investors will seek new opportunities and the firm will fail.

The cost factors play an important role in pricing and its influence in pricing varies with the circumstances. In some pricing decisions costs play only a secondary or tertiary role. For instance, in liquidation sale, costs are relatively unimportant. On the other hand, the impact of the cost factors is great in some pricing decision (Horngren, Foster and Datar, 2003).

The manufacturing cost of product is calculated using activity-based costing and the company has three direct manufacturing cost categories- direct materials, direct manufacturing labour and direct machining costs- and three indirect manufacturing cost pools-ordering and receiving, testing and inspection, and rework- in its accounting system. Aunt Connie’s Cookies treats machining costs as a direct cost of product because it is manufactured on machines that are dedicated to the production. The following table summarizes the activity cost pools, the cost driver for each activity, and the cost per unit of each cost driver for each manufacturing cost pool.

  1. Direct material costs as varying with the units of product produced
  2. Direct manufacturing labour costs as varying with direct manufacturing labour-hours and
  3. Ordering and receiving, testing and inspection, and rework costs as varying with their respective cost drivers.

However accurate the completion estimate is with respect to conversion costs depends on the care, skill and experience of the cost accountant and the nature of the conversion process (The ICFAI University Press, 2004).

Estimating the degree of completion is usually easier for direct materials needed for a completed unit and the quantity of direct materials for a partially completed unit can be measured more accurately. In contrast, the conversion sequence usually consists of some basic operations for a specified number of hours, days or weeks, for various steps in assembly, testing, and so forth. The degree of completion for conversion costs depends on what proportion of the total conversion costs needed to complete one unit or one batch of production has been devoted to units still in process (Horngren, Foster and Datar, 2003).

Instead of providing a pricing tool, costs in this case serve primarily to indicate the profitability with which a product might participate in an established market at the current or predicted future market price. Or, if the costs of a product prohibit it from being sold in the competitive market at a satisfactory profit, management is asked to discontinue the production of the product or discover ways to produce and market it less expensively (The ICFAI University Press, 2004).

Product variety, despite the fact that it enhances sales volumes, requires rather sophisticated synchronization between supply and demand. To be able to achieve this stated objective, businesses need to appreciate the impact of the pricing decisions on customer buying behavior, customer purchase decisions, and also have an extensive need to manage their prices and inventories jointly.

Aunt Connie’s Cookies being Multi product, there is imminent need to understand the consequences of pricing on revenue streams. It is believed that a range of products help manufacturers to finally differentiate their products, thus giving every customer a preferred product. The establishment of a strong correlation between pricing and inventory having its direct impact on business bottom lines has made pricing a very challenging decision to make in a multi-product environment. The two issues that need to be again addressed are – 1) impact of pricing on customer behavior which leads to an understanding of multiple dimensions of customer’s reactions to past, current and future prices & 2) customer preferences to substitutes (Eliyahu and Goldratt, 2004).

Reference list

Eliyahu, M. & Goldratt, J. C. (2004). The Goal – A Process of Ongoing Improvement. MA: North River Press Publishing Corporation P:60,61.

Horngren, C., Foster G. & Datar, S (2003). Cost Accounting: A Managerial Emphasis. Sydney: Pearson Education, 2003 pg. 212-251.

The ICFAI University Press (2004). Introduction to Management Accounting. Hyderabad: The ICFAI University Press.