This memorandum gives guidelines on the accounting for costs that are associated with the production of frames for the Winnebago home. The technique that will be used to estimate the cost of the product is job order costing.
In this case, Freightliner needs to use job-order costing because it constructs unique homes. These homes are not homogenous. Therefore, each home will be considered a job, because they have unique features. For instance, the standard floor plan for each house differs from one another. This hinders the ability of the company to carry out mass production of the homes. Some of the direct materials that are used in the production process are lumber and plywood. These are used for the construction of “wall panels, roofs, and floor trusses, as well as other items such as windows and doors” (Hirano 197).
Some of the other direct raw materials that are used in the construction of the Winnebago home are “shingles, exterior finishes such as stone, stucco, siding, or brick, kitchen cabinets, cement for the foundation, and bathroom fixtures” (Hirano 198).
It is also worth mentioning that the cost of materials for each home would differ due to specific customer requests. For instance, a variation in the size of the house or the type of material chosen would create a major difference in costs. Bigger homes will require more materials than smaller homes. The geographical location of where the homes will be constructed also creates a difference in the cost of the product. For instance, homes constructed in states such as New England are likely to be more expensive, because of basements, than homes constructed in a state like Florida.
Also, homes constructed in South Carolina are likely to be more expensive than those that are constructed in Ohio, because of the front porches involved. The location of the home can also affect the choice of windows and insulation materials. Some may require more expensive windows and insulation materials than others. Thus, the geographical location plays a significant role in the costing of the product. Finally, the taste and preferences of the customers also create a variation in the cost of products (Hirano 198).
Under the direct labor costs, the company will incur two categories of direct labor costs. First, the company employs direct laborers in the manufacturing plants. These are workers who work directly in the production plants of the company where the various components are manufactured. The wages that are paid to these workers are directly added to specific homes that they construct. The company also makes use of subcontracts.
At the home sites, subcontractors are hired to carry out some tasks, and their costs are included in the fixed price of the contract. This can also be traced back to the specific home that is built. Therefore, the subcontractors are not employees, and the management of the company does not need to monitor the number of hours worked. This is based on the fact that the contract price is independent of the number of hours worked.
A review of the financial statements of the company reveals several overhead costs. Examples of the production overheads are “land acquisition costs, land development costs (e.g., grading and clearing), road construction costs, underground utility installation costs, swimming pools, golf courses, and tennis court” (Rios-Mercado and Rios-Solis 206). Thus, these costs cannot be traced easily to specific homes, but they are important in the construction of Winnebago homes.
A review of the financial statements indicates that the overhead costs are assigned to the products based on the number of homes constructed in a community. Also, homes that are of high value are assigned more overhead costs than those of low value. Therefore, the process of allocating overheads takes into account both the number of units produced and the quality of the houses. Assigning the overhead cost to the homes is important because it helps in determining the total cost of a completed product.
Even though job order costing helps the company in determining the cost of the frames, the company relies heavily on the customer’s willingness to pay, and not the cost of the product. This is based on the fact that the company deals with the production of luxury homes. Luxury products do not follow the law of demand. The law of demand states that there is an inverse relationship between price and quantity while holding other factors constant. The demand curve of a normal commodity is downward sloping. In the case of a luxury commodity, the demand curve slopes upward. Thus, the price will tend to go up as demand rises.
This gives the company the ability to sell at double or triple the cost of the product, depending on the demand. This implies that during periods of high demand, the company can sell at lower prices. Thus, the company has significant power to vary the price, depending on the demand. In other words, the prices of the houses are determined by value to the customers and competitive conditions. The company also has a built-in program that compares the prices of their products to those that are offered by the competitors. Therefore, in as much as the company does not use cost-plus pricing to value their products, the job order costing technique provides a guide in making management decisions.
The journal entries for the annual production cost for the Winnebago home are summarized in the table below.
|Raw materials |
Accounts payable (cash)
To record the purchase of raw materials on credit (cash)
|Overhead cost pool |
To record indirect production costs
|Work in progress |
Overhead cost pool
To record the allocation of overhead to the finished goods
|Work in progress |
To record labor charges
|Work in progress inventory |
Raw materials inventory
To record the transfer of raw materials to work in progress
|Finished goods inventory |
Work in progress inventory
To record the completed product
Bhimani, Alnoor, Charles Horngren, Srikant Datar, and George Forster. Management and Cost Accounting, England: Pearson Education Limited, 2008. Print.
Drury, Colin. Management and Cost Accounting, Boston: Cengage Learning, 2008. Print.
Hirano, Hiroyuki. The Just-in-Time Production System, Florida: CRC Press, 2009. Print.
Rios-Mercado, Roger and Yasmin Rios-Solis. Just-in-Time Systems, New York: Springer, 2011. Print.
Vanderbeck, Edward, and Maria Mitchell. Principles of Cost Accounting, Boston: Cengage Learning, 2015. Print.
Weygandt, Jerry, Donald Kieso, and Paul Kimmel. Managerial Accounting: Tools for Business Decision Making, London: John Wiley & Sons Ltd, 2010. Print.