Identification of the products with overstated costs and those with understated costs and Explanation of why the costs are misstated under traditional process costing.
The way by which Kota Mills manager use the ABC information to improve operations.
Explain how you would close the total variance; that is, identify the account or accounts that would be affected, and whether expenses in the accounts will be increased or decreased to adjust the records for the total variance.
Identification and describe questions Helen, the owner of Devine Denim, might have about April’s production costs.
Calculate whether the Haywood Mills offer should be accepted on financial grounds.
Discuss at least five qualitative factors that would affect the decision to keep, drop or outsource the polyester brocade.
Explanation of how lean thinking has been implemented and used.
Outline the benefits achieved by adopting lean thinking.
In this report, the different aspects of the costing of different organisation will be discussed. Then how lean thinking should be implemented and the benefits that can be procured by adopting lean thinking will be discussed.
The product with overstated cost under the conventional process of costing is 13 ounce of denim, and the products which are understated are 8 ounces and 16 ounces of denim. The reason for which understatement of 8 ounce of denim and 16 ounce of denim happened due to the lower allocation of direct labour and overhead cost than what actually incurred. On the other hand, the overstatement of 13 ounce of denim happens due to a higher allocation of overhead and direct cost than what incurred (Geiszler, Baker & Lippitt, 2017).
There are some significant ways by which the information from ABC can help to improve operations. Firstly, the cost driver of each cost is accurately identified, and this identification will help Kota Mills in controlling and monitoring all the costs of the business. This better cost control in operation increase the efficiency of the business. Secondly, the ABC information can help to identify the processes or products or services or different elements of operation which is not giving any value to Kota Mill and the business management can adequate steps to remove those elements from the business operation. Thirdly, the ABC information also helps to identify the strengths of the operation of Kota Mills by identifying the areas which incurring less cost than what is budget for by adequately calculating each activity cost. Fourthly, Kota Mills can aim for continuous improvement by using the ABC information as by thorough analysis of ABC information help to identify the areas which are performing less than the organisation expectation. Fifthly, all overhead costs of different activities can be accurately calculated, and this lead to the better budgeting and planning of the operation, which makes the achievement of the goals of the operation more comfortable to achieve. Sixthly, Kota Mills can also plan it’s pricing or product mix of its operation more efficiently according to the cost and profit information of the products from ABC information (Soekardan, 2016). Therefore, as it can be seen that from different aspects of the operation can be benefited from ABC information.
There are seven accounts which will be affected. The accounts which will increase are variable factory overhead cost, direct labour cost account and inventory account. The accounts which will be reduced are selling and administrative cost, direct material cost, fixed factory overhead cost and cost of goods sold.
The above April month’s variance report shows that some cost of production which are higher than what was budget for it and there are some cost of production which has incurred lower than what was budgeted for it. The costs which incurred more than what was budgeted for are variable factory overhead cost and direct labour as shown in the variance report that they are in negative due to incurring higher amount than what was budgeted for it. There are three other costs which have been incurred lower than what was budget for it, and these costs are direct material cost, fixed factory overhead cost and selling and administration overhead cost. The amount of selling and administration cost has shown the highest positive variance. In overall, the total cost of production has been $27 less than what was budgeted for.
As it can be seen that the cost of manufacturing at the current level of 450 bolts of polyester brocade cost around $82 but the company can procure polyester brocade at the cost of $55 per bolt from Haywood Mills, this lead to the conclusion that the Haywood Mills offer should be accepted on financial grounds as the cost of manufacturing is far higher than what Haywood Mills is offering.
The five qualitative factors that would affect the decision to keep or drop or outsource the polyester brocade will be discussed here. The first qualitative factor is the reliability of the supply in the tough situation is one factor that taken into account for this decision making like suppose if there some disturbance in the market which likely is the supplier to be able to supply these products. The second qualitative factor is the impact of the quality of the product that will be produced by Kota Mills by taking these decisions as Haywood Mills may have been able to offer the product at such low cost due to lower quality of material given by them. The third qualitative factor is the level of the material that can be procured through Haywood Mills as it is possible that in some situation, Kota Mills needed more material than before and it should be assessed whether Haywood Mills will be able to fulfil the demand (Yourarticlelibrary.com, 2020). The fourth qualitative factor is the impact on the competitive advantage of the business as to get the exact quality of the business; organisation sometimes has to disclose some formula which makes the material quality improved and this can be a big disadvantage to the strategic position of the business. The fifth qualitative factor is to find out whether there any hidden benefit of manufacturing polyester brocade which has been neglected in this assessment.
Lean thinking means a way of thinking by which organisation and management keep on thinking of a new way by which the business can reduce wastage and this lead to the increase in the sustainability of the business. In this report, it will be discussed how lean thinking can be implemented in Divine Denim and what all benefits that the business can get by implementing lean thinking in the business. In the end, the conclusion will be given which will include main finding of this report.
Figure 1: Lean Thinking Implementation process
(Source: Think Lean Six Sigma, 2020)
Lean thinking can be implemented by following some steps, and these steps will be discussed here. The first step which has been to be taken is the identification of the value from the point of view of the consumer of the organisation as the perceived value which the customers derived from products or services of the organisation can be increased. The second steps will be to value mapping in which identification of the process and the way by which the value of a product or service is provided to the customers is appropriately identified (Tezel, Koskela & Aziz, 2018). The third steps are to better the flow of the value to remove any functional barrier, which may have been lowering the value that the organisation is providing to the customers. The fourth step is to let the customer need and demand decide the product production estimation in the future period. This leads to better forecasting and planning of the business operation. The fifth step is to look out for the issue in the production always and after identification of those issues, look for the way to remove these issue. By following all these steps, Divine Denim can implement lean thinking in its organisation.
Lean thinking is used by the organisations in different ways. The first way is to build a working environment of the organisation in such way that it encourages the innovation and new ideas from the employee. The second way by which it is used is to brainstorming session in which the employees are given an issue of the organisation and they are asked to find its solution by constructive discussion. The third way is to find process of the organisation and then evaluate the benefits of each process and to find out whether there is actually any benefit of the process or not (Holmemo, Rolfsen & Ingvaldsen, 2018). Then the organisation also can implement it by giving incentive to the employee for new innovation which will lead to the better performance of the organisation. All these are some way by which the lean thinking is used.
There are many benefits which Divine Denims can get by adopting lean thinking, and these benefits will be discussed here. The first benefit is that lean thinking helps in the reduction of wastage in the operation of the business by finding new and innovative ways and this reduction in the wastage reduces the cost of the business. This lead to an increase in the sustainability of the business as the cost of the business reduces and profit of the business increases. Therefore, Divine Denim can get to increase their financial sustainability with lean thinking. The second benefit is that natural resources are better utilised by the business under the lean thinking and this lead to the business better fulfilment of the social responsibility of it. Therefore, Divine Denim can better handle their responsibility toward the society in which it works by adopting lean thinking. The third benefit is the increase in the efficiency of the business by better performance of the different process of the business.
Lean thinking’s another benefit is that it helps the business become more sustainable by finding different ideas and innovation by which business can become more sustainable than before by reducing the time that is taken by it to fulfil different requirement or process of the business. Therefore, Divine Denims could better its efficiency by adopting lean thinking. The fourth benefit is that the increase in the employee satisfaction as the unnecessary work increases the work of the employee and under this process, those unnecessary works can be identified and this will lead to the reduction of the employee workload. This leads to an increase in employee satisfaction. Therefore, Divine Denims can increase their employee’s satisfaction by adopting lean thinking.
The sixth benefit is the increase in the output quality of the organisation, and this happens as the reduction in the unnecessary workload and better and efficient work process of the organisation lead to a higher amount of time that is available to the business to finish each unit of output. This leads to a better quality of output produced by the organisation. Therefore, Divine Denim can better its clothing quality by using lean thinking. The seventh benefit is the increase in the growth of the business, and this is due to the fact that under lean thinking, less resource is needed to produce each unit of output and this lead to the organisation having higher opportunity than before to expand their business as they have more free resource than before (Pozzi et al., 2018). Therefore, Divine Denim can expand its business in the garment industry more quickly using lean thinking.
The eighth benefit is that by adopting the lean thinking the customer satisfaction can be increased as under this process, one of the aims is to increase the value of the customers and this lead to the better value through is provided to the customers as the focus is on the customer needs and requirements. This leads to the customer satisfaction which also helps to retain the customers. Therefore, Divine Denim can use the lean thinking process to better their customer relationship management which lead to the better customer retention and customer satisfaction. All these are some benefits which the business including Divine Denim can get by adopting lean thinking process.
In this report, the different aspects of the lean thinking process had been discussed like how it should be implemented or what its benefits are, and it had been found that the lean thinking has many benefits like increase in efficiency or reduction of cost and many more benefits like these. It had also been found out that there are five steps which have to be taken to implement lean thinking in the organisation.
In this report, the different aspects of the costing had been discussed and evaluated both theoretically and practically. Then, in the end, a report had been written about lean thinking.
Geiszler, M., Baker, K., & Lippitt, J. (2017). Variable Activity‐Based Costing and Decision Making. Journal of Corporate Accounting & Finance, 28(5), 45-52.
Holmemo, M. D. Q., Rolfsen, M., & Ingvaldsen, J. A. (2018). Lean thinking: outside-in, bottom-up? The paradox of contemporary soft lean and consultant-driven lean implementation. Total Quality Management & Business Excellence, 29(1-2), 148-160.
Pozzi, R., Strozzi, F., Rossi, T., & Noè, C. (2018). Quantifying the benefits of the lean thinking adoption by the beer game supply chain. International Journal of Operational Research, 32(3), 350-363.
Soekardan, D. (2016). An Analysis Of Activity Based Costing: Between Benefit And Cost For Its Implementation. International Journal of Scientific & Technology Research, 5(06).
Tezel, A., Koskela, L., & Aziz, Z. (2018). Lean thinking in the highways construction sector: motivation, implementation and barriers. Production Planning & Control, 29(3), 247-269.
Think Lean Six Sigma. (2020). Retrieved 2 April 2020, from https://www.thinkleansixsigma.com/article/lean-thinking
Yourarticlelibrary.com (2020). Retrieved 2 April 2020, from http://www.yourarticlelibrary.com/production-management/make-or-buy-decisions-of-a-product-introduction-factors-and-functional-aspects/57483 Lean
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