Full Absorption Costing Procedure by Mark Webb

This essay is concerned about the full absorption costing procedure that Mark Webb has computed to Pedro’s peanut business, and how the total cost has been built up by Mark. Meanwhile, the positive and negative factors of the absorption costing will be discussed to the scenario as well. At the third part, it will have some research on the importance of the Management Accounting to the managers to make management decision, followed by the comments and some recommendations related to the scenario.

First of all, the full absorption costing concept will be discussed, and based on the concept; the essay will also give some examples of the procedure based on Pedro’s peanut business and the procedure of how the total cost that Mark has calculated will be explained as well.

As the absorption costing defined, it can be used to determine the product costs as a managerial accounting cost method to accumulate all manufacturing costs, include both variable costs and fixed costs as well, they are associated with a production process and assigned to the individual units of products, those units are described as a full absorb manufacturing costs (Garrison, Noreen & Brewer, p84). There have three key types of costs need to be assigned to products under an absorption costing system: 1. director materials, this is the raw materials which are included to use in the final product, and the final product of one organization can be the raw materials of another organization. For raw materials, it also contained the director and the indirect raw materials. Director materials are those materials which can be conveniently identified as a prime part of the final product and those costs can be traced to the final products easily. For Pedro’s peanut business, the costs of purchasing the peanuts can be defined as the direct raw materials. For the indirect raw materials, they are the costs which cannot easily to track of some insignificant materials to the finished goods (Garrison, Noreen & Brewer, p25).the indirect materials are included in the manufacturing overhead, in Pedro’s peanut business, the example of indirect materials may be the cleaning supplies to clean up his restaurant, the washing-up liquid. 2. Director labor, this is the factory labor costs which is be consisted to construct an individual units of product and the costs can be physically traced as well. In Pedro’s peanut business, the wages of the waitress and the chief are the direct labor costs, the reason is because the chief is the person who directly made the peanut and that peanut is the lead to attract customers to come to the restaurant. Thus, the direct labor can also be defined as the touch labor; the reason is they are typically touching the product while it is being produced, such as the waitress in Pedro’s business. Apart from the direct labor costs, the indirect labor costs are the costs that cannot be physically touched to the finished goods, or it can only be traced inconveniently. The example of the indirect labor cost of Pedro’s case can be the wages paid to the night security guards of his restaurant, and the time Pedro spent on the peanut sales. 3. Manufacturing overhead, this is also can be defined as the factory burden costs to predict the cost behavior, which are the costs consisted with variable costs and fixed costs. (Garrison, Noreen & Brewer, p26). For the variable overheads, they are the costs to operate a company’s manufacturing facility and changeable with the production volume, in the scenario, the costs of lighting and heating to operate the peanut factory or the restaurant are the variable manufacturing overheads. Besides the variable part, the manufacturing overhead also has the fixed costs which are the constant costs to operate the factory or organization and do not vary with the production volume. Such as the rent of the restaurant, depreciation, insurance of the peanut manufacturing facilities are consisted in the fixed manufacturing overheads to the peanut business. Apart from variable and fixed cost, the mixed cost existed and can be explained by the equation Y=a + bx where y is the mixed cost, a is the fixed cost; b is the variable cost per unit multiplied by the activity base x. A company may also incur some costs which are associated with the selling and administrative functions, these costs are not included as a part of manufacturing overheads, applied to the case, the sales commission paid to the peanut salesperson, selling costs of the peanuts, shipping costs, or even the Pedro’s compensations are classified as the selling and administrative costs which are not included in the manufacturing overheads. Applied to the case, Pedro thought the selling price of the peanut is based on the purchase price, which is the direct cost, but based on the absorption accounting costing procedure, Mark thought the other costs which are indirect costs should be considered to the peanut operating costs as well, therefore, the build-up of total cost is consist the direct costs as well as the indirect costs. For example: the total cost that Mark has calculated to Pedro for his peanut business consists: the direct costs which are included of direct materials which is the cost of purchasing the peanut, add up the direct labor of the wages to the cook, then the indirect materials costs of some cleaning up supplies to his restaurant, indirect labor which can be the night guard to look after his restaurant or the peanut manufacturing factory, finally, it need to contain the manufacturing overhead of both fixed and variable overheads.