Report On Product Costing For Dumbellow Ltd Essay

Report On Product Costing For Dumbellow Ltd - Essay Example Furthermore, the production manager considered re-organization of production activities and also the use of a cheaper component of product Z. though all these proposals are viable; they have various shortcomings which may outweigh their expected benefit. In addition, a comparison of marginal costing and full costing (absorption costing) is dealt with in this report. The advantages of using marginal costing instead of full costing, in decision making, are discussed. In conclusion, the shortcomings of the analyses of various proposals examined in this report are identified. Recommendations on the best way to handle the case of product Z are also discussed at the end of this report. Key strategies that were recommended include reorganization of the production processes and the termination of the product. 2.0 Background Information Dumbellow Ltd is a manufacturing company that produces three industrial valves which are incorporated into equipment used in the Oil and Gas industry. The boa rd of Directors of the company is meeting on 3rd of October to discuss the draft budget for the following year, a few months before the start of that calendar and financial year. They are concerned about two issues; the deterioration of product Z in terms of its profitability in the present period and the financial year and the failure of the company to make a total profit of at least ?400k to meet their required 20% return on capital. Owing to the dissatisfaction of the board, the managers of Dumbellow Ltd raised varying proposals on ways to boost the profitability of the company. These diverse views prompted the formation of a group of five members with an objective of writing this report and making recommendations to the board on the most optimal course of action (Lewis, 2001). 3.0 Marginal Costing and Absorption Costing Marginal costing, unlike full costing, focuses on the additional costs of producing one ore more units of a product or service. Under this method, the cost of ma terials and labour are the only components which make up the marginal cost. Other costs such as rent and taxes are considered fixed since they will have been covered. For this reason, marginal cost is easier to compute and thus preferable for quick decision making. Besides saving on time, marginal costing it helps in the generation of additional profit. Every organization aims at maximizing profits which in turn facilitates growth of the business organization. One of the ways of maximizing profits is through reduction or minimization of costs, mostly the costs of production. Dumbellow ltd, for example, through marginal costing can utilize the spare capacity available to produce more of their products. In this case, fixed costs will not be considered since they are already paid; only labour and material costs matters. This enables managers to see quick means of generating extra profit. However, if full costing is used by the company to access the cost of producing extra units, it wil l be found unprofitable or t result in negligible profits because of fixed costs included and it will require a lo of time (Elliot & Elliot, 2004). Marginal costing brings about better performances but significant risk is experienced. Businesses using full costing sets their prices by ensuring that all costs are covered and a profit margin is also included. This calculated profit