Question

Explain the main components of the Ford Motor Company’s operations. Is this a manufacturing, merchandising, or service company? What are the main raw materials used by the company? Explain whether Ford Motor Company is a good candidate for standard costing. Describe the benefits of standard costing to the company from the standpoint of pricing products or services, performance evaluation, and financial reporting.

Answer 1

Following are the main components of Ford Motor Companies :

Automobiles

Ford Motor Company sells a broad range of automobiles under the Ford marque worldwide, and an additional range of luxury automobiles under the Lincoln marque in the United States.

Trucks

Ford has produced trucks since 1908, beginning with the Ford Model TT, followed by the Model AA, and the Model BB. Countries, where Ford commercial vehicles are or were formerly produced, include Argentina, Australia, Brazil, Canada (also badged as Mercury), France, Germany, India, Netherlands, Philippines, Spain (badged Ebro too), Turkey, UK (badged also Fordson and Thames), and the United States.From the 1940s to late 1970s, Ford's Ford F-Series was used as the base for light trucks for the North American market.Most of these ventures are now extinct. The European one that lasted longest was the lorries arm of Ford of Britain, which became part of the Iveco group in 1986. Ford had a minority share in the new company and Iveco took over sales and production of the Ford Cargo range. Ford's last significant European truck models were the Transcontinental and the Cargo.At the end of 1996, Ford sold the rights to its heavy trucks division to the Freightliner Trucks division of Daimler AG, with Ford producing the Cargo, Louisville, and Aeromax, through the 1998 model year. During the 1998 model year, Freightliner began production of its own versions of Ford-developed trucks in St. Thomas, Ontario, launching the Sterling truck brand. Slotted between Freightliner and Western Star, Sterling trucks were produced through 2009.

Buses

Ford manufactured complete buses in the company's early history, but today the role of the company has changed to that of a second stage manufacturer. In North America, the E-Series is still used as a chassis for small school buses and the F-650 is used in commercial bus markets. In the 1980s and 1990s, the medium-duty B700 was a popular chassis used by school bus body manufacturers including Thomas Built, Ward, and Blue Bird, but Ford lost its market share due to industry contraction and agreements between body manufacturer in Europe, Ford manufactures the Ford Transit Minibus which is classed in Europe as a Passenger Carrying Vehicle and there are options of 12-, 15-, or 17-seaters.

Tractors

The "Henry Ford and Son Company" began making Fordson tractors in Henry's hometown of Springwells (later part of Dearborn), Michigan from 1907 to 1928, from 1919 to 1932, at Cork, Ireland, and 1933–1964 at Dagenham, England, later transferred to Basildon. They were also produced in Leningrad beginning in 1924. In 1986, Ford expanded its tractor business when it purchased the Sperry-New Holland skid-steer loader and hay baler, hay tools and implement company from Sperry Corporation and formed Ford-New Holland which bought out Versatile tractors in 1988

Financial services

Ford offers automotive finance through Ford Motor Credit Company.

Automotive components

Ford's FoMoCo parts division sells aftermarket parts under the Motorcraft brand name. It has spun off its parts division under the name Visteon

RAW MATERIALS

Automobiles require a wide variety of raw materials for their production, including the iron used for steel, aluminum, glass, the petroleum products used to make plastics, rubber, and special fibers.

A large number of component parts go into assembling an automobile. Beyond the big basic building blocks such as engines and transmissions, there are the interior parts such as instrument panels, seats and HVAC systems, along with all the necessary wiring to tie them together. Over the years, the materials used to build these various component parts have changed somewhat, but the overall bulk of what goes into automotive manufacturing has remained largely the same.

Steel

Produced from mined iron ore (its base raw material), steel is perhaps the most widely used component in auto manufacturing. It accounts for roughly 80% of the weight of an average car. Steel is used to construct a car's chassis and body, including the roof, body and door panels, and the beams between doors. Steel is often used in the manufacture of mufflers and exhaust pipes as well. Technological advances over the years have enabled auto manufacturers to utilize different types of steel that have varying levels of rigidity.

Plastics

Oil and gas are the raw material source of the many plastic components in cars. Chemical companies are the industry that transforms petroleum byproducts into plastic. Plastics are the challenger to steel for prominence in auto manufacturing. Altogether, plastic comprises roughly 50% of what goes into the manufacture of a new car. Among the countless car parts made from plastic are door handles, air vents, the dashboard and airbags. The versatility, durability and lightweight character of plastics make them an ideal material for various parts.

Aluminum

Aluminum, primarily because of its malleability and lightweight nature, is being increasingly used in car manufacturing. Aluminum has progressed from accounting for just 2% of the weight of an average car in 1970 to nearly 15% today. Wheels are commonly made of aluminum, and it has replaced steel and iron in the construction of many critical auto parts, such as engine blocks.

Rubber

Rubber is essential for cars, and the auto industry is essential to the rubber industry. Tires are one of the most important parts of a car. In addition to tires, rubber is also used for making numerous belts, hoses and seals critical to the functioning of a car's engine. Like plastic, rubber is durable and easily molded into different shapes. In all, the demand for rubber that comes from the auto industry accounts for approximately 80% of the world's total rubber production.

From metals to fibers to sand and quartz used to make glass, automobile manufacturing uses possibly more raw materials than virtually any other production industry. Since it first developed the assembly line process, the auto industry has always been a leader in innovations in mass production, and its adaptive use of raw materials is an important factor in its success as an industry.

Standard Costing

In the 1920s, the Ford Motor Company was the first mass producer to champion and use Frederick Taylor’s ideas of scientific management. Standard Costing & Variance Analysis (SCVA) was hailed as a new innovation in production control. Since then, business schools worldwide have taught it as the preferred system to control production efficiencies and costs.The SCVA requires that companies establish budgeted amounts of output and calculate standard quantities of inputs and costs for materials, labor, and manufacturing overhead (usually based on time-and-motion studies).

Two important components are actual costs and standard costs. Actual costs are the amounts paid or incurred. Standard costs are an estimated or predetermined cost of performing an operation or producing a good or service under normal conditions.As the production activities begin, the actual costs of materials, labor, and overhead (indirect manufacturing costs such as maintenance, insurance, and some electricity) are collected in three control accounts, one for each actual cost input category. Then, accountants split and transfer the actual costs from each control account to either the work in process (WIP) inventory account or variance accounts. The WIP inventory account gets the standard costs for the actual units produced. The variance accounts show the difference between the actual costs and the standard costs for the units produced. Those differences or variances can be favorable or unfavorable. Unfavorable cost variances enable an accountant to initiate a conversation with production personnel about the root causes.There are six variances in the simplest system of SCVA—two for each of the three categories of materials, labor, and overhead:

• materials price variance and materials quantity variance,
• labor rate variance and labor efficiency variance, and
• overhead spending variance and overhead volume variance.

If there are significantly large unfavorable cost variances, then a cost accountant goes to the shop floor to question employees about possible reasons for the higher than expected costs incurred.

Benefits of Standard Costing

Five of the benefits that result from a business using a standard cost system are:

• Improved cost control.
• More useful information for managerial planning and decision making.
• More reasonable and easier inventory measurements.
• Cost savings in record-keeping.
• Possible reductions in production costs.

Improved cost control Companies can gain greater cost control by setting standards for each type of cost incurred and then highlighting exceptions or variances—instances where things did not go as planned. Variances provide a starting point for judging the effectiveness of managers in controlling the costs for which they are held responsible.

Assume, for example, that in a production center, actual direct materials costs of $ 52,015 exceeded standard costs by $ 6,015. Knowing that actual direct materials costs exceeded standard costs by $ 6,015 is more useful than merely knowing the actual direct materials costs amounted to $ 52,015. Now the firm can investigate the cause of the excess of actual costs over standard costs and take action.

Further investigation should reveal whether the exception or variance was caused by the inefficient use of materials or resulted from higher prices due to inflation or inefficient purchasing. In either case, the standard cost system acts as an early warning system by highlighting a potential hazard for management.

More useful information for managerial planning and decision making When management develops appropriate cost standards and succeeds in controlling production costs, future actual costs should be close to the standard. As a result, management can use standard costs in preparing more accurate budgets and in estimating costs for bidding on jobs. A standard cost system can be valuable for top management in planning and decision making.

More reasonable and easier inventory measurements A standard cost system provides easier inventory valuation than an actual cost system. Under an actual cost system, unit costs for batches of identical products may differ widely. For example, this variation can occur because of a machine malfunction during the production of a given batch that increases the labor and overhead charged to that batch. Under a standard cost system, the company would not include such unusual costs in inventory. Rather, it would charge these excess costs to variance accounts after comparing actual costs to standard costs.

Thus, in a standard cost system, a company assumes that all units of a given product produced during a particular time period have the same unit cost. Logically, identical physical units produced in a given time period should be recorded at the same cost.

Cost savings in record-keeping Although a standard cost system may seem to require more detailed record-keeping during the accounting period than an actual cost system, the reverse is true. For example, a system that accumulates only actual costs shows cost flows between inventory accounts and eventually into cost of goods sold. It records these varying amounts of actual unit costs that must be calculated during the period. In a standard cost system, a company shows the cost flows between inventory accounts and into cost of goods sold at consistent standard amounts during the period. It needs no special calculations to determine actual unit costs during the period. Instead, companies may print standard cost sheets in advance showing standard quantities and standard unit costs for the materials, labor, and overhead needed to produce a certain product.

Possible reductions in production costs A standard cost system may lead to cost savings. The use of standard costs may cause employees to become more cost conscious and to seek improved methods of completing their tasks. Only when employees become active in reducing costs can companies really become successful in cost control.

Three of the disadvantages that result from a business using standard costs are:

• Controversial materiality limits for variances.
• Nonreporting of certain variances.
• Low morale for some workers.

Controversial materiality limits for variances Determining the materiality limits of the variances may be controversial. The management of each business has the responsibility for determining what constitutes a material or unusual variance. Because materiality involves individual judgment, many problems or conflicts may arise in setting materiality limits.

Nonreporting of certain variances Workers do not always report all exceptions or variances. If management only investigates unusual variances, workers may not report negative exceptions to the budget or may try to minimize these exceptions to conceal inefficiency. Workers who succeed in hiding variances diminish the effectiveness of budgeting.

Low morale for some workers The management by exception approach focuses on the unusual variances. Management often focuses on unfavorable variances while ignoring favorable variances. Workers might believe that poor performance gets attention while good performance is ignored. As a result, the morale of these workers may suffer.