Question

BTN 20-7  This chapter’s opener featured Jeff Kearl and his company Stance.

Required

Sock makers like Stance typically use several different processes, including knitting, design imprinting, washing and drying, inspection, and packaging/shipping. What are some benefits of using separate process cost summary reports for each process?

Jeff tries to order raw materials just-in-time for their use in production. How does holding raw materials inventories increase costs? If the items are not used in production, how can they impact profits? Explain.

How can companies like Stance use yield to improve their production processes?

Answer 1

Some benefits of using separate process cost summary reports for each process are:-

1.Each process can be assigned a particular budget within which they need to operate and in this way costs incurred for each process can be identified and controlled.

2.Under process costing system, each department is assigned a cost center. A cost center is a number or code that identifies the purchases made by a single department. As a result inefficiencies if any can be identified on time and rectified by taking necessary steps.

3.Through the process costing system, a company will ensure that every department, regardless of function, operates in a uniform manner. This will help in creating uniformity among the organization.

Holding Raw Material Inventories increase cost in the following ways:-

There are a number of costs and expenses a company incurrs due to holding inventory like Holding cost / Carrying cost i.e. cost for storage, handling , insurance, cost of obselence, disposal etc. Extra staffing cost also in case of holding inventories.
Inventory has significant financial impact on an organization. From the standpoint of financial accounting, inventory represents both an asset on the balance sheet and a cost that impacts the profitability of any firm.

Use resources more effectively by focusing on the areas that will have the biggest impact on productivity. Ensure processes are under control. Higher yield rates will reduce the manufacturing cost of the product therefore having positive impact on Gross profits and thereby increasing the overall profitiability of the company.