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Economic System of Shoe Production

Shoe production systems that Target can use
The first production system that Target can use is a batch production process, during which shoes will be produced in batches. The batch production system uses one or more equipment to perform various processing activities on raw materials within a certain period of time. As far as Target Co. is concerned, shoe production can be divided into three operations: shoe design and review, fabric cutting and molding, and thinning and sewing. The steps in each process must be executed carefully and correctly to make high-quality shoes. The second production system available to Target is mass production, which will involve the manufacture of hundreds of similar shoes. (Tien, 2011) on a production line. In this case, Target’s Co. production line will consist of three activities: cutting and shaping the fabric into the pre-designed specifications, thinning of the edges, and sewing the edges together. A raw material will pass through these three activities and at the end, the company gets the finished goods. The production process has been divided into small specialized tasks and standardization of raw materials across all shoes. A significant advantage of this system is that it efficient, fast, and cheap.
There are other production systems such as one-off and continuous, but they are inappropriate for Target Co. A closer look at batch processing shoes that it is inappropriate for making shoes because, in such a process, there should be the discontinuous flow of raw materials. Raw materials are introduced in a sequential manner into the process following a prescribed amount and order. However, for the case of the shoes, no new materials are to be introduced in every stage and therefore, mass production is the best system for Target Co.

Accounting systems to use
The first accounting system that Target Co. can use is process costing. Process costing is mostly used by companies that produce identical items through a series of processes, that is, involves the conversion of raw materials into identical products (Fischer & Krumwiede, 2015)). In this case, Target Co. will have processing departments where work is performed, and materials, labor, and overheads are added to the shoes. These departments in Target Co. are cutting and shaping, thinning and sewing. The costs will be traced and accumulated in these departments and are assigned to the products. Process costing is the most appropriate for Target Co. because the raw materials go through uniform processes and the final product is identical.
Operation costing is the second accounting system that Target Co. can use. Operation costing is a hybrid that incorporates the characteristics of job order and process costing (Garrison, 2011). It is applicable in situations where the shoes have similar characteristics such as they must undergo cutting, thinning, and sewing and also have identical characteristics, such as different types of materials and designs. Therefore, this would involve producing shoes in batches where shoes with same materials are produced as an identical batch or job. However, they still undergo the similar process through the two departments and costs assigned to the products.
Difference between cost accumulation systems
Target Co. uses process costing and as pointed out earlier; costs are accumulated in each department. The meaning is that direct materials, direct labor, and overheads added in either of the cutting and shaping or thinning and sewing departments are accumulated there. Each department will have its work in process account and accumulate its costs. These departmental costs are then transferred into the finished goods inventory, and this enables the determination of the cost of goods sold.
However, service organizations use job-order costing where costs are accumulated per job. Service businesses such as accounting firms, movie studios, and law firms. For example, a movie studio produces different films each with its direct materials, labor, and overheads. Therefore, each film is categorized as a job and costs are accumulated for each film or job separately. Therefore, Target Co. accumulates costs for each processing department while a service organization accumulates costs for each job completed. Secondly, service organizations have a job cost sheet which computes the unit cost for a job while for Target Co., the product unit costs are determined by each department. Also, Target Co. produces a single identical product while service organizations work on many different jobs each with different production demands.
Reasons product cost information is important
Product cost information is important to managers because it helps in the setting of selling prices (Akroyd & Maguire, 2011). Most manufacturing systems use cost plus pricing where they add a markup to the cost of the product to establish the selling pricing. Therefore, accurate and product cost information is essential to setting a fair selling price that will see Target Co. make a profit. Secondly, this information is critical in making product improvement decisions (Bumbescu & Paschia, 2013). In such decisions, Target’s managers require information on costs the shoes that will be affected, for instance, the raw material costs will increase. Also, the information on the behavior of these costs is relevant, for instance, after improving the shoe, some fixed costs might become variable. Thirdly, product cost information enables Target managers to make decisions on whether to abandon a product based on historical performance of the shoe. For instance, if the cost of production has been increasing over the past few years and the shoe is becoming unprofitable, the managers might decide to discontinue such products.
Work-in-process account
For Target Co. the work in process will refer to the partially finished shoes awaiting completion, for instance, have undergone cutting, thinning, but not yet sewing. For process costing, the work in process inventory is not counted as part of the finished goods and therefore, it is translated into equivalent number of fully completed units. These equivalent units are the number of the partially completed ones (work in process) multiplied by their percentage of completion for each process. For example, in the thinning and sewing department, 500 units from the shaping and cutting department may be 60% complete. Therefore, the final output will have 300 equivalent units (500*60%) showing the number of complete shoes that would have been obtained (Garrison, 2012).
Target accounts for the costs in the process through the use of a production report either using the weighted-average method or FIFO method. The production report indicates the number of equivalent units from work in process and calculates the cost per each equivalent unit. Each department will prepare its production report which summarizes the costs assigned to the products transferred out to the next department or finished goods and any units of work in process inventory.
Categories of manufacturing costs
Direct materials are the first category of manufacturing costs, and it refers to the costs of the materials that form an integral part of the finished product. The cost includes purchasing cost, import duty, storage costs, and freight-in costs. For the case of Target Co., the skins form the direct materials. Direct labor is the second category, and it refers to the wages of the people involved in converting the skins into the finished shoes. Target’s direct labor includes the workers who cut, shape, thin, and sew the skin into shoes. Manufacturing overheads, on the other hand, are the third category, and it refers to all the other costs incurred manufacturing the shoes but cannot be directly traced to the finished products, the shoes, in any way. They include depreciation on the equipment, repairs and maintenance carried out, the cost of the sewing threads, and rent for the manufacturing premises.
Manufacturing costs refer to all the costs that are required to convert raw materials into finished products while the cost of goods sold refers to the cost of the finished inventory sold by a company (Kinney & Raiborn, 2012). Manufacturing costs are not reported on the income statement, but the cost of goods sold is the one reported to calculate gross profit. Also, manufacturing costs factors in all the direct materials and labor started in producing the shoes, but the cost of goods sold factors in only the products that are sold. For instance, if Target uses $1000 of DM, $1o00 direct labor and produces 100 shoes, the total manufacturing cost is $2,000. However, only 50 shoes are sold, and therefore, the cost of goods sold is $1,000 because it considers only the sales, not production.
Cost of goods manufactured
Target Company
Cost of goods manufactured for the years ended 31st December 2014
beginning raw materials inventory 19,500
add purchases 25,500
total raw materials available 45,000
less ending raw materials inventory 8,100
total raw materials used 36,900
direct labor costs 31,000
manufacturing overhaed applied 25,500
total manufacturing costs 93,400
add beginning work in process inventory 24,000
117,400
less ending work in process inventory 13,500
cost of goods manufactured 103,900

References
Akroyd, C., & Maguire, W. (2011). The roles of management control in a product development setting. Qualitative Research in Accounting & Management, 8(3), 212-237
Bumbescu, S. S., & Paschia, L. (2013). The Cost Information Relevance In The Decision Foundation. Annales Universitatis Apulensis: Series Oeconomica, 15(2), 384
Fisher, J. G., & Krumwiede, K. (2015). Product costing systems: finding the right approach. Journal of Corporate Accounting & Finance, 26(4), 13-21
Garrison, R. H. (2011). Managerial accounting for managers. McGraw-Hill Irwin
Kinney, M. R., & Raiborn, C. A. (2012). Cost accounting: Foundations and evolutions. Cengage Learning
Tien, J. M. (2011). Manufacturing and services: From mass production to mass customization. Journal of Systems Science and Systems Engineering, 20(2), 129-154

August 09, 2021
Category:

EconomicsLife

Subcategory:

Lifestyle

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