Cost Estimation Essay Research Paper Generally Accepted

The time use of facilities corrects variable product valuation problem. It offers a better basis for allocating the actual accrued cost share of facilities, burden, overhead, and direct expenses to the product. The time use of labor, machine, and plant facilities provides a measureable and definable cost standard for each operation. These costs can be accrued into the product’s inventory valuation on the basis of operation time.

The time use of facilities and how it fits into he use rate calculation will no be explained. A use rate is calculated for each workstation. It includes all indirect, burden, and overhead costs, which are attributable to the workstation. It is charged to the product and operation just for the time used during the operation and is based on the standard annual hours of use of the workstation. The time use of facilities sue rate defines the impact of schedule or performance base under or over utilization of the facility. This is a variance and is an adjustment to profit. It adds charges to the labor cost for work cycle time of labor operation and total operation cost is added to the material cost to compute level by level inventory valuation at each step.

Level by Level Total Absorption

This is the complete allocation of indirect expenses to the product based on the bucket concept. This is the costed WIP inventory of each item attached with all elements of labor, material, burden, overhead, and G&A costs accumulated on a time use of facility basis. The basic principles of level by level total absorption is that each activity or performance element in a manufacturing, warehousing, transportation, or merchandising operation involves the use of facilities and equipment, the use of materials and supplies, the expenditure of labor, and the use of money. By using work measurement techniques, the direct and variable cost elements of labor, material, and supplies can be defined, computed, and predicted for each operation with a reasonable degree of accuracy. Indirect and overhead charges can be assigned to the costs of operation in direct and equitable proportion to their time contribution to each function or activity by applying a time use of facilities approach and a workstation use rate.

With this total absorption costing method is it possible to isolate cost of individual parts, item, and operations. One can quantify the impact of methods or product design and changes. The cost impact of capital facility and data control feedback improvements can be defined by comparing standard costs accumulated in the WIP inventory record and the actual costs accumulated. One can identify and promote higher margin products and services.

Differences

The primary differences between the conventional method and how the use right applies indirect and period costs to the product is that the use rate applies the capital investment burden (depreciation), manufacturing burden and overhead, indirect costs, general and administrative expense to a stable predictable measurement unit (square feet and time) on a time sue of facilities, total absorption, standard costs basis. Burden and overhead costs are usually fixes (nearly stable) and have not normally fluctuated with production volume, labor or material costs. This method uses that portion of the plant’s manufacturing capacity and operating time, which is scheduled and actually used to support the operation and the production schedule. An example of the difference between the conventional method and the use rate method: In a Just in Time environment, batch sizes have moved down and frequency of movement has gone up. The GAAP principle says that transportation and set up costs go up because frequency is going up. But the use rate method says that since there is no adding of labor, it is really the same since there should be no volume relation. If losing production of a non-bottleneck, really not losing anything.

Different Types of Labor

Direct labor is people who change the product’s condition, status, shape, packaging, appearance or function.

Indirect labor are people who logistically support, handle, move, inspect, control, set up, affects the product’s flow through the manufacturing process without changing the product itself. In use rate calculation, treated as overhead.

Burden labor are people who provide supporting supervision, clerical or administrative personnel, labor relations, maintenance, safety without direct product contact. Examples are department managers, supervisors, and engineers. Treated as general overhead in use rate calculation.

Manufacturing management labor are people like the vice president of manufacturing, MIS, inventory control, personnel, etc. Treated as overhead in use rate calculation.