Different Types of Costing

Inventory Management The author of this report is to speak on two major topics in this brief paper. The first topic is inventory management in the context of getting the right amount of a product where it needs to be and when it needs to be there. Further, there will be discussion of the ABC system as it relates to a firm that the author of this report is familiar with.

There will also be a discussion of lean synchronization and its overall goal of perfect quality with no waste at all. There are two forms of waste in particular that will be discussed and those are waste from irregular flow and waste from inflexible response. While perfect quality with no waste is not really feasible, it should always be the goal for a firm that is serious about quality and proper inventory management. Analysis When it comes to inventory management, the concept of ABC is actually short for activity-based costing.

It is a method of allocation overhead and overall expenses in a way so that the applicable overhead and such is apportioned based on the activity. For example, a non-ABC system would assign the same overall overhead to two different products regardless of how much of each is made. For example, if there is $50,000 of overhead and two overall products, $25,000 each would be applied to each product. However, unless identical amounts of revenue emanate from those two products, that would be against the concept of activity-based costing.

If the revenue split was 60/40 between the two products and activity-based costing was in place, then the product that has sixty percent would get sixty percent of the overhead and expenses assigned against it and the forty percent product would get forty percent. Further, activity-based costing ranks products in terms of their overall profitability with the letter "A" being assigned to the most profitable, "B" to the second-most profitable and "C" to the third most profitable. Ford is a company that could obviously use activity-based costing to their advantage.

For example, let us say that the only two models that Ford had (and of course they have more) are the Mustang and the F-150. Let us also assume that the Mustang is thirty percent of Ford's sales while the F-150 is seventy percent. If they have one million in overhead, then $300,000 would be assigned to the Mustang's bottom line as an individual product and the other $700,000 would be assigned to the F-150 (Nikolakopulos 2015).

However, it should be noted that Ford would probably be wise not to use the ABC method because the Mustang and the F-150 are not the same cost…to Ford or to the consumer (Ford 2015). It is commonly accepted and practiced that unit cost is the more important factor when one wants to apportion overhead and expenses to individual items or product lines being sold.

Further, there are some products and line items that are necessary evils due to compliance and so forth and thus assigning cost to them is not exactly productive or fair because they will have to be done no matter what. Beyond that, the activity-based cost system is rather costly to put into place and keeping running. Also, there are the conflicts with other cost systems like the mentioned above as well as others. For example, accountants typically ascribe to and abide by the Generally Accepted Accounting Principles set of standards.

Those standards effectively mandate a cost-based system (as mentioned above) rather than activity. Put another way, if there is a small widget and a large widget and a batch of each both costs a million dollars to make, the overhead assigned to each group would be the same regardless of how many is in each batch because it is the cost that is being scrutinized and not the count.

Since Ford is a publicly traded company and thus must abide (at least in terms of public reporting) abide by GAAP principles, they would focus at least most of their energies on the cost side of the accounting equation rather than the quantity one, although both matter to some degree (Phan, Baird & Blair 2014) When it comes to lean synchronization, there are a number of different waste types but two in particular will be focused on for this report.

The first one that will be discussed is waste from irregular flow. This is when there are barriers that do not allow for the smooth flowing of goods, items and services between processes. To use Ford as an example, a waste that could happen is that the production line would have to stop on F-150's because they ran out of bumpers or a certain type of screw or bolt.

Indeed, there needs to be a constant flow of all of the goods and supplies or parts that go into each truck, car or whatever it is that Ford or another company might be working on. Another type of waste from irregular flow that could apply to Ford is if the different processes for making a car are not in sync.

For example, if a car is done in terms of being put together and is ready to be painted but the painting station is not ready due to a breakdown or backup of production, this would be a waste from irregular flow (Meerkov & Liang 2011). The other major type of waste that shall be discussed is waste from inflexible response. This type of waste would be much more uncommon for Ford but could certainly occur.

For example, if a customer custom-orders a car in a particular shade that normal or easy to sell and then the customer reneges or cannot pay, this would lead to (at least temporarily) a waste due to inflexible response. What this type of waste refers to is when a customer changes their preferences or demands and the manufacturer cannot respond in a timely manner and thus this leads to waste.

Perhaps a better example, and one that also relates to Ford and it really happened, was the Firestone/Explorer fiasco that happened some years ago. For whatever reason, many sport utility vehicles with Firestone tires were experiencing blowouts. This is especially concerning for a maker of SUV's because SUV's have a higher center of gravity and thus are more apt to tip over and a blowout can lead to precisely that.

Irrespective of who was at fault for the blowouts, this certainly put Ford in a position of having waste due to inflexible response because there were surely a lot of consumers that did not want any part in buying a Ford Explorer that came with those Firestones from the factory. Further, they might think the actual truck is the problem and not want the Explorer at all.

A sudden fall in demand for the model would lead to a glut of Explorers with no one that wants to buy then and this.