Direct materials are the materials that are used to complete the final product during product. These materials are directly tied to the finished product while direct labor is the manpower that is put into the production of the product (e.g. how long it take to fully complete a unit of the product). Lastly, overhead is any other cost that is needed for the completion of the product. Usually this is variable cost such as wages, utilities, marketing, etc.
Schneider (2017),"A job cost system identifies cost with individual jobs or products" (sect.3.1). While a process system identifies cost by measurement or units by a specific department. The main difference is process costing method is used for products that are similar in nature while job costing is used when a variety of products are manufactured.
After reading the article it appears that the company's manufacturing costs are mainly due to the production of the panels for larger products. Some examples of their manufacturing costs are the direct materials (wire, tubing, glass, solar cells, etc.) All of these items have to be purchased for the product to be made. Over the last years the company has worked to decreased their manufacturing costs so that solar charges could be reduced if manufacturing costs reduced. They have been successful because in 2013 they were able to decrease the manufacturing costs by around 12% which subsequently allowed for a decrease in the per watt charge.
Schneider, A. (2017). Managerial Accounting: Decision making for the service and manufacturing sectors (2nd ed.) [Electronic version]. Retrieved from https://content.ashford.edu/
Explain how these costs are associated with the manufactured product.
There are several costs associated with the production of a manufactured product. Three of those specific costs are direct material, direct labor and manufacturing overhead. Direct materials are those raw materials needed in the manufacturing process that result in a tangible product. Direct labor is the term used that refers to the work by employees that is needed and used to produce the product and lastly manufacturing overhead is considered any subsidiary costs that are sometimes incurred during the manufacturing process.
Why are some of these costs allocated to the product through costing methods such as job order costing or process costing?
Costs related to the manufacturing of a product can be categorized into a costing method. Two of those methods are job order costing and process costing. The job cost system recognizes the expenses that correlate with a specific jobs or products (Schnieder, 2017). Companies that produced made to order items often use the job order costing system. For instance in the military we have a tradition of challenge coins that are specifically made for our organization. Because they are custom designed and made the company that produces them would most likely use a job order costing method to allocate the costs to the product as they must track costs by each individual product or order manufactured due to each order is going to be different and dependent on the customer.
However, the process costing method is used to assign the product costs to the manufacturing stations that the product may have to pass through during production (Bariska, Pasztory & Koloszar, 2019). Process costing can be considered the opposite of job order costing as it routinely used in companies that mass produce the same product. According to Schnieder (2017), “the unit cost of a final product will be the sum of all costs allocated to the product by each department that worked on it” (p.97). Therefore is a company has three separate departments where two of them are each responsible for a particular part and the third is accountable for assembly then the each department individual costs will have to be combines to get the final production cost of the product.
Provide a specific example of this company’s manufacturing costs.
In regards to the article about First Solar’s it can be determined that company produces solar panels. Therefore an example of a manufacturing costs would be the reduction of the cost per watt to $0.49 as this can be considered a direct material costs for the company as wattage is what is used to produce the panel (Trefis Team, 2014). The other costs of freight, recycling and warranty charges would be classified as nonmanufacturing costs.
Bariska, M., Pásztory, Z., & Koloszár, L. (2019). The Efficiency Based Costing Method – Using a Sawmill as Example, 22(2), 229–243. Retrieved from http://search.ebscohost.com.proxy-library.ashford.edu/login.aspx?direct=true&db=eoh&AN=EP138112238&site=eds-live&scope=site (Links to an external site.)
Schneider, A. (2017). Managerial Accounting: Decision making for the service and manufacturing sectors(2nded.) [Electronic version]. Retrieved from https://content.ashford.edu/ (Links to an external site.)
Trefis Team. (2014, February 24). First Solar preview: Manufacturing costs, project order book in the spotlight. Retrieved from http://www.forbes.com/sites/greatspeculations/2014/02/24/first-solar-preview-manufacturing-costs-project-order-book-in-the-spotlight/