Manufacturing Cost: Managers need to make decisions on how to make their companies become successful and gain profit.

They need to determine how much the company will have to spend and how much it will get back in return. Direct materials, direct labor, and manufacturing overhead costs are some of the most important cost data that managers especially in the manufacturing industry use for decision making. Direct Materials This is a part of the direct cost for manufacturing a product. These materials are used to build a product and should end up within the finished goods to be considered as direct materials. Nissan 350z is one of Nissans top selling cars in the United States. Every car they make comes with hundreds or thousands of different parts that can be considered as direct materials. One of the direct products they use for this specific car is their tires that they buy from Bridgetone, another company that manufactures tires (Bridgetone Potenza). In Bridgestones side, the majority of their tire products are made out of rubber which is considered as part of their direct material costing. Some parts of the products are separated from the cost of direct materials because they cannot be traced easily. These are the indirect materials. Indirect materials are minor parts of the production that can either be costly to monitor or just simply not worth tracking. In making their tires, Bridgetone has to use some oil, grease, or other chemicals to make sure their machinery runs smoothly. Although these chemicals are used in making their tires, they do not count them as direct material cost because they are not going to look at each tire and figure out how much grease was used in making it. They

will have to include the chemicals as indirect materials to be included in their manufacturing overhead cost. Direct Labor This is the representation of the people who are involved in making products. This cost can be traced to the employees who are actually doing the work that directly impacts the production. Carpenters are considered as direct labors because they are part of building a house. It can be confusing because there are some employees of the production company does things that are does not physically affect the products. Although production supervisors work inside the factory, they cannot be considered as direct labors because do not deal directly with the goods therefore they are part of indirect labor. Manufacturing overhead This is the costs in a company that are not direct labor or direct materials but has something to do with the factory operations. This includes cleaning supplies, electricity, and the cost to pay supervisors, secretaries, and janitors. These three costs are assigned to every unit that the company makes to put value to inventory and cost of goods sold and is reported according to GAAP. Direct materials, direct labor, and manufacturing overhead are what COGS is calculated from. Managers look at it to see how much it costs to make each unit and determine the price tag that they will assign to a unit.

Variable Cost vs. Fixed Cost Variable and fixed costs are the two main types of costs. Fixed cost does not change regardless of how many finished goods the company makes or sold. A university like DeVry

will have to pay the building rent or lease regardless of how many students they enroll or, an airliner will put the same amount of gas in a plane that flys from New York to L.A. with either 100 passenger or empty seats. Variable cost on the other hand changes depending on what the company needs. A full service restaurant manager that assigns five food servers to cover the floor during Tuesday afternoons might need to put ten or twelve of them to work during dinner shift on Saturdays. It is essential that managers know when to make changes and how much changes their establishments need. If a factory like Hershey does not make enough candies before Halloween, their customers are going to look at their competitors to make sure they have enough to give out to the kids. If a computer company like Compaq makes too many of a certain type of computer, its not going to take long before they need to sell some of them for lower price because competitors have already came out with something better. Cost Volume Profit Relationship Another tool that managers rely on to decide what type of product to offer at what price, what marketing strategy to use, and what cost structure to implement is CVP. (Cost-volumeprofit, pg 233, Managerial). This analysis illustrates how profit is affected when the costs, volume, or prices of products or services are changed. Managers will know how much they have to lower the price of their products as long as there is enough sales volume that makes up the profit. Managers will also be able to figure out how much money they have to spend on advertisement in order to reach certain sales goal. Example: A jewelry store is having a special sale going on for a certain type of pendant. They paid a wholesaler an amount of $50 per pendant and they have variable cost of $12. They are selling

these pendants at a price of $100 a piece and they incurred a fixed cost of $150,000. The store owner wants to know if how much profits his store is going to make if they ended up selling a total of 3000 pendants. First they multiply the cost per unit of $100 to 3000 = $300,000. Then they will multiply 3000 x $62 (cost per pendant plus variable cost) to get the variable cost of $186,000. Sales of $300k minus fixed cost of $150k minus variable cost of $186k equal -36K. It shows that they are going to loose money unless they try to increase their sales. Break Even Analysis Break even analysis is another calculation to see if at what point a company is making no profit or loss, so it is when their total revenue covers total costs so it is to show how much output they are going to have to produce to cover the total costs and the target profit. Even with this analysis, it is also important to determine how the sales to get even are going to be attained. For example, a shoe store has a target of 2000 shoe sale to get even and anything more than that will be added to their net operating income (How to, about.com). What if the goal is unachievable? That is why managers have to use many different business analysis methods to incorporate with this one in order to make their organization profitable. Activity Based Costing This plays a vital role in managerial accounting. It is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore fixed as well as variable costs according to our textbook (pg 310). ABC also lets management how to spend their money to gain better profit. The first step in activity based costing is by identifying activities. Identifying the activities allows the company to eliminate the non-value added activities that are not necessary to the organizations success. The second step is by assigning resource costs to activities. Costs will be organized by activities and

also the services provided from each activity. The third step is identifying the outputs where activity unit costs are calculated. (Activity based) Capital budgeting and time value of money Organizations are always looking to improve their profit. Many of them do a lot of research and look for the best business strategy to become better. Most of them end up in spending tons of money in a new venture like opening a new branch or upgrading their information system to speed up the process. This is where managers get involved in capital budgeting. Managers have to be very smart in selecting the best option for the organization and spending for its long term investments. When management makes decision on the organizations investment, they have to be aware of the importance of the time value of money. They can make calculations of how much a return from an investment would be but they also have to realize that as time pass by their money will not have the same value.

Work Cited Pages: Activity Based Costing, 06/08. < http://www.defenselink.mil/comptroller/icenter/learn/abcosting.htm> Bridgetone Forenza, 06/08.

< http://www.tirerack.com/tires/tires.jsp? tireMake=Bridgestone&tireModel=Potenza+RE040> How to do a break even analysis < http://www.defenselink.mil/comptroller/icenter/learn/abcosting.htm> Managerial Accounting, Garrison, Noreen, and Brewer. 06/08