Management Accounting - balance sheet and cost reduction - Assignment Example From the indexes given the cost of labour has increased over the years while the price of their products also tends to increase over the years, therefore the increase in the cost of labour has led to an increase in prices. The cost of direct materials has increased over the years meaning that this could have caused the increase in the cost of production for a unit. On the other hand retail prices have increased over the years as indicated by the retail price index. b) An indication of the possible areas of weaknesses in the material, labour and overhead costing and control practices and procedures used in the factory of the company. In addition, you should comment on any other areas you consider to be significant. Job order costing is used where each job is unique and requires special attention, therefore this is the best method to be used by Sidcup limited because each order is different in production, the problem faced by this company is that the determination of cost of labour used and materials used, the method used is inappropriate. Sidcup estimates material costs using the cost from the previous year which is very wrong because their costs may increase or decrease during the year, therefore the company should adopt one of the material cost estimation methods. (Pizzey A (1989)) Direct labour cost estimation is also not approp... Last in last out- this means that costs of materials used will be determined by the cost of those that came in last. Average method- this means that the cost of materials used will be determined by an averaged cost of the materials. Specific identification this means that materials cost will be determined by the specific cost of those used in production. Sidcup estimates material costs using the cost from the previous year which is very wrong because their costs may increase or decrease during the year, therefore the company should adopt one of the material cost estimation methods. (Pizzey A (1989)) Direct labour cost estimation is also not appropriate, the cost of labour used is that determined at the beginning of the year using the previous year expenses. The company should adopt direct labour cost estimation methods which will use labour hours and cost per hour to determine labour costs. The company has no budget for any year, the company therefore should budget prepare sales budgets, production budgets, direct material usage budgets and direct material budgets in order to aid in planning and coordination of activities in the organisation. According to the components of the costs of production given below, the cost of labour is higher than any other cost; therefore they use a labour intensive method of production. The cost of production can be brought down through the adoption of a capital intensive means of production where the machines do a lot of the work. Machines will also increase their production capacity and this will lead to economies of scale where the total overheads will be distributed to a large number of units produced.
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