Reference no: EM132204585

Accounting for managment class

Topic : Identify the similarities and differences between job-order and process costing.

Case:

The Trappist monks of St. Sixtus monastery in Belgium have been brewing beer since 1839. Customers must make an appointment with the monastery to buy a maximum of two 24-bottle cases per month. The scarce and highly prized beer sells for more than $15 per 11-ounce bottle. The monastery has not expanded its production capacity since 1946, seeking instead to sell just enough beer to sustain the monks’ modest lifestyle.

There are two conventional costing approaches in manufacturing: job order and process. These methods have similarities and differences. Both systems have the same basic purposes—to assign material, labor, and manufacturing overhead costs to goods and services and to provide a mechanism for computing unit product costs. Both systems use the same basic manufacturing accounts, including manufacturing overhead (indirect cost), raw materials (direct cost), labor (direct costs), work in process, and finished goods. Once the goods and or services are complete, the costs of producing these goods and services are recorded under the “cost of goods sold” (COGS). As you may know, the COGS is a line item within a company’s income statement. From an accounting perspective, it useful to match the COGS to the revenues generated from the sale of units sold. The difference between the sales revenue and the COGS equals the gross profit. Process costing is used when a company produces a continuous flow of units that are indistinguishable from one another. Job-order costing is used when a company produces many different jobs that have unique production requirements (custom orders). As you can imagine, companies that use the job order costing methodology tend to experience higher production costs, since their company is producing multiple goods or services or different variations of the same goods or services (hybrids). Conversely, companies that are using process costing, tend to have lower production costs, since they produce a single good or service.

Question:

The St. Sixtus monastery last expanded its’ production capacity in 1946; however, due to an increase in the cost of maintaining their modest lifestyle and expanding demand for specialty brews, they are now considering four (4) business options:

maintain the status quo, same product and same production capacity;

expand existing production capacity and maintain the existing product;

create custom micro-brews, but maintain the same product capacity, and create custom micro-brews, and expand existing production capacity.

The monks are aware that there is a growing demand for specialty beers, but don’t know if this the correct direction they should take their enterprise.

1 give recommendation as to which business options makes the most sense for St. Sixtus monastery.

consider the current and future demand, production cost implications, the costing approach, sales revenue, and any other relevant information given the different business scenarios (options). Ensure that your recommendation is well supported, properly vetted, and logically presented.

It is important that management carefully consider any potential ethical implications associated with their stated position.