Company Major Businesses Operates. One Business Manufactures

¶ … company major businesses operates. One business manufactures sells unicycles commercial circuses (total sales $150M), sells bicycles public (total sales $20M). The unicycle business occupies 75,000 square feet manufacturing warehouse, bicycle business occupies remaining 25,000 square feet.

Business scenario

Unicycle and bicycle manufacturing

Advertising and warehousing costs

The totality of the advertising and warehousing costs -- M -- were divided equally between the two businesses. Specifically, this means that advertising costs were of 0.5 M. For the unicycle business and 0.5 M. For the bicycle business. Similarly, in a context in which the total warehouse costs were of M, and they were equally divided between the two businesses, it is stated that 0.5 M. were the warehousing costs for the unicycle business and 0.5 M. were the warehousing costs for the bicycle business.

Recommendations for cost allocation

Aside from the traditional manner of dividing the total costs equally and allocating them to the two business activities, there are two other possibilities of allocating the costs -- based on the space occupied in the facility, and based on the level of sales. The warehousing costs would be allocated based on the space occupied in the facility. Specifically, warehousing costs would be allocated as follows: 0.75 M. For the unicycle business and 0.25 M. For the bicycle business. In terms of the advertising costs, these would be allocated in a larger proportion to the bicycle business, as this is more commercial and requires more publicity, than the unicycle business, which ensures distribution through specific and niche segments.

3. Cost allocation issues

The adequate allocation of the costs to the two business operations is necessary in order to avoid and address several issues, including the following:

Resource necessities

Profitability computations

Future growth projections

Investment necessities

Expected outcome and so on.

Part 2: Job order costing system vs. process type costing system

1. Compare and contrast

Job order costing refers to the allocation of costs to each job encountered in the production process (Business Dictionary). The process type costing system on the other hand collects all costs and equally divides them per units of produced items (Bradford, 2008). Job order costing is as such focused on the unit costs of a product based on the cost of the operations incurred in its creation, whereas process type costing is interested in the unit cost of an item through the lenses of all costs incurred in the total production.

2. Selection based on company type

Each of the two costing system above discussed is adequate in specific circumstances. The job order costing system for instance is more adequate in companies where more types of products are manufactured and this is because the costs are assigned to the jobs, and they are then divided by units of products manufactured. "In a job order costing system, costs are traced to the jobs and then the costs of the job are divided by the number of units in the job to arrive at an average cost per unit" (Accounting for Management).

In the case of the process type costing system, this is more suitable for companies which produce homogenous items. Managers in these types of companies producing similar items use the process type costing system as this saves time, is more flexible and easier to implement than other costing systems (Vitez, 2011).

3. Company particularities

The organization under discussion aims to produce a single type of product for the time being, but hopes to diversify its operations some time in the future. Under these circumstances, it is recommended that the company now implemented the job order costing system, with the possibility of replacing it with the process type costing system once the production diversifies.