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Accounting. John Deere Company’s Manufacturing Costs Report

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Introduction

This memorandum gives a breakdown of the manufacturing costs of a combine harvester. The determination of these costs has been arrived at after carrying out comprehensive research on the process of manufacturing the product. The production of a combine harvester goes through distinctive stages, namely, cutting the steel into blanks, welding the form parts, painting, welding the grain tank, final assembly, and quality control.

There are material costs and other costs that are incurred at each stage. The final product is easy to maintain, dependable, and easy to use. The costs will be grouped into three broad categories. These are direct materials, direct labor, and manufacturing overheads. Analysis of the manufacturing costs of the product will act as a guide for setting the price. Discussion of the costs is below.

Direct material costs

The major raw material in the production of a combine harvester is sheet steel. The company receives large quantities of steel. The steel goes through the process of cutting, drilling, shaping, and welding to make the body, external panels, and grain tanks. The round bars and square steel are also cut and drilled for axles, driveshafts, augers, and supporting structures. The company also has complex subassemblies for the engine transmission and other important components.

Other raw materials such as axels, hubs, tires, paint, oil, gas, hydraulic lines, wiring materials, and polyurethane are also purchased externally. The manufacturing process is carried out using computer-controlled units to ensure efficiency and precision (Vanderbeck and Mitchell 370). The cost of direct materials used in the production process is estimated with the formula below.

Cost of direct materials = cost of opening direct materials + cost of direct materials purchased – the cost of closing inventory of direct materials

Direct labor costs

The direct labor costs represent the wages paid for the production of a combine harvester. It excludes the wages and salaries paid for activities other than the production of a combined harvester. As much as the manufacturing of the harvester is computerized, workers are required to operate the machines. Therefore, there is an element of direct labor in the production of the product. The direct labor costs will be made up of “the salaries and wages paid to the workers in the manufacturing plant, payroll taxes, company-paid medical insurance, life insurance, worker’s compensation insurance, company-matched pension contributions, and any other benefits that are paid for by the company” (Weygandt, Kieso, and Kimmel 174). The value of the workers can be estimated using the formula presented below.

Value of employees = work time * wage earned

Manufacturing overhead costs

This final category is made up of all other costs other than direct materials and direct labor costs. Some of the manufacturing overheads are payment of utilities such as electricity, sewer, gas, and water for the plant; insurance for the plant; property taxes, repairs, and maintenance of the plant; depreciation of factory equipment; factory supplies; payment of factory employees (other than direct labor); and safety and environmental costs.

It is worth mentioning that some of the costs are for the entire production plant. They relate to all the products that are manufactured in the production plant. Therefore, since the company deals with the manufacturing of an array of products, these costs should be apportioned to the combine harvester. Several techniques are used to apportion these costs. Furthermore, selling, marketing, and administrative costs should be excluded when estimating the cost of the product (Weygandt, Kieso, and Kimmel 175).

Flow of costs

Since the company deals with the manufacturing of goods, the flow of costs is significant, because it shows the balances of raw materials, work in progress, finished goods, and cost of goods sold. The company makes use of both a last-in-first-out and a first-out-last-in basis to value the inventory and to track the flow of accounting information. The journal entries below are for the cost of manufacturing a single combine harvester.

Details Debit Credit
Raw materials
Accounts payable (cash)
To record the purchase of raw materials on credit (cash)
$75,000 $75,000
Overhead cost pool
Account payable
To record indirect production costs
$25,000 $25,000
Work in progress inventory
Raw materials inventory
To record the transfer of raw materials to work in progress
$75,000 $75,000
Finished goods inventory
Work in progress inventory
To record the completed combine harvesters
$75,000 $75,000
Work in progress inventory
Overhead cost pool
To record the manufacturing overhead allocated to combine harvester
$25,000 $25,000
Cost of goods sold
Finished inventory
To record the sale of a combine harvester
$100,000 $100,000

Works Cited

Bhimani, Alnoor, Charles Horngren, Srikant Datar, and George Forster. Management and Cost Accounting, England: Pearson Education Limited, 2008. Print.

Drury, Colin. Management and Cost Accounting, Boston: Cengage Learning, 2008. Print.

Hirano, Hiroyuki. The Just-in-Time Production System, Florida: CRC Press, 2009. Print.

Rios-Mercado, Roger and Yasmin Rios-Solis. Just-in-Time Systems, New York: Springer, 2011. Print.

Vanderbeck, Edward, and Maria Mitchell. Principles of Cost Accounting, Boston: Cengage Learning, 2015. Print.

Weygandt, Jerry, Donald Kieso, and Paul Kimmel. Managerial Accounting: Tools for Business Decision Making, London: John Wiley & Sons Ltd, 2010. Print.

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IvyPanda. (2021, April 7). Accounting. John Deere Company's Manufacturing Costs. Retrieved from https://ivypanda.com/essays/accounting-john-deere-companys-manufacturing-costs/

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"Accounting. John Deere Company's Manufacturing Costs." IvyPanda, 7 Apr. 2021, ivypanda.com/essays/accounting-john-deere-companys-manufacturing-costs/.

1. IvyPanda. "Accounting. John Deere Company's Manufacturing Costs." April 7, 2021. https://ivypanda.com/essays/accounting-john-deere-companys-manufacturing-costs/.


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IvyPanda. "Accounting. John Deere Company's Manufacturing Costs." April 7, 2021. https://ivypanda.com/essays/accounting-john-deere-companys-manufacturing-costs/.

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IvyPanda. 2021. "Accounting. John Deere Company's Manufacturing Costs." April 7, 2021. https://ivypanda.com/essays/accounting-john-deere-companys-manufacturing-costs/.

References

IvyPanda. (2021) 'Accounting. John Deere Company's Manufacturing Costs'. 7 April.

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