I think that in some instances customers may receive products or services of lower value than the price of the firm’s products or services. This is especially the case for monopolistic firms which exploit customers with exorbitant prices for goods and services. Although monopolistic firms may offer some low-value products and services (in terms of quality or prices), the customers do not have an alternative and thus may continue buying even when they do not get value for their money.
I am convinced that there are cases where a firm may sell its services or products at a lower price than the cost of producing these products or services. This may however be done on a temporal basis as the firm looks for ways of lowering production costs. A firm may find itself in price wars especially where there is unhealthy competition. This may force a firm to lower its prices to match those of its competitors in order to curtail the migration of its customers to competing firms. Sometimes it may even lower prices below those of the competing firms. The new prices may be lower than the production costs of the firm’s products and services and may therefore be unsustainable. However, a firm may embrace this strategy in order to safeguard its market share as it seeks more sustainable ways of dealing with competition. Therefore, unhealthy competition such as price wars may cause a firm to temporally lower the prices of its products and services to a level below the production costs. However, this strategy is not sustainable but only a short-term measure aimed at stifling competition.
The idea of a lag between when a firm incurs cost and when it receives revenue was a little confusing to me. The section “products as cost objects” suggests that firms store products as inventory for some time until they are sold. This suggests that the products are cost objects as long as they are still stored. My question is founded on firms that enter into contracts with some customers. For example, if a leading supermarket was to enter into a contract with Cadbury for the supply of a given quantity of chocolate, would the product still be considered a cost object? If the supermarket had paid a certain percentage of the total amount due to Cadbury for the supply of the agreed quantity of chocolate, how does it affect cost allocation?
The explanation on period costs was also not very clear to me. There lacked examples to make it clear what these costs are in a firm. Therefore, it is possible that some of these costs although classified as expenses could actually be beneficial to a firm in the future. The allocation of indirect costs was also very confusing. Even with the Cadbury example, the allocation of indirect cost allocation was confusing.
I was very excited by the concept of attaching costs to cost objects. I was excited to realize that it is crucial for managers to know which aspects within a business are contributing to the firm’s profitability and which are not. I think this is a good thing because it will help the managers to control costs so that areas that do not contribute to a firm’s profitability do not end up incurring very high costs. However, it was not very clear to me how some customers are “more important” than others. I believe that the wide range of products and services produced by a given firm make every customer crucial and therefore there is no special customer. The allocation of costs to basic units of work such as warehousing, operating a store, recruiting new staff, and sending customer bills was also an exciting concept. It helped me understand that costs could be allocated to every activity of a firm and thus help a manager to be able to control costs. In my opinion, the understanding of cost allocation by a manager and especially understanding how costs are linked to cost objects in a firm is important in helping them to make decisions. The reason for control of costs is based on the premise that people in a firm are spending “other people’s money”. However, we have witnessed emerging trends in the business world where firms are allowing employees to own company shares and thus become owners of the business. In this situation, how are people in a firm spending “other people’s money”?
The apportionment of indirect costs to a cost object was hard for me to understand. For example in the case of council rates in the Cadbury factory example, it was assumed that the rate would be apportioned according to space occupied by each department. Since reducing the space does not reduce council rate, how do firms ensure that they choose realistic assumptions that would have an impact on the allocation of overheads?
Although I have long believed that there existed a clear difference between products and services, I was surprised that this line could become blurred especially where products and services are supplied together. The example of a meal in a restaurant (a product) that comes with a waiter serving (a service) was a very good example of how the line between a product and a service can be blurred.
I was able to clearly understand job costing as a technique of allocating costs to a particular product. This was made possible by the use of the examples (i.e. the 90,000-tonne luxury cruise liner and the chocolate-making process in the Cadbury). In the case of separately identifiable products such as the case of the luxury liner, it is possible to use the job-costing technique. However, attaching costs to the process of making chocolate during manufacturing as explained in the case of the chocolate-making process is impossible since the processes are not separately identifiable. Chocolate making process will thus use process-costing as opposed to job-costing. This information was very exciting to me.
In conclusion, I would say that chapter six provided very exciting information and an in-depth understanding of various costs, cost allocation techniques, and the need for a manager to understand all these. For example, I was able to learn that allocation of direct costs to a cost object is normally comparatively simple. On the other hand, the apportionment of indirect costs to a cost object is more difficult and requires making a number of judgments and assumptions. In my opinion, it is not easy to clearly understand the judgments and assumptions entrenched in the allocation of indirect costs. However, this understanding is crucial in enabling insights into the economic and business realities of a firm.