Generally, a business that entails manufacturing and other relative activities requires the manager to have the proper insight into the basic necessities, including their market prices. In order to effectively evaluate the cost of producing a product, various factors, including labor, overhead cost, materials, distribution channel, and other valuable aspects, must be considered to aid in establishing the overall price at which the end product will be charged in the market. A first-rate analysis is a fundamental approach that enables producers to factor in all the possible costs incurred in the process of production to determine whether the operation is worth undertaking.
During manufacturing products, costs involved are categorized as either relevant or irrelevant. The relevant cost refers to charges that can be easily avoided and are mostly incurred when making a given managerial business decision. They aid business owners in deciding whether to continue undertaking specific actions or to stop (McLaney & Atrill, 2020). For instance, an entity uses relevant to choose between buying and making any component required to facilitate production. Based on the bakery situation, such charges include labor costs, delivery charges, and packaging.
Similarly, the other aspect of charges in managerial accounting is irrelevant cost. This refers to the rates which are not affected by any management decision regarding the production of wedding cakes. In other words, when business managers make choices, they do not consider the facet of such charges. Such costs remain unchanged over a long period of time during the operation period. They include the cost of ingredients and the overhead, which contains the machinery and other equipment used in the bakery process.
Minimum Price for Wedding Cake
Pricef cake = labor + ingridients + delivery
Labor = 3 staff members working at 10$ per hour
Preparing wedding cake requires 2 hours of labor time
Ingridients = $20
Delivery cost is $10, which is the price of fuel
.:Labor costs = 3*2($10) = $60
The overall cost = $60 + $20 + $10 = $90
Since the profit margin of cakes is 100% of the cost price, then the minimum price for the cake should be $180. Based on the analysis above, I will charge the ordered wedding cake $190 because the packaging and delivery are done by the business. Furthermore, the overhead costs such as the charges for electricity and other requirements, including the time I spend to take the product to the wedding, must be fully compensated.
The main aim of outsourcing services is to enable an organization to reduce costs and increase the efficiency of operations. However, in some cases engaging in the practice might be more costly than depending on the in-house production. It is important for the manager to analyze the possible cost associated with the choice before deciding whether to obtain services from outside. For the case of outdoor catering, the management should weigh the charges associated with hiring persons compared to the variations that would occur, supposing the process is undertaken in-house.
Cost When the Service Is Provided In-House the Shop
Labor = 3 staffs each $20
Contribution other products = -$5 for each staff
cost = (3*$20)+(3*$5)
cost = $60 + $15
cost = $75
Cost When Outdoor Catering Services Are Outsourced
Labor = 25 persons each $35
cost = $875
Based on the analysis above, when the services are offered in-house the shop, the cost of labor is $75 because the business will retain the same number of staff to provide the services. However, when outsourced, the number of staff required will be 25, each costing $35, making the overall charge $875 to deliver outdoor catering. By comparison, the outdoor catering services should be in-house to reduce the cost. By using the in-house services, the business will reduce the extra costs of acquiring labor to provide the services. The quality of cakes will be guaranteed since the staffs have the knowledge and necessary skills as per the demands of the business. Furthermore, the services will be customer-oriented, making the bakery satisfy customers. The team will be able to work under less supervision leading to high efficiency.
The above information is useful in helping businesses to save on the cost of producing products. In addition, it enables an organization to estimate the prices at which they will sell the goods. It provides a clear basis for rating the production of staff the production. It also enhances the flexibility towards facilitating the process of operation. Comparing the two options gives clear insight into the best strategy worth undertaking.
There are a number of factors that bakery businesses should consider before opting to engage in in-house or outsource outdoor catering services. They include the cost of acquiring the personnel to undertake the production. When the cost of hiring staff is high, the entity might choose to use in-house services. I will consider the ability to meet stipulated deadlines during production (Sandhu et al., 2018). When the in-house service cannot provide a service rate to meet the time frame, I will opt to outsource it to achieve the goal. Similarly, supposing the hired individuals are unable to offer outdoor catering services in a timely and lack proper backup to counter in case they miss the deadline, then I will outsource the services. Another crucial qualitative factor to be considered is the aspect of supervision. Before hiring vendors to provide the services, I will have to evaluate whether they can offer the services and protect the available resources without proper supervision. Furthermore, I will consider the element of trustworthiness to enable an understanding of the level of reliability of the people.
Generally, the production costs are categorized as marginal, absorption, or activity-based costing according to how charges are valuated. Marginal costing is an approach whereby the fixed costs are treated as period costs, and variable charges are reflected as the product cost (Maheshwari et al., 2021). On the other hand, absorption costing is a criterion that groups variable and fixed costs as the cost of the product. Activity-based costing (ABC) entails assigning direct and indirect charges to the products.
Moreover, the purpose of marginal costing is to indicate the overall contribution of the cost of the product. The absorption estimate is aimed at providing an accurate measure of profits. ABC assessment is focused on allocating the overhead charges incurred during the production process. In addition, marginal costing is valued as a contribution per a given unit. Absorption is expressed in terms of the profit of each component. On the other hand, ABC bases its cost on a central cost.
Furthermore, the marginal costing approach evaluates the cost of the next unit. The absorption procedure is focused on determining the charges of each unit, whereas ABC determines the overall cost of creating a given product (Hansen et al., 2021). In addition, marginal costing is effective for determining prices in the short term. The absorption method is essential in tracking the profits of the organization. ABC, on the other hand, allows for accurate product pricing, making it easier for entities to charge goods and services accordingly.
Therefore, based on the three valuation methods, ABC is the most appropriate for the bakery business because it ensures accurate estimation of the prices, which will make the organization charge the correct prices for their products. Furthermore, ABC deals with the overall cost of producing a commodity, unlike both marginal and absorption costing, which gives detail of each unit. It is necessary for managers to compare the various costs to comprehend the one with proper insight into determining product costs.
References
Hansen, D. R., Mowen, M. M., & Heitger, D. L. (2021). Cost management. Cengage Learning.
Maheshwari, S. N., Maheshwari, S. K., & Maheshwari, M. S. K. (2021). Principles of Management Accounting. Sultan Chand & Sons.
McLaney, E., & Atrill, P. (2020). Accounting and Finance. Pearson Education, Limited.
Sandhu, M. A., Shamsuzzoha, A., & Helo, P. (2018). Does outsourcing always work? A critical evaluation for project business success. Benchmarking: An International Journal. Web.