BB210 Management Accounting for Amcor Limited

Answers     

Product Cost Accounting: Amcor Limited

Introduction

Amcor Limited or Amcor is one of the global hugest packaging firms. Amcor provides fiber, plastic, metal as well as glass packaging products besides packaging-associated services. The company operates mainly in the United States and Australia. Amcor is headquartered in Hawthorn, Victoria, Australia and hire around 33,868 workers globally. It is the global largest supplier of the flexible packaging and operates across thirty countries besides eighty-nine plants (Fisher & Krumwiede, 2012). The products comprise packaging for fresh foods like meat, bread, fish, produce as well as dairy; processed foods including confectionary, coffee, ready meals and snack foods; alongside high value-added resin as well as aluminum oriented medical applications, pharmaceuticals, hospital supplies, person and home care products alongside specialty packaging. Amcor also undertakes rigid plastics with its seventy-five plants crossways thirteen countries and its Rigid Plastics remains the global largest manufacturer of polyethylene terephthalate (PET) containers and supplies consumer products alongside FMCG firms, small and big. The Rigid Plastic containers and capabilities comprise packaging for cold and hot, alcoholic beverage, blow molded as well as extrusion molded plastic containers for the food, alongside a range of PP, HDPE and PET containers for the home and personal care products and pharmaceutical.

1: Amcor’s Costs Included in Product Cost

This section gives a detailed description of the particular costs that Amcor Limited includes in its in product cost.  Amcor Limited cost-based pricing methods builds from the product cost subtotal. In the calculation of Amcor’s product cost, the company includes the business operational cost. The operating cost include the raw material, advertising, transportation, wages as well as rent alongside other cost Amcor incurs in producing its products. The firms does this to obtain the base cost and subsequently the level of the profit it wishes to the subtotal of the product cost for the determination of the price of the product (Stark, 2015). The amount of profit that Amcor Limited adds to the product cost subtotal is set based on three diverse methods: including a profit % with the cost of product also called mark-up pricing, adding a % to the indefinite product cost also called cost-plus pricing and price is looked at as the total profit alongside product cost blending, also called planned-profit pricing. To be accurate, Amcor Limited uses a completed subtotal product cost. In Amcor, the key to accuracy is to make sure that all cash as well as non-cash costs (labor, raw materials, and operating or overhead costs) are encompassed in the subtotal of the product cost. Amcor Limited sets a value for its management expertise alongside labor. The company further values the use of its capital equipment and land alongside the depreciation on its machinery alongside buildings. Amcor then includes these values in the subtotal of the product cost. The company undertakes cost separability and need for allocation. The joint cost are those total cost of the labor, raw material ad overhead cost it incurs up to initial point of split-off. The company allocates these joint costs to its final product solely in certain arbitrary manner since these costs can never be traced straight to the final product they benefit. The allocation of the joint cost to the final product is undertaken in Amcor to meet the GAAP financial reporting requirements alongside the federal income tax law for measuring income alongside valuation of inventory. Amcor

2: Amcor’s Detailed Level Direct Product Costs Tracking

Amcor Limited take keenly a detailed level of tracking direct product costs since the company believes that only then will the right decisions be made to propel the company in creating a sustained  competitve edge. Most managers in the companies that sell multiple products make significant decisions relating to pricing, process technology and product mix on the basis of distorted cost info (Pettersson & Segerstedt, 2013). Amcor is aware of such practices and hence tracks its direct product costs effectively to make the right decision since what is worse is that alternative info exist rarely to alert such managers that product cost is flawed badly. Therefore, unlike other firms that would fail to detect the problem before the deterioration of the competitiveness and profitability, Amcor seeks to do it right from the initial time to remain profitable and competitive to edge out its sleeping rivals. Unlike in the past where the direct product cost (direct labor, raw materials and overhead) could be easily traced effortlessly into the final individual products, thigs have changed in the contemporary business leading to more distortion of the cost information where firms like Amcor manufacture broad array of products. Amcor understands that in the contemporary business, information distortion from allocating factory as well as corporate overhead through rates of burden on direct labor are major unlike before when they were minor (Vezzoli et al., 2015). Moreover, there is a more sophisticated allocation of product overheads and this validates the keen interest by Amcor to trach its direct product cost at a highly detailed level. Amcor further understands how product lines along with channels for marketing having proliferated with the direct-labor presently representing a minor portion of corporate cost, whereas expense of covering Amcor factory support operations, distribution, engineering, marketing, and additional overhead functions have ballooned. This invalidates the allocation of increasing support alongside overhead costs via the diminishing direct-labor-base. Accordingly, such unsophisticated methods have ceased from being defensible in the presence of the IT plummeting cost. The use of ancient simplistic allocation approaches can be dangerous coupled with the intensified international competition as well as radically novel production technologies in Amcor thereby making accurate product cost info essential to competitive survival (Chandrasegaran et al., 2013). The pricing policy is also affected by such a detailed level of direct product cost tracking since this informs Amcor on how to effectively price its flexible and rigid packaging without making losses while still being sustainable and competitive.    

3: Indirect Product Cost Organization

Amcor takes it serious when organizing its indirect product costs. Indirect costs describes the ones affecting the whole company and not merely single product. These cost include advertising, depreciation, general supplies and accounting services just to mention a few. They are called overhead costs since they are the ongoing cost of operating the Amcor business that are indirectly linked with making products of offering. Amcor Limited uses both variable and fixed direct costs (Kaplan & Atkinson, 2015). The fixed cost include the rent Amcor Limited pay on the building and the variable cost can include electricity or water bill that can change per month. The firm also used indirect materials as well as indirect labor. Indirect materials include tools, cleaning supplies as well as office supplies that facilitate the company’s product production feasible which can never be assigned to a particular product (Reim, Parida & Örtqvist, 2015). Indirect manufacturing cost of the Amcor include depreciation, repairs, and maintenance, electricity for the production equipment and facilities. Salaries, fringe benefits alongside wages of indirect manufacturing personnel like production supervisors, handlers of materials, quality assurance alongside other factory support personnel are another category of Amcor indirect costs. Factory supplies, outside services relating to manufacturing as well as additional manufacturing associated cost. By looking at how to account for the costs incurred by Amcor in its manufacturing processes on the basis of product, Amcor can use product based costing systems via process- and job costing (Ruiz-de-Arbulo-Lopez, Fortuny-Santos & Cuatrecasas-Arbós, 2013). In regards to the process costing, Amcor need to organize its indirect cost on the basis of types of the processes and subsequently allocate indirect product cost to product on the basis of quantity. In regards to job costing, Amcor can be used by Amcor to organize its indirect product cost to products based on engagement or job. Amcor should then move further to allocate the indirect product cost to products on the basis of different resources’ usage.

4: Amcor Indirect Cost Allocation to Products

Amcor should change the manner in which they allocate indirect costs to products. Amcor is still using traditional cost accounting whereby the allocation of indirect manufacturing costs is done or spread to products manufactured oriented on the direct labor hours, direct labor costs, or production machine hours (Drury, 2013). Nevertheless, in the contemporary business, the indirect manufacturing costs have increased in Amcor significantly and are less probably to be triggered by quantity of the direct labor/production machine hours. With Amcor’s consistently large amount of inventory, the company will face a problem for the Amcor’s pricing as well as other decision and hence the need for new allocation methods. Amcor should allocate indirect cost to products on the basis of the quantity through process costing approach where cost are organized by type of the process (Fisher & Krumwiede, 2012). Ultimately, Amcor will use these system in high volume context, implying that Amcor is manufacturing a lot of identical goods. To visualize this in Amcor, it should think of diverse production phases alongside production department one dealing with cutting and sorting raw materials and the second one dealing with compilation of good, putting each material together. The company will then work through both of work-in-process inventory phases, and subsequently goods move in to finish-goods inventory phase. Finally, when such goods are sold, the classification of the costs is done as an expense in category cost of goods sold (Kalpakjian & Schmid, 2014). Thus, process costing systems will help Amcor organize the indirect product cost of different categories of the costs on the basis of process involved in the completion of products. Amcor can also use the job costing approach to organize the indirect product cost by engagement or job. The allocation of cost is thus done to products on the basis of usage of different resources. The job costing is useful to Amcor in case of extremely customized product contexts. To visualize it in Amcor, the firm should have identical categories and manufacturing overhead and assuming Amcor is operating in a product based environment. Work-n-process inventory, after such costs are beginning to be incurred, Amcor organize them around the diverse engagement or job which had been producing. After the completion of jobs based on process they are then shifted into finished goods inventory and once sold, it converts to an expense and is then categorized as the cost of the product (Baines & Lightfoot, 2013).

Conclusion  

The product costing approaches identified in this discussion are the job costing and process costing. The discussion has highlighted different direct and indirect costs that attached to Amcor Limited in the manufacturing of its flexible and rigid packaging. Some of the cost identifiable to be included in product cost of Amcor included direct labor cost and raw materials where indirect labor cost and depreciation and electricity alongside rent are highlighted as the indirect cost of Amcor. The analysis has identified that Amcor takes its tracking of direct cost into higher detail level to make the right decision thereby creating sustained competitive edge. It has been highlighted that Amcor should organized its indirect costs based on type of the process (process costing approach) and job or engagement (job costing approach). Amcor should allocate the indirect product cost to products on the basis of different resources’ usage using job costing method and allocate in terms of quantity using process costing method.

References

Baines, T., & Lightfoot, H. (2013). Made to serve: how manufacturers can compete through servitization and product service systems. John Wiley & Sons.

Chandrasegaran, S. K., Ramani, K., Sriram, R. D., Horváth, I., Bernard, A., Harik, R. F., & Gao, W. (2013). The evolution, challenges, and future of knowledge representation in product design systems. Computer-aided design, 45(2), 204-228.

Drury, C. M. (2013). Management and cost accounting. Springer.

Fisher, J. G., & Krumwiede, K. (2012). Product costing systems: Finding the right approach. Journal of Corporate Accounting & Finance, 23(3), p. 44.

Kalpakjian, S., & Schmid, S. R. (2014). Manufacturing engineering and technology (p. 913). K. V. Sekar (Ed.). Upper Saddle River, NJ, USA: Pearson.

Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.

Pettersson, A. I., & Segerstedt, A. (2013). Measuring supply chain cost. International Journal of Production Economics, 143(2), 357-363.

Reim, W., Parida, V., & Örtqvist, D. (2015). Product–Service Systems (PSS) business models and tactics–a systematic literature review. Journal of Cleaner Production, 97, 61-75.

Ruiz-de-Arbulo-Lopez, P., Fortuny-Santos, J., & Cuatrecasas-Arbós, L. (2013). Lean manufacturing: costing the value stream. Industrial Management & Data Systems, 113(5), 647-668.

Stark, J. (2015). Product lifecycle management. In Product Lifecycle Management (pp. 1-29). Springer International Publishing.

Vezzoli, C., Ceschin, F., Diehl, J. C., & Kohtala, C. (2015). New design challenges to widely implement ‘Sustainable Product–Service Systems’. Journal of Cleaner Production, 97, 1-12.