Imagine that one of your parents has traveled across the country to visit you at college. As the two of you have dinner together at one of your favorite restaurants, the discussion turns to your accounting class. You begin describing some of the new ideas and techniques you have been learning lately. Suddenly, your parent wants to talk about the family business. As the discussion goes on, it become clear that your parent is expecting you to provide some specific ideas about how to improve the management process in the family business using current accounting methods. You certainly want to impress your parent with all the detailed knowledge that you have gained since beginning your course work in accounting. However, you are also concerned that you may describe something incorrectly or say something misleading.
One day you expect to run the family business, and you would hate to say anything during dinner that might later cause problems in the company!
Required:
You need to respond to your parent using insights gained from the first three management accounting chapters (Chapters 15–17). Further, answering your parent’s questions will require you to carefully construct your remarks in light of the exact nature of the family business. Hence, we will assume three separate types of businesses for your family:
1. Computer manufacturing plant
2. Large architectural firm
3. Neighborhood grocery store
Part A
Listed below are a number of topics from Chapters 15 and 16. Briefly describe in three sentences or less how each topic may relate to the family business.
1. Direct materials costs
2. Direct labor costs
3. Overhead costs
4. Inventory
5. Job order costing
6. Process costing
Part B
For only the company types 1 and 2 above (computer manufacturing plant and large architectural firm), describe how activity-based costing (presented in Chapter 17) can be used to better understand the costs associated with the company’s products or services. Identify specific production departments for each of these two company types and describe how each department generates costs or revenues for the company. Also, identify specific drivers for those departments that may help to effectively assign overhead costs.