Cost accounting Essay Example
When considering the decision to move to a new market, there are a number of factors to consider. These factors range from the financial aspects to the non-financial aspects. The relevant costs of production must be factored in.
Relevant costs are the costs which the firm incur at a given time in the future and vary for each alternative decision taken by the decision maker. (Blocher, Stout, Cokins, Che)
Silky Shag Ltd are faced with a decision proposed to them by a competitor, Shaggy Rags proposing to them to move its business to China. As the CEO of the company, it is of importance to evaluate the viability of the decision before making the final decision as to whether to accept the decision or reject it.
The relevant costs in this case include:
Direct labour -This is the cost of paying the employees that will work for the company while engaged in the production process. These are costs such as the wages they will pay to the workers and the cost of hiring new workers if need be.
Direct material costs- these are the costs incurred in acquisition of raw materials required in the production of the product. Silk Ltd thus needs to evaluate if the costs to be incurred will be reasonable enough to ensure that they are not high so that the company gets a profit from its activities. In this case,the particular costs are:
-the cost of buying Silk which reduces by 20%
-the cost of buyingthe polyester which reduces by 45%
The overall effect of these costs on the profit need to be evaluated before the decision is made.
Rent –this is the amount that Silk Ltd is going to pay for occupying a new building in another country. The rent to be paid by Silk in case it moves to China, reduces.
Research and development cost- this is the cost that Silk Ltd will incur in carrying out additional research in the market and also in developing the product to meet the
Other financial issues and costs
These are issues that have a financial implication and are considered as costs. They affect the profitability of the firm and also its operations. These factors which should be considered by Silk Ltd include:
Opportunity cost – this is defined as the value of the best forgone alternative. The value of the decision to be made by Silk Ltd must be measured against other available decision alternatives before a settlement is made.
For instance, Silk Ltd owns a building in Australia in which they are currently based. Also, they have a lease agreement signed for the plant and machinery. Therefore they have to value the costs such as the value of the building which they will cease to occupy against the rent which they will pay for a new building in China. If this value is too high then the decision should not be undertaken. Also, the amount they will pay incase of termination of the lease contract should be evaluated and the opportunity cost for this against the decision to be made evaluated.
Cost of moving to a new market- the costs to be incurred while moving to a new market should be considered. These are costs such as set up costs and such like. Silk Ltd should evaluate the availability of funds for the undertaking.
Costs of production- the aggregate cost of production in a market should be considered. Costs such as cost of land, technology and management costs should be evaluated before the final decision is made. Despite the fact that Sales increase by 50%, theselling price per unit decreases by 40% per unit. This could have a negative effect on the profit generated by the company. This thus should be evaluated.
These are the factors which cannot be valued financially by a business yet they affect its operations. Such factors need to be considered by any business before undertaking a decision to produce in a particular market. Silk Ltd needs to consider the following factors:
1) Tastes and preferences of the consumers- Silk Ltd needs to evaluate whether the consumers in the new market desire their product and can buy it. If there is desire for it then the decision to move to this market should be considered.
2) Risks in the new market-risk factors such as market risks and financial risks before moving to start operating in China. If the risks faced are too high then the company should consider rescinding the decision.
3) Laws and regulations –laws and regulations in China such as taxation and minimum wage laws need to be considered. SilkLtd needs to evaluate whether these rules are not punitive on foreign companies such as itself and it can operateprofitably within the rules.
Demand for the product in the new market-Silk limited needs to evaluate the demand for their product and the market share which they will control in case they move to China.
Competition-Silk ltd will have to consider the level of competition in China .it should consider other competitors present in the market and if it can handle the competition they present before it decides to venture into the market.
Economic stability of the country-Silk Ltd should consider the economic stability of China before it decides to move its business there as this would have a direct impact on its existence and profitability.
7)Motive – Silk Ltd should consider the motive behind the move by Raggy Ltd to ask it to move its operations to China since Raggy is it competitor and any move by it should be carefully analysed.
8) How long Shaggy would buy its product – before moving to China, Silk should consider how long Raggy wold buy its product as this may affect its market and profitability.
Blocher, Stout, Cokins, Chen: Cost Management, 4e 9-50 ,the McGraw-Hill Companies, Inc., 2008
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