Cost Accounting and Management Decisions Name: Institution: Ford Motor Company Description Henry Ford founded Ford Motor Company in 1903. Headquartered in Dearborn, Michigan, the company mainly produces three products automobiles, commercial vehicles and automobile parts. Ford is currently the second largest U.S based automaker but the fifth in the world…
1). Management of this company believes in ranking the automobiles by the quantity of contribution margin earned for internal decision-making purposes. They view direct labor, direct material, and the variable manufacturing overhead as product costs while fixed manufacturing overhead as period costs (Hicks, 2002, p. 36). A major change in the company’s manufacturing has been conversion of most of the plants to produce smaller cars instead of the bigger cars that are seen as fuel inefficient. In the recent past, Ford Motor Company has concentrated of production and sell of small cars that achieve higher mileage on less fuel. This strategy has been influenced by the desire to cut on the global air pollution, something responsible for the global warming. The current global challenges have made the company embark on manufacturing varieties of the automobiles to ensure that the costs are balanced. For this reason, management has lately discouraged any production of goods that do not produce adequate sales to cover up its variable manufacturing costs (Weygandt, Kimmel and Kieso, 2011, p. 23). The company has maintained the main manufacturing lines of cars, trucks, buses, tractors, and their spare parts. Ford’s success motorsport has been evident in their ability to manufacture rally cars, stock cars, formula one, sports cars, as well as touring cars. It is also important to note that the company has maintained its presence in all parts of the world, having assembly lines in many countries in order to serve many regions. Changes in the Variable/Fixed Cost Structure of the Company on Cost-Volume Analysis Decision by Managers First, it is important to note that fixed costs do not change as a whole but register changes per unit when production volume changes, and on the other hand, variable cost indicates constant unit cost but changes in total when a decrease or an increase in production is registered. Ford’s fixed costs may include rents for the plants and machinery while variable costs may include direct labor. This means that fixed cost is as important as variable cost and monitoring the changing trends stands to help managers make informed decisions. World over, absorption costing is commonly used for both internal and external information in an organization. Most companies use absorption approach entirely because of its attention on full costing of units of a particular product. In order to make informed choices, most managers assume that fixed manufacturing overheads directly vary in relation to the automobile units sold, something that never works (Weygandt, Kimmel and Kieso, 2011, p. 103). Managers who make this mistake may assume that since costing is done per unit base, an additional manufactured should cost the same, while reality shows an additional expense. Ford Motor Company is a multinational manufacturer, employing very many employees in all the plants across the globe. Labor has been an important factor in ensuring that production consistency is achieved in this company. In the current economic uncertainties, managers in this company are sometimes faced with the dilemma of laying of workforce in an attempt to maintain profitability. Such a decision is informed by the notion that direct labor is variable cost, something that is disputable because most of its workers are highly skilled and are under employment contracts. For this reason, any decision made by the ...
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