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For this assignment, our chosen project will be a “Chocolate” because it is used by the people of each age group anytime anywhere. All persons in each age group like this product. Thus, in order to manufacture a new product, it is the best option to undertake. The company would be able to generate more sales in the future with this product.
The production consists of all the processes that are involved in converting the available inputs into a finished product that can be sold in the market. In order to manufacture a chocolate, following inputs are required:
Raw materials: to manufacture any product, raw materials are always required because with the combination of raw materials, one can manufacture a product. Thus, to manufacture a chocolate you will require: sugar, water, currants, milk solids etc.
Labor: labor is always required to manufacture a product. The reason is that when a company is manufacturing a product, then it will manufacture the product in large quantities. Thus, labor is always required to manufacture a product in the company. So the company would need employees that are involved in running the machinery.
Machinery: every work cannot be done by hands only. Machines are always required to get the work done because it makes the work easy and ends it early. Thus, machinery is required to mix the ingredients, cook the biscuits, pack the biscuits and check on quality (Noel Hyndman, September 2009).
Finance: nothing in this world can be purchased without money. Thus, in that case, the company would require funds to pay for the wages of the employees, the cost of the raw materials, and the purchase of the machinery. Time: it is a very important resource that companies usually care about. While making or launching a new product, it is important to make estimates for the timing of operations. It needs to be well planned and organized (Drury, 2007).
Packaging and labelling: Packaging and advertising is an essential component of the product. It helps in differentiating a product of its kind. With the labelling and packaging, the user can easily identify the product anytime anywhere. The color, the labels, the packaging styles differentiates it from the other products easily.
Marketing and advertising resources: marketing and advertising of a product is a very basic condition for every company (Sheppard, April 2011). These resources always help a company to launch a product. It helps in creating awareness among the end users about the product. This helps in increasing sales as well as the reputation of the company.
Bean Selection and Cleaning: the first and the foremost step in chocolate making is to select the appropriate cocoa beans for the products. Once they are selected, they are cleaned by passing it through a bean cleaning machine which helps in removing the extraneous materials. Then those beans are mixed and precisely blended in order to produce the desired flavor of chocolate. This process of blending is considered as a science as well as an art because bringing the material in proper ratio and mixing it thoroughly to bring out the best flavors of chocolate from the beans.
Roasting: in order to make the best chocolates, in our company we will use the method of nib roasting. This process of nib roasting allows for the deeper roasts in order to produce a more robust chocolate flavor. When the unshelled nibs went into the roasting process, it gives more control over the temperature and time that in turn gives a more specific flavor.
Liquor mining: the nibs that are roasted in the previous step are now milled through a process that liquefies the cocoa butter in the nibs and forms "chocolate liquor”. In other words, it is chocolate liquid that can be pressed for cocoa butter and can be molded and solidified to make unsweetened chocolate.
Cocoa Pressing: the chocolate liquor is hydraulically squeezed to attain a portion of the cocoa butter from the chocolate liquor, leaving "cocoa cakes". These cocoa cakes can be used for a secondary product that is cocoa powder.
Mixing Refining: Ingredients such as chocolate liquor, sugar, cocoa butter, and milk powder, in quantities that make up the different types of chocolate, are blended in mixers to a paste with the consistency of dough. Chocolate refiners, a set of rollers, crush the paste into flakes that are significantly reduced in size. This step is critical in determining how smooth chocolate is when eaten.
Tempering and Molding: after this the above mixed dough is then sent for tempering heating and cooling process that creates small, stable cocoa butter crystals in the fluid chocolate mass. These are molded with proper tempering in order to create a finished product that shows a glossy and smooth appearance.
Cooling and Packaging: the chocolate is then entered into cooling tunnels to make the pieces solid. Depending on the size and shape, the cooling process takes between 20 minutes to two hours. From the cooling tunnels, the chocolate is packaged for delivery to retailers and ultimately into the hands of consumers.
Classification of costs
Selection of best beans and cleaning, Tempering and molding
Semi Skilled Labor
Labor mining and cocoa Pressing
Roasting and Mixing Refining
Cooling and Packaging of the chocolates
Rent of Plants and machines
Raw Material: As mentioned above is considered as a basic requirement of a product. In our product, it is estimated that the cost of this Raw material mentioned above will be around 30% of the total cost of the product.
Unskilled Labor: As per our experience, the unskilled labor will be available at a cost of 10% of the total cost of the product. The reason being that they do not have to do any critical work or something in regard of the manufacturing. The only work assigned to them is the work of selection and cleaning of beans and arranging the material properly (Drury, Management Accounting for Business, 2006).
Semi Skilled Labor: the semi skilled labor will be assigned the work of Labor mining and cocoa Pressing. Thus, as per our experience, the semi skilled labor will contribute for about 15% of the cost.
Skilled Labor: the main work in the manufacturing of our product is provided in the skilled labor. Hence, we believe that 25% of the total cost will be absorbed by the skilled labor (Fia Foundations in Management Accounting Fma, 2013).
Overheads: The overheads include the packaging and labelling cost of the product. This is considered the most essential work in the manufacturing of the product. Hence, 20% of the total cost will undergo Overheads.
Raw Material----- 30%
Semi Skilled Labor- 15%
Skilled labor- 25%
A unit cost of a product is the cost incurred by a company to produce, store and sell one unit of a particular product. Unit costs include all fixed costs (i.e. plant and equipment) and all variable costs (labor, materials, etc.) involved in production. Thus, it is important to ascertain the unit cost of the product. Because in the absence of the unit cost, the company would not be able to set the profit level of the product. In absence of profit margin, the company would never be able to keep a check on its earnings. Since, the Fixed cost is a part of the unit cost, it will help in finding out the breakeven point of the company (Media, 2013). The breakeven point of the product will help in ascertaining the level of output or the level of sales that the company would require to cover the fixed costs and then ultimately reaches to the situation of “No Profit and No Loss”. Unit costs must be available for comparison of varying volumes and amount and for the purpose of establishing the unit sales price of the product or service. If volume of activity increases, the variable cost per unit remains the same, but the fixed cost per unit drops.
- The price for the raw material can be easily ascertained on the basis of the purchase price and the expenses incurred with the purchase.
- While calculating the price of the labor, always try to calculate the cost on the basis of the house being used to manufacture the product. Because it is the easiest way to know the no. of units produced during one hour.
- Overhead costs can be easily ascertained on the basis of the material purchased and printed for the packaging and labelling of the product.
- Fixed cost can be broken down into per unit costs by analyzing the number of units produced during the period of while the fixed costs has been incurred by the company.
- After adding all the above costs, the per unit cost of the product can be calculated easily without any issues and difficulties.
The selling price of the product is the price at which the product is sold in the market for the end users. The selling price of the product should be estimated in such a way that it will be able to cover all the costs (Variable as well as the fixed) of the product and will help in generating income for the company. Thus the selling price is the sum of the profit and the costs being incurred by the company. Thus, while calculating the selling price, it is important to estimate that how much does the company wants to earn? Since, a chocolate is used throughout the year, a regular purchased product by people of all age groups and is also a low priced product. Thus, as per my opinion, the company should at least earn 15% of the total cost of the product. In other words, the company has to sell the product at a price equal to 115% of the total cost.
The company should always keep in mind that while estimating the prices, it will be able to cover all the costs. In case the costs are left uncovered, then the company would undergo losses and there will be no use of manufacturing the product.
Hence, it would not be wrong to say that while calculating the prices of the product, the costs play a very vital role. Because if the costs of the product are not known, then the company would never be able to estimate its earning in any product.
So while estimating the cost it is important to find out the contribution of the product:
Contribution= Sales less Variable costs. If the company is able to recognize the value of contribution, then it would be easier to set the selling price of the product.
While estimating contribution, the company has to understand the breakeven point by making the use of the fixed costs incurred by the company. Thus, at break even point the contribution should be equal to the fixed costs incurred by the company.
Overall, while estimating the selling prices, the company has to work upon the contribution and the costs of the product. This will finally help to ascertain the selling price of the product.
Drury, C. (2006). Management Accounting for Business. Cengage Learning EMEA.
Drury, C. (2007). Management and Cost Accounting. Cengage Lrng Business Press.
Fia Foundations in Management Accounting Fma. (2013). United kingdom: Bpp Learning Media.
Media, B. L. (2013). Cpa Management Accounting. United Kingdom: BPP Learning Media .
Noel Hyndman, D. M. (September 2009). Cases in Management Accounting and Business Finance . Ireland: Chartered Accountants Irelands.
Sheppard, G. (April 2011). Management Accounting. Dublin: Gill & Macmillan.