Business

Two things to do here. I wrote about about two different topics and so did my classmate. What I need you to do for BOTH topics is comment on my classmate’s post, compare it to my post , and point out what you agree with on what they wrote.

I need you to write 250 words on each topic comparing my post to theirs. (Put the first one on 1 page and the second one on Page 2)

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Please let me know if you need further instruction.

This is MY post on the first topic:

 

Planning is essential to businesses, and it enables them to assess changes that they can make to their operations, in order to increase profits. Cost behavior analysis is one of the approaches used by businesses in planning. It enables executives to establish the changes in costs associated with changes in business activity (Mowen, Hansen, & Heitger, 2017). Unfortunately, cost behavior estimation into the future can be challenging due to several factors, such as inflation. Therefore, managers must adopt strategies to compensate for the effects of inflation when preparing cost estimates. Discounting models present the methods that can be used to account for inflation.

The net present value (NPV) is one approach of the discounting models that can be used to compensate for the effect of inflation. It helps to evaluate long-term projects by accounting for the time value for money, which indicates that the worth of money in the present is more than that of the same amount in the future (Mowen, Hansen, & Heitger, 2017). Bora (2015) defines net present value as the “difference between the present value of all cash inflows and outflows in a business.” In order for a project or investment to be considered profitable, the NPV must be positive. A negative NPV indicates the investment is undesirable, while zero indicates neutrality in terms of gains or losses to be expected. Thus, NPV is one approach that businesses can use to account for inflation when estimating costs in the future.

Another approach that businesses can use to compensate for inflation is the internal rate of return (IRR). Porter and South-Winter (2017) define IRR as “the percentage of profit the investment will return over its life.” The IRR is computed using trial and error until a greater value than the required rate of return in a company is produced. Like the NPV, a negative value is undesirable, and zero indicates neither gains nor losses that are to be expected from a project. Thus, the use of IRR is another approach that businesses can use to account for inflation during cost estimation.

The key benefit of the two approaches over other methods is that they present a single value for evaluating an investment. Using a single value for decision making is easier, while other methods produce several values that sometimes require additional analysis to establish a proper finding (Mellichamp, 2017). Moreover, the NPV method can accept several values, which means that the estimation can be calculated using different periods, such as annually, among other ways. Thus, both approaches are suitable for compensating for inflation in cases that involve estimating future cost behavior.

 

And this is what my classmate’s post on the first topic:

 

Cost behavior is the general term for describing whether and how a cost changes when the level of output changes (Mowen et al, 2016). It is critical for companies to properly estimate cost behavior in order to avoid business failures. Some different types of costs that must be monitored are variable costs, fixed costs, mixed costs, step costs, and semi-variable costs. The reason that cost behavior is so important is that it allows for accounting managers to prepare budgets, predict cash flows, plan dividend payments, and establish selling prices. These types of predictions can make or break a company financially. Another factor to consider when looking at cost behavior is inflation and how it can affect future costs.

The first way a company can account for the effects of inflation when preparing cost estimates is to avoid using the nominal returns rate and instead use the real rate of return. Inflation will usually reduce the value or increase the cost of items, therefore they need to be accounted for and anticipated. The calculation for the real rate of return is as follows:

Real rate of return = Nominal interest rate – inflation rate

This means that the real rate of return is able to adjust predictions for the effects of inflation (Hargrave, 2020). When a company uses the nominal rate they are not adjusted for inflation and the real rate of return example is proper adjusted. The issue with using real rate of return on costs is that they are not always accurate since it is an estimate. With that said, it is better to estimate than not account for inflation at all for cost estimates because it will usually drive up the costs for everything.

Another way one can account for the effects of inflation when preparing cost estimates is by using “inflation accounting”. Inflation accounting is the practice of adjusting financial statements and predictions according to price indexes (Liberto, 2019). This allows for estimates to be restated, reflecting current and potential costs. In an environment that deals with a lot of inflation or deflation it is important to focus on current costs along with cost estimates. This is more likely to be seen with international companies that work in parts of the world that are less stable. Regardless of where a company is located they must effectively predict costs in order to plan for future projects and costs.

In my opinion, these are the two best ways to compensate for the effects of inflation when preparing cost estimates because they accurately outline and show potential inflation ramifications. It is challenging for companies to always predict inflation rates, especially since there are so many factors at play depending on the region. It is best for companies to be proactive and use real rate of return and inflation accounting instead of being reactive to unpredictable scenarios. When companies rely on reactive techniques it can often be too late to make to necessary adjustments that affect cost estimates.

 

Next is going to be the 2ND topic. This is MY post on that and i need you to compare it to the classmates post:

 

An advantage of job-order costing is that it enables the calculation of costs and revenue earned on a particular job. As such, companies can abandon projects that are unprofitable to focus on those with higher earnings. In addition, it enables managers to assess the performance of workers and their teams more accurately. The evaluations allow the managers to control costs, productivity, as well as efficiency (Mowen, Hansen, & Heitger, 2017). On the other hand, job-order costing requires record-keeping, and employees must maintain several documents, such as quotations, receipts, and invoices, among others. While information has improved record-keeping, the approach still requires a lot of documentation in order to increase accuracy compared to process costing. Moreover, since it relies on estimating overheads, job-order costing makes it hard to control them because the approximations are not precise enough.

In contrast, process costing does not involve a lot of documentation like job-order costing. It utilizes statistical analyses that are fairly accurate, as opposed to the actual inputs involved (Langfield-Smith, Thorne, & Hilton, 2018). For instance, in a goods manufacturing factory, the average number of units produced is a statistical figure used in calculating cost. Besides, the salaries in different departments are consistent between different periods. As such, the approach enables managers to compare performance over time, based on certain consistent qualities. However, the processing costing method is prone to errors, which can affect pricing. For example, errors that increase costs hike prices. Conversely, errors that lower costs cause reduced profits for the business. Thus, process costing risks the financial performance of a company, due to the possibility of errors.

Job-order costing and process costing are different methods of determining the minimum value of products. As such, each approach is suitable for various businesses more than others. For example, job-order costing is ideal for companies involved in accounting services, software production, movie production, and construction. In each of the identified businesses, different jobs have varying characteristics, which Hilton and Platt (2016) assert that they affect the costs. As such, job-order costing is the appropriate approach in such types of firms.

Process costing is suitable for businesses involved in manufacturing. For example, water bottling, canned food production, and car manufacturing are the types of companies that are suitable for process costing (Vercio, 2018). The businesses produce their goods in repetitive processes, which makes it appropriate to ascertain costs based on the inputs utilized on each stage.

 

 

This is my classmates post on the 2ND topic:

 

Job-order costing is one way for organizations to record the charges associated with materials and labor for specific products (Franklin, Cooper, & Graybeal, 2019). This method can help for supervisors to calculate the revenues obtained from individual jobs in order to help them determine which jobs should be extended and which ones should be discontinued (Ingram, 2019). This gives the company an idea for what is working and what is not. Job-order costing is based on specific and unique jobs which makes it beneficial to consumers that require custom orders and specifications. It also enables the companies to keep track of the workers’ and overall group performances for controlling costs, productivity, and efficiency (Ingram, 2019).

 

One of the disadvantages linked to job-order costing is that it can be on the expensive side because everything is being customized specifically for that order. There is a costly price to having unique materials and labor for creating a certain product (Franklin, Cooper, & Graybeal, 2019). Another issue with this method is that employees must keep a record for all the materials and labor that go into creating the products (Ingram, 2019). This can be tedious and also hard for the workers to make sure that everything is always accounted for when they are trying to make the products. Some of the businesses that may use this type of approach include Boeing, Lockheed Martin, and Deloitte & Touche (Heisinger & Hoyle, 2012). These companies need to make products that are specifically designed for the needs of the industry which can make them more expensive and raise prices.

 

Process costing is another way for companies to keep records of costs, and then designate the materials and labor to each department within the company (Franklin, Cooper, & Graybeal, 2019). The main difference between this and job-order costing is that this method works best when products need to be identical to each other. One advantage of this way is that it is less expensive than the other way (Franklin, Cooper, & Graybeal, 2019). More advantages include simplifying the records by having calculations on statistics instead of the actual inputs, and it enables the supervisors to get comprehensive information on data for departments and groups (Ingram, 2019). This method is better for mass production of products rather than tailoring each order to a certain product. It also allows for the companies selling the products to market to a wider audience instead of just one organization.

 

Unfortunately, process costing does have its detriments. Some of these consist of easily made cost errors, recording all expenses which is a cost in production, and non-production expenses which can raise the price of production (Clavero, 2017). These problems can cost the company as not as many consumers may buy the products if the prices are too high. There are a variety of companies that use a process costing system and some of them are Chevron Corporation, Wrigley Company, and Pittsburgh Paints (Heisinger & Hoyle, 2012). All of these organizations are in completely different industries which shows the versatility that the process costing method has. This method can be used for most companies that do not need to specialize in products that are individual to each consumer.

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