Although Exhibit 4 was useful to understand what changes (i. e. o cost items) helped Superior improve its profitability, it does not explain the reasons behind such changes and therefore we cannot be sure that 2005’s results reflect a true improvement in profitability as shown. For example, if the reduction in depreciation was due to a change in method in 2005, we would need to take account of this and apply the same method to 2004’s figures in order to reveal a fair profitability comparison between the two time periods. Q4. Why is it Important that Superior has an effective cost system? What is your overall appraisal of the company’s cost system and its use in reports to management? List the strengths and weaknesses of this system and its related reports for the purposes management uses the system’s output.
What recommendations, if any, would you make to Waters regarding the company’s cost accounting system and its related reports? Simple cost system: Strategic planning, product-line decisions, identifying manufacturing process-improvement opportunities, profitability analysis, performance evaluation, cost control, and inventory valuation purposes (value inventories, prepare budgets, and analyze performance). There are several reasons why it is important that Superior has an effective cost system. Firstly, accurate budget planning of a production is central to the success of a business. That is to say, allocating one’s resource in the right place in the beginning is particularly essential to achieve a promising result.
Secondly, Superior’s manufacturing strategy was based on the “dedicated factory” concept, which means each factory has its own direct cost, such as raw material, used in its production line. That implies that it is easy for the managers to tell whether a product generates money and to calculate the direct/indirect costs in order to control costs in each factory. Furthermore, an effective cost system would provide Superior high-level executives advantages to position their goals in terms of profitability and improve their decision making process towards such goals. Strengths: • Entire view of costs (direct/indirect costs, variable/non-variable costs) • Performance tracking in each production line.