Netcom Inc.
NETCOM, INC.
Manager: “I can’t believe how you accountants can always give me useless information! Look, last year I asked you to turn in cost information that would help us strategize in order to contain the already decreasing operating profits of the company and what do we have?! Our financials are worse than ever before!
Accountant: "Ahh, but Sir. We've got to charge a higher price, especially for our electronic goods, in order to sufficiently cover our already-high costs."
M: "Higher price? Nowadays you've got to beat competition by being able to offer your product at lower and lower prices. Look, how much do you figure is the average cost per unit of your electronic products?"
A: "Um, er, let me see (does some rough calculation). In the neighborhood of PhP 5,800 a unit last year, Sir. You see, our costs can't go any lower than that."
M: "Ha! Surely you could go much lower than that. I'd bet you're charging an awful lot of ‘unwanted’ costs to that product."
A: "But, ah, Sir …"
M: "No arguments! Investigate the reasons for our deteriorating financials, and provide me with re-done accounting and costing procedures. Then send me a report."
NetCom, Inc. is engaged in the design, manufacture and sale of metal products as well as high-technology electronic goods, such as consumer audio and telephone products. Its income statements for this year and last year are shown as Annex A.
The company had been using commonly-used costing methods, especially in the allocation of overhead, in costing its products. In the ever-competitive and highly automated environment NetCom finds itself, the company's managers had instituted many improvements in the production system to remain competitive. Lately, however, management felt that the product costing system also had to be reviewed to make sure that it did not stand...
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