Assessment Management Accounting
Australia is a major manufacturer in dairy products.
To ensure the long-term health of this very important industry, dairy producers need to understand the costs of the milk they produce.
Do you think Australian dairy producers use job costing, process costing or a combination of these two product costing systems in producing milk? (10 marks)
Based on your answer to Question 1, consider each step in the production of a dozen bottles of milk. Create a product cost outline for these processes using your own figures. (5 marks)
Based on your answer to Question 1, what factors outside of production costs would you suggest in order to improve the net profit? (10 marks)
(1) It is likely that Australian dairy producers use a combination of job costing and process costing to determine the costs of producing milk. Job costing may be used for unique or custom orders, such as producing milk for a specialty cheese or yogurt product. Process costing is likely used for the bulk production of milk, where the cost is allocated to the production process rather than to a specific batch or order.
(2) The production process of a dozen bottles of milk includes several steps such as:
a) Raw materials acquisition: This includes the cost of purchasing the dairy cow, feed, and other materials necessary for the cow’s health and milk production.
b) Milking and storage: The cost of labor and equipment involved in milking the cows and storing the milk until it is processed.
c) Pasteurization and bottling: The cost of heating and cooling the milk, bottling it, and labeling the bottles.
d) Quality control: The cost of testing the milk for quality and safety.
Based on rough estimates, the cost breakdown for each process step could be:
a) Raw materials acquisition: $3.50 per gallon
b) Milking and storage: $0.75 per gallon
c) Pasteurization and bottling: $1.50 per gallon
d) Quality control: $0.25 per gallon
Therefore, the total cost to produce a dozen bottles of milk (assuming each bottle contains one gallon) would be:
Total cost = (a + b + c + d) x 12 = ($3.50 + $0.75 + $1.50 + $0.25) x 12 = $72
(3) Factors outside of production costs that could improve the net profit of Australian dairy producers include:
a) Market demand and price: The producers need to keep track of the market demand and price of milk to ensure they are getting a fair price for their product. This could involve exploring new markets or developing new products to meet changing consumer preferences.
b) Cost efficiency: Dairy producers can improve their profitability by finding ways to reduce their costs, such as reducing waste, improving their herd management practices, and exploring new technologies.
c) Government policies and regulations: Government policies and regulations can have a significant impact on the dairy industry, so producers need to stay up-to-date on any changes that may affect their operations and profitability.
d) Branding and marketing: By developing a strong brand and marketing their products effectively, dairy producers can differentiate themselves from competitors and increase the value of their product in the eyes of consumers.