Effects Of Production On Costs And SOX Essay Samples
Sales and production have various effects in the managerial accounting of an organization but in terms of specific costs when the sales and production volume was to decrease, Unit variable costs experience an increase in prices This is due to the laws of efficiency which has savings in numbers and repetition. Specifically the higher the volume the lower the variable costs, in this case since there is a drop in volume the opposite occurs. Total fixed costs for example salaries for management( Non hourly based) remains the same as the company has to make these payments regardless of the level of production so in this case total fixed costs experience no change in regards to a drop in production and sales.
In terms of Lean production, companies are looking for the most efficient methodology to engage in their line of business by eliminating waste or ‘muda’ like the Japanese call it. The obvious advantages of lean production are the minimization of fixed overhead costs, operational costs and raise the competitive stance of a company. When considering logistics the production cycle experiences a shorter lead time from the point of taking orders to it reaching the customers. Work in process inventories can either be drastically reduced or eliminated hence providing a potential for space saving. Overall healthier and effective communication can be achieved using lean production. Lean production also allows a firm to have a higher level of material control and schedule control of the products being sold. The company will experience a reduced risk of scrap generation caused by changes in the manufacturing process or obsolescence. These all add to the overall efficiency and flown in the entire supply chain of the organization.
Like every other production strategy there are pitfalls or a downside of lean production. The company will experience lower equipment utilization as part of the structure is to eliminate bottlenecks. Another disadvantage of lean production is a loss of dedicated expertise for areas where one operator must operate several parts of the production process. In lean production even small changes in the production process can have dire results on the entire cell layout and efficiency. Some multi product cells may become a bottleneck when scheduling parts for high volume orders. Although the variable cost of in lean production is low, the fixed costs are high, which means that periods of low demand could result in the organization falling below the break-even point resulting in losing money.
Managers often assume a strictly linear relationship between cost and volume, also seen in the high low method but it must be noted that only two data points are used which doesn’t account for other factors which influence volume like seasonality within the industry. This linear relationship stand point is widely used even though that most costs are curve linear. This assumption is only valid the cost formula is only used within the relevant range.
When using a search engine to find out of SOX we are given a number of explanations on the acronym and how it relates to the business world. Although this is a widely used business term most of my understanding comes from the issues which arose from the ENRON scam over a decade ago where issues arose from their auditing accounting firm Anderson. In this case the company used unscrupulous accounting practices to pad their bottom line hence misrepresenting themselves to their stakeholders.
SOX or Sarbanes-Oxley act was passed by the US congress in 2002 to protect shareholders from unscrupulous accounting practices by publically traded firms. It also serves a vessel to lesson any accounting errors and provide a higher level of detail of disclosures by companies. SOX have made companies develop a higher sense of internal control and have caused a positive effect on its borrowing practices. Once SOX is implemented in a company potential investors feel that the firm in question is more reliable and look at investing in the organization long term.