15 Nov Cost management strategy for the cost object (TIP: from SESSION 10 LECTURE on Cost of Customer, Cost of Quality, Cost of Supplier, and etc…) ACCT802-GroupResearchModule1.docxACCT80
Cost management strategy for the cost object
(TIP: from SESSION 10 LECTURE on Cost of Customer, Cost of Quality, Cost of Supplier, and etc…)
ACCT802 Group Research Module #1
By Group 5
Jasmin Marie De Leon
September 25, 2023
A famous British multinational engineering corporation, Rolls-Royce Holdings plc, designs, manufactures, and distributes power systems, primarily aircraft engines and propulsion systems for diverse uses. Charles Rolls and Henry Royce founded the corporation in 1904, and it has a distinguished history in aircraft, marine, and energy. Rolls-Royce's nicknames include "Rolls", "Roller" and "Double R", but in Derby, England, the company is commonly known as "Royce's". The saying "The Rolls-Royce of…" is often used to describe something or something as being the best. Rolls-Royce serves consumers in over 150 countries from its London headquarters. Additionally, Rolls-Royce has led innovation and technology by developing some of the most modern and efficient engines for civilian and military aircraft. The firm is prominent in defense and civil aerospace due to its reliable and powerful engines. Rolls-Royce also powers commercial and naval ships (Jake, 2020). The corporation generates power and provides energy services, making it crucial. Rolls-Royce has successfully adapted to market demands and technological advances throughout its history. Research and development have kept the corporation at the forefront of engineering, helping meet worldwide transportation and energy needs. Rolls-Royce remains an icon of British engineering and a global aerospace and power systems provider.
In 2003, BMW Group assumed ownership of Rolls-Royce Motor Cars, a historic moment in the lineage of the iconic British luxury automaker. BMW secured the rights to the Rolls-Royce name for automobiles in a competitive bid, leading to a transitional period where Rolls-Royce vehicles still bore the name but featured BMW-supplied engines and technology. With full ownership in 2003, BMW embarked on a new chapter for Rolls-Royce, investing significantly in modernization while preserving the brand's hallmark craftsmanship and opulence. Rolls-Royce cars, known for their meticulous handcrafting and bespoke features, have continued to represent the pinnacle of automotive luxury. The Goodwood facility in England serves as the epicenter of this artistry, where skilled artisans assemble vehicles to meet the exacting standards of individual customers. Under the BMW Group's stewardship, Rolls-Royce has successfully harmonized tradition with innovation, solidifying its standing as an enduring symbol of automotive excellence.
The most distinctive thing about Rolls-Royce is that it uses a lot of manual labor. In the UK, where labor costs are quite high, this will inevitably lead to high production costs. This is one of the reasons why Rolls-Royce is so expensive. To this day, Rolls-Royce engines are entirely hand-built. What’s even more amazing is that the grille of the Rolls-Royce front radiator is completely completed by skilled workers’ hands and eyes without any measuring tools. A radiator takes a worker a whole day to manufacture, and then another five hours to process and polish it.
Nowadays, Rolls-Royce's annual output is only a few thousand cars. The brand's success is due to its adhering to the traditional British car-making art: refinement, permanence, and meticulous attention to detail. It is therefore incredible that more than 60% of Rolls-Royces built from 1906 to the present are still in good condition.
II. Cost Object
For our final project, we’ve decided to research the costs that come with manufacturing a Rolls-Royce Phantom VIII car. First introduced and manufactured by Rolls-Royce Manufacturing in 2017, which is a subsidiary of BMW AG, the Phantom VIII is highly regarded as one of the most luxurious cars manufactured. The Phantom VIII is classified as a four door, full-sized luxury car, having a length of 226.9 inches, width 79.4 inches, and height 64.8 inches ( Rolls-Royce phantom VIII). They come in various colors, although the most popular color schemes are silvers, whites, and blacks. Notable outside traits of the car are, “a short front overhang and upright front end, a long bonnet and set-back passenger compartment as well as a long wheelbase and a flowing rear end. It also uses rear-opening "coach doors" (Roll-Royce phantom VIII). Overall the design of the car is often described to be elegantly simple. Robert Cumberford, a former automobile designer for General Motors, describes the design as impressive and that the Phantom is “ imposing and inspires respect and admiration but not reverence for its elegance of form” (Robert Cumberford). Underneath the hood, the Phantom VIII is powered by turbocharged 6.75-liter V12 engine with 563 horsepower and 664 lb-ft of torque, operating top speeds at 155 mph. The transmission is a 8-speed automatic and uses gas as its base engine type (Cantu). It also requires the Phantom to use premium unleaded gas as its fuel type, which would cost a monthly estimate of $479 in the state of California (Cantu). The base price of a Phantom VIII without any modifications is $470,350, nearly half a million. The extended wheelbase variant on the other hand costs $550,350. This specific generation of the Phantom was made notable for its endless customization options for the owner to add on additional modifications and design features. You can add anything from upholstery, metal and wood accents,deep-pile carpeted floor mats, power-adjustable seats with massage, a refrigerated console compartment, and remote controls for the infotainment system” (2022 Rolls Royce Phantom). Phantoms are often customized in the taste of their owners. After all, people who can spend money on a Phantom can afford the extra luxuries. Customizations can add another $25,000 to $75,000. However, for our cost item we will be focusing on manufacturing a base Phantom VIII without the variant and modification or design features.
Rolls-Royce Phantoms are notoriously synonymous with wealth, whether they are a celebrity or a CEO of a big company only the most elite and high class people are seen owning and driving in these cars. Familiar faces such as Kim Kardashian, Floyd Mayweather, and Shaquille O’Niel have the privilege to own their very own Phantom VIII. Most reviewers and owners describe this car as being exclusive and elegant, with one reviewer stating, “It's about the size of a tiny house and 10 times as expensive, but the 2022 Rolls-Royce Phantom justifies its price tag”. The Phantom has an overall positive rating with many raving about the new add on features such as the “privacy suit” which adds a electronic glass divider between the front and rear seats as well as a duo 12 inch monitor in front of the rear seats. Clients also highly praise the V12 engine which provides large amounts of power, while running so silently you could barely hear (Drew). What draws clients the most to this car is its level of exclusivity, since only the wealthiest can afford the price tag and its add ons. Like many other luxury items, owning a Phantom is a sign of one's own status without directly stating it. However, unlike popular luxury items like gucci or a mustang that are often associated with loud luxury, the Phantom car reflects quiet luxury and wealth. The Rolls Royce VIII does not need a very complicated design to show its worth, rather most of its worth is drawn from the craftsmanship that goes into manufacturing each car.
III. Cost Items
Identifying specific cost items are essential for business to thrive. By identifying these cost items businesses can make the best managerial decisions to run their companies efficiently. Although there are similarities in the production of cars in general, manufacturing a luxury car Rolls-Royce Phantom VIII has its own specific cost items that the company must identify. The Rolls-Royce Phantom car VIII is known for allowing a large variety of customization in its design features. As a result each individual Phantom VIII might have a slightly different cost item added in addition to the cost items needed in a base Phantom VIII. For our cost object, we will be only focusing on the cost items of a base Phantom VIII without any modifications. However, we do want to emphasize that in real-life, Rolls-Royce Phantom cars are more than often customized to the taste of their buyers but at an additional cost. It would be difficult to account for every customization possibility. By this reasoning, we are only including the cost items of a Phantom VIII car before any customization is added to make the cost item list more generally applicable for the usage of the company to make decisions. The manufacturing cost of a Roll-Royce Phantom is influenced by various factors, including the cost of labor, materials, research and development, engineering, and overhead expenses. Additional costs can vary based on the customization and unique features chosen by the customers; however, we will not take that into consideration.
There are various types of cost items that are included in a cost object. In the case of the manufacturing a Rolls-Royce Phantom car we need to know product costs and period costs associated:
· Direct Materials: Includes all materials needed to make the cost object or become part of the cost object eventually and can be directly traced back to a cost object.
· Small Hardware: Note that since car manufacturing involves a large amount of small hardware (such as screws and bolts) that is hard to keep track of each individual piece, we will group all of the small hardware into one group.
· Metals (steel and aluminum): Are often used for the structure of the car and may be included in interior design as well. Most of the components that make up the Phantom VIII are made out of metal, like the engine, turbo air intake, the steel of wheels, or gas tank.
· Plastics: Although it has become a trend for a lot of cars to use more plastic components in their cars, the Phantom VIII uses majority metal components. Nonetheless, they still use plastic for various interior components like its dashboards and the interior trim.
· Rubber: This mainly applies to the tires of the car.
· Glass: Needed for passenger doors, rear doors, windshield and rear end windows
· Computer chips: The Phantom VIII has come a long way from its predecessors, and like many cars of recent times, they do have a significant amount of technology built into their systems. The Phantom VIII has several monitors that can control several features of the car. In order to make this possible these cars need computer chips installed so that the monitors and the car can act accordingly.
· Wires: In accordance with computer chips, wires are needed to connect the computer chip and other technology components to various parts of the car.
· Leather and other upholstery: The Phantom VIII usually uses leather as its main upholstery but it also uses other types of upholstery such as polyester or acrylic in other parts of its interior design.
· Direct Labor: Any labor that can be directly traced back to the cost object.
· Wages and benefits paid to workers: Workers identified in this area are the ones who are responsible for converting direct materials to finished goods. Workers included in this area are machine operators and assembly line workers.
· Manufacturing Overhead (MOH): Anything manufacturing costs that are indirectly related, this can also be referred to factory overhead costs.
· Research and Development: R&D was needed to make the concept of Phantom VIII model. Various aspects such as the technology used, the type of material needed, and the final design of the car were determined in this process.
· Wages and benefits to indirect workers: Unlike the machine operators and assembly line workers, workers such as factory managers, janitors, and plant maintenance are not directly responsible for creating the Phantom VIII but are still essential to the manufacturing of the car. These workers are also found inside factories where the cars are manufactured so they are considered manufactured overhead costs.
· Factory rent: You need a place to manufacture the car themselves, unless you own the property, rent is paid.
· Property Taxes: For your property you need to pay property taxes to the government each year.
· Plant Depreciation: Each year that the plant is used to manufacture cars, the value of the manufacturing plant depreciates.
· Purchase of new Machinery: Some parts of the manufacturing process of the Phantom VIII requires the use of heavy machinery as part of its automotive process. Some of these machines include the CNC machine which cuts the metal pieces into precise spaces needed, Jig Welders that hold pieces in place while wielding them together, robots that are often used to paint the outer coat of the car, and conveyor belts that move parts around the factory (Manager).
· Regular Maintenance of Machinery: With the need of machinery around the factory, there is always the possibility that these machines can malfunction so regular maintenance is needed to keep them in shape.
· Quality Control and Testing: These can be considered product costs when related to activities such as in-process and end-of-line testing. Rolls-Royce maintains high-quality standards, which require rigorous testing and quality control procedures. This includes extensive testing and quality control procedures. This includes extensive testing of engine, chassis, and other various systems.
· Transportation: Getting materials and components from the suppliers to the manufacturing facility are incurred.
· Selling Expenses: Any expenses that are related to the selling of the products include salaries to sales employees, advertisement, social media, selling commission and shipping expenses to the customers.
· Transportation and distribution: transportation and distribution of material and product itself is needed.
· General and Administrative Costs: These costs are associated with running a manufacturing facility and company that also contribute to the overall expenses. These include rents and utilities, insurance, executive team, and office employees.
· Salaries and wages for office workers: These are workers who are not part of the actual manufacturing aspect of creating the Phantom VIII but are a part of the administrative aspect. These workers are often located not in the factory but in a separate building. Workers like these include the CEO, CFO, COO, accountants, higher managers, and many others.
The cost of manufacturing a Roll-Royce Phantom VIII can vary depending on several factors, including the specific features and customization options chosen by the buyers. Rolls-Royce is known for its high level of customization and excellent craftsmanship, which means that each Phantom VIII can be tailored to the individual preferences and requirements of the customers. Taking all of the cost items associated with manufacturing a regular Rolls-Royce Phantom VIII into consideration, the company can take steps to create a more effective manufacturing process in the future to increase their future profits while decreasing their costs. After measuring and analyzing financial information relating to manufacturing costs, managers can now make decisions regarding various aspects of the company such as pricing of the product, improving business process development, sourcing and hiring, outsourcing, mergers, acquisitions, and many more. Knowing a cost object’s cost items is essential to the success of the cost object itself.
IV. Significance to the business operation
Cost objects, integral to the world of business operations, play a crucial role in understanding the financial intricacies of ventures. Just as the Rolls-Royce Phantom VIII embodies excellence in the automotive industry, cost objects facilitate a profound comprehension of the costs and profits associated with different aspects of the business. Assigning costs accurately to the Phantom allows the company to gauge its profitability effectively. Managers rely on these cost objects to discern both direct and indirect expenses linked to the Phantom's production, enabling them to make strategic decisions aimed at achieving target volumes and profits. By leveraging cost objects, the company identifies opportunities to trim costs or adjust prices, similar to how the Phantom's allure is enhanced through precise craftsmanship. Furthermore, these cost objects aid managers in pivotal decisions, such as whether to produce components in-house or procure them externally, mirroring the choices that shape the Phantom's production process. In essence, cost objects become the compass guiding the determination of the total costs of producing the Rolls-Royce Phantom VIII and setting a selling price that not only covers these costs but also ensures profitability, mirroring the essence of excellence embodied by the Phantom itself.
· Brand Image and Prestige: At the heart of the Phantom's significance lies its role as a vanguard in establishing and perpetuating the Rolls-Royce brand's image and prestige. It operates as a veritable beacon, illuminating the path to excellence, craftsmanship, and magnificence. This majestic vehicle embodies the perfect example of luxury and serves as a symbol of aspiration for connoisseurs worldwide. Through its presence, the Phantom amplifies the brand's allure and desirability, solidifying Rolls-Royce's position as a supplier of the world's most lavish and esteemed automobiles.
· Profitability: While the Phantom constitutes a relatively modest portion of the company's overall production volume, its financial contribution is far from insignificant. This regal automobile commands a price point that soars high above its counterparts, owing to its exclusivity and unparalleled craftsmanship. Consequently, the Phantom becomes a sign of enhanced profit margins for Rolls-Royce. Despite its limited sales volume, the revenue derived from Phantom sales wields considerable weight, constituting a substantial chunk of the company's earnings.
· Innovation and Technology Showcase: The Phantom serves as a dynamic canvas upon which Rolls-Royce showcases its prowess in cutting-edge technology and engineering. Each replication of the Phantom is a testament to the company's commitment to pushing the boundaries of innovation. As a living embodiment of technical excellence, it stands as an enduring testament to Rolls-Royce's capability to merge tradition with modernity, constantly introducing advancements that set new industry benchmarks.
· Market Positioning and Differentiation: In the fiercely competitive luxury automobile market, the Phantom is an indispensable tool for Rolls-Royce in setting itself apart from rivals. It strategically positions the company as a perfect example of top-tier luxury car manufacturing, attracting discerning customers who crave unmatched craftsmanship, boundless customization options, and a one-of-a-kind ownership experience. The Phantom's presence serves as a resounding signal to those who seek automotive perfection, effectively differentiating Rolls-Royce from the masses.
· Customer Experience: Beyond its mechanical capability, the Phantom plays a pivotal role in crafting an exceptional customer experience. It epitomizes the company's commitment to catering to the unique needs and desires of its esteemed clientele. From the moment a customer embarks on their journey with Rolls-Royce, the Phantom is the indicator of fortune and personalized luxury, ensuring that the ownership experience transcends the ordinary and becomes a memory to cherish.
In sum, the Rolls-Royce Phantom is more than just an automobile; it's a symbol of excellence, a generator of profit, a platform for innovation, a beacon of differentiation, and a guardian of unparalleled customer experiences. It stands as an embodiment of Rolls-Royce's enduring commitment to craftsmanship, luxury, and the relentless pursuit of automotive perfection.
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Cantu, Michael. “2022 Rolls-Royce Phantom Prices, Reviews, and Pictures.” Edmunds, www.edmunds.com/rolls-royce/phantom/2022/ . Accessed 25 Sept. 2023.
Cumberford, Robert. “By Design: Rolls-Royce Phantom VIII.” MotorTrend, MotorTrend, 8 Aug. 2017, www.motortrend.com/features/rolls-royce-phantom-viii-by-design/ .
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“Rolls-Royce Phantom VIII.” Wikipedia, Wikimedia Foundation, 7 Sept. 2023, en.wikipedia.org/wiki/Rolls-Royce_Phantom_VIII.
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ACCT802 Group Research Module #2
By Group 5
Jasmin Marie De Leon
October 30, 2023
I. Recorded and reported
Cost recording is a thorough and precise process for producing the Rolls-Royce Phantom VIII. Precision and meticulous attention to detail are required in this luxury vehicle's design and craftsmanship and in managing the complex financial aspects of production. It is important to go deeper into the cost-recording process in this expanded explanation, outlining several factors and variables that Rolls-Royce considers.
Direct Materials and Customization Costs
The remarkable craftsmanship and wide range of customization choices of the Rolls-Royce Phantom VIII are well-known. It is critical to distinguish between the expenses incurred for modification versus the standard model. Important components are the direct materials, which include plastics, rubber for tires, metals (such as steel and aluminum), and several kinds of upholstery. In the company's chart of accounts, these materials are attributed to particular accounts. Even though they are all under the direct materials category, every substance is closely monitored. With the various personalized features that Rolls-Royce offers, buyers can customize their cars down to the last detail (Roll-Royce Phantom VIII). Every customization aspect should be considered a separate cost item, and customization expenses should be meticulously documented.
Direct Labor and Labor Intensity
An in-depth examination of direct labor costs is necessary due to the laborious nature of Rolls-Royce's manufacturing method, particularly in the building process of the Phantom. The car's body and interior are handcrafted by talented artisans and crafters known for their unrelenting dedication to precision. The detailed workmanship that distinguishes Rolls-Royce is made possible by these professionals. The direct labor costs include the salary and perks paid to these skilled workers. The salary and benefits are considered direct labor costs and are reported as such. This financial tracking of each vehicle's manufacture is essential. Rolls-Royce must maintain precise records of the time and skill invested in each vehicle to ensure that the labor contribution of this highly talented personnel is reflected in the overall cost structure.
Quality Control and Testing Expenses
Quality control and testing are essential to guarantee that every Rolls-Royce Phantom VIII satisfies the company's exacting standards of excellence. Upholding these criteria is crucial to preserving the brand's reputation for luxury, excellence, and performance. Strict quality control procedures are implemented at every stage of the manufacturing process, covering everything from engine performance to chassis integrity to interior details. To ensure that every Phantom meets Rolls-Royce's strict quality standards, all quality control costs, including the salaries of quality control staff and specialized testing equipment, are tracked.
Transportation and Supply Chain Management
Transportation expenses of many kinds are incurred when acquiring materials and components needed for the construction of the Phantom. These expenses cover the transportation of supplies from vendors to Rolls-Royce's production site. Some variables, like the supplier's location and the kind of items being delivered, might affect the costs. Furthermore, Rolls-Royce works with a global supplier chain, necessitating careful supply chain management. Relationship management with suppliers is something the business must handle, including contract negotiations and performance reviews. Since they immediately affect Phantom VIII's cost structure, these expenses are documented as part of the cost recording procedure.
The cost of producing a luxury car like a Rolls-Royce is higher than the cost of producing a more mainstream vehicle. This is because luxury cars use higher-quality materials and components, and have more complex designs and features that require more time and resources to produce.
In addition to the direct manufacturing costs, there are also other costs associated with producing the car, such as research and development expenses, marketing and advertising costs, and distribution and logistics expenses. All of these factors contribute to the overall cost of a vehicle.
Costs associated with the manufacturing of the Rolls-Royce Phantom are reported with a clear distinction between direct materials, direct labor, and manufacturing overhead costs. Direct materials, including a significant portion of production costs, contain the expenses related to the exquisite materials directly integrated into the vehicle's construction. These materials include high-quality steel and aluminum for the body, opulent leather and wood for the interior, and specialized electronic components. These direct material costs are diligently monitored and initially recorded as assets, specifically in inventory accounts that are in the form of raw materials, work in progress (WIP), or finished goods, depending on the manufacturing stage. As each Rolls-Royce Phantom nears completion, the cost of the direct materials utilized is systematically transferred from inventory to the Cost of Goods Sold (COGS) section of the income statement.
Similarly, direct labor costs include another integral component of the manufacturing process. These costs encapsulate the compensation provided to workers who were directly engaged in crafting the luxury vehicle, including highly skilled assembly line workers, machinists, and technicians. Much like direct materials, direct labor costs are initially recorded within inventory accounts while the vehicle is being produced. As the Rolls-Royce Phantom advances through the various stages of manufacturing, these direct labor costs are progressively shifted from inventory to the COGS.
Moreover, manufacturing the Rolls-Royce Phantom necessitates a spectrum of indirect expenses that collectively form the manufacturing overhead. These costs encompass various indispensable but non-directly attributable expenses, such as factory rent
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