Company Overview
Ford Motor Company is an American manufacturer that designs, produces, markets, and serves a wide range of Ford trucks, SUVs, and cars. The company provides its services in such segments as the automotive industry, lending, and mobility. The first sector is the production part of the entire organization. Cars and their components and are developed, manufactured, processed, and designed here. The Mobility section conveniently represented Ford’s autonomous car development and related businesses. Argo AI, a developer of autonomous driving systems, and Spin, a micro-mobility service provider, are also owned by the corporation (Johnson, 2018). On a consolidated basis, the Ford Credit section consists of the Ford Credit business, which primarily deals with vehicle-related lending and leasing activities. Ford Credit provides a comprehensive range of car financing options to and through dealers worldwide (Johnson, 2018). Thus, it can be claimed that the Ford company is a manufacturing organization.
Costing Methods
Traditional costing accounts for the average overhead rate in the manufacturing of goods in addition to direct costs. Overhead rates are set based on cost drivers, allowing costs to be spread out in this manner. It is better to utilize when a company’s overhead costs are lower than its direct costs. Activity-based costing is different from traditional costing. It calculates all of the overhead processes involved in producing various items (Dikov, 2019). Because overhead costs are not required for all products, they only apply where they are used in the manufacturing process. The cost can be either more or less, depending on the chosen method, since everything depends on the processes taken into account. The differences arise because the traditional method allocates costs only based on direct labor dollars. Thus, a high direct labor dollar allocation product receives more overhead expenses than a product with a low direct labor dollar allocation.
Factory Overhead
First of all, the following overhead costs can be allocated: set up costs, special part handling costs, customer invoicing costs, material handling costs, and other overheads. Using the traditional method, variable or indirect costs are distributed based on the hours spent by the labor force on the production of standard and custom products. Therefore, in this case, it is better to use the ABC method because instead of treating all indirect expenses as a single pool for the entire organization, ABC divides the costs by activity (Dikov, 2019). Thus, the following cost drivers can be marked applicable to the Ford company: set-up per batch, special parts per unit, invoices per year, number of batches, and labor hours. Since the company under analysis consists of many divisions, and a large number of actions are used in the production of products that need to be taken into account separately, the activity-based costing method is the most applicable.
Recommendation
Based on the analysis, the following results can be summed up. It is evident that the most suitable method for Ford is activity-based costing. Based on all of the above, it can be concluded that the ABC method, due to the expansion of the cost pool, allows for determining which processes the company’s resources are used explicitly. When resources are allocated too narrowly, it can lead to a lack of understanding of how they are spent on activities. Another important aspect is that this method assists in the cost assignment of specific segmented activities based on their importance in overall processes. Finally, activity cost drivers allow the company to determine the costs of such specific areas as customer activities, services, and individual categories of goods.
References
Dikov, D. (2019). The activity-based costing model. Magnimetrics.
Johnson, M. W. (2018). How Ford is thinking about the future. Harvard Business Review.