Group Overview
The Lego Group was established in Billund, Denmark, in 1932 by Ole Kirk Christiansen, one of its co-founders. During the specified time frame, the collective manufactured wooden legos, ironing surfaces, seating arrangements, and climbing aids. Due to their significant market share and high demand, the team prioritized the production of wooden toys. According to Isa and Liem (2021), the group’s management comprises Ole Kirk Christiansen, Godtfred, Kjeld Kirk, and Jorgen Vig Knudstorp. According to a report published in 2022, the projected annual revenue for this particular group is estimated to be 2.956 billion Euros. Furthermore, the company concluded the fiscal year with a net profit of 706 million Euros and an operating capital of 1.001 billion Euros. The organization has a workforce of approximately 10,000 individuals across various countries, including Germany, the United States, and Malaysia.
Costing methods
Two main methods manufacturing companies use to cost their products; are job and process costing. The American National Standards Institute developed job costing to monitor the expenses of delivering a service or product. The employment of this accounting methodology facilitates the tracking of the monetary resources required to produce a given commodity, as stated by Weygandt et al. (2020). Different materials are necessary for individual products, and the workforce must monitor the duration of their involvement in the production of each product. Furthermore, a predetermined portion of the general expenses is allocated to each task.
The process costing methodology encompasses the comprehensive documentation and registration of all the operations and tasks associated with producing or providing a particular product or service. According to Hansen et al. (2021), using process costing provides widget manufacturers with a precise comprehension of the expenses incurred in labor and materials. The production cost calculation involves the sum of each division or entity’s labor, material, and overhead costs, followed by the division of the total by the number of employees. This technique is employed to manufacture a solitary product in large quantities over an extended duration.
When deciding between job and process costing, it is advisable to consider whether the accounting pertains to a solitary undertaking or multiple undertakings spanning a period. Performing a comprehensive cost analysis is imperative in project budgeting as the two distinct cost calculation methodologies cannot be equated. Suppose an individual is concurrently engaged in several projects spanning several months or years. In that case, they will be presented with ample occasions to compare and evaluate the two methodologies employed in addressing the issue.
Applicability of the costing methods to Lego Group
Implementing the Job Order or Process Costing Method for pricing could increase Lego’s profitability. Job Order Costing entails systematically recording and allocating costs to specific client orders. This approach is frequently advised for enterprises engaged in the production of personalized commodities such as Lego playsets. Secondly, Implementing either Job Order Costing or Process Costing could aid Lego in effectively monitoring its expenditures and revenues. The corporation could enhance its financial forecasting capabilities. The Job Order Costing method monitors the expenses associated with individual customer orders. Based on this data, the company can assess the expenses of fulfilling orders and pinpoint any inadequacies hindering productivity. By combining the expenses of customer orders with the transaction, the enterprise can effectively monitor the profitability of each sale.
The term “process costing” pertains to identifying and allocating expenses to various stages of the manufacturing process. The method employed by Lego and other corporations engaged in the mass production of identical products is utilized for their processing. In this instance, the organization would monitor expenditures incurred during the production phase, encompassing labor, materials, rent, and utilities. The integration and allocation of expenses to the production process enable the team to monitor each stage’s profitability precisely. This enables the organization to identify and rectify inefficient production processes. Upon aggregating and allocating these expenses to the manufacturing procedure, a company can enhance its ability to monitor its financial gains. This enables the organization to identify and rectify inefficient production processes.
The cost implications of using one method over another
The cost of a particular method may vary depending on the product in question. Customized orders entail higher expenses in raw materials, workforce, and indirect costs than those produced in large quantities. The group’s manufacturing practices can impact expenses, adding complexity to the situation. Employing a more streamlined production methodology can result in cost savings for a collective.
An illustration of Job Order Costing. A consumer places a customized order for a Lego construction kit with the Lego Group. The consumer selects multiple personalization alternatives. A personalized set will undoubtedly entail a higher cost than a standard set belonging to the same category. Customized configurations require supplementary resources, workforce, and indirect expenses. The team will meticulously monitor all expenditures associated with customized furniture. Subsequently, the corporation would aggregate all expenses and allocate them to the customer’s order to accurately monitor the transaction’s profitability.
Process costing illustration, Lego group is finalizing a conventional Lego set for the summer period. The group would produce the set of toys in batches, implementing a more streamlined production process for the corporation regarding set development. Implementing this strategy could decrease expenses related to resources, labor, and overhead since the products would be costed in batches, and the costs would be summed up after the production process. Upon aggregating and allocating these expenses to the manufacturing procedure, a corporation can enhance its ability to monitor its financial gains. Additionally, process costing enables the organization to identify and rectify inefficient production processes.
Factory overhead costs
Factory overhead encompasses all of the indirect expenses that arise during the production process. Typical manufacturing overhead expenses include the depreciation of factory equipment, wages and salaries for factory employees, and the cost of electricity to power factory machinery. The phrase “overhead costs” is utilized in the manufacturing industry to refer to indirect expenses that cannot be directly attributed to a specific item (Indeed, 2023). The product’s final cost encompasses these expenditures using a pre-established overhead absorption rate. A company’s “overhead absorption rate” refers to the proportion of non-production expenses allocated towards financing production costs, including rent, utilities, and rent escrow. Cost drivers include indirect materials, indirect labor, utilities, financial, and material costs.
Recommendations
According to my research findings, it is recommended that the group adopt a hybrid accounting system that integrates both Process Costing and Job Order Costing methodologies. Using Job Order Costing is advantageous for enterprises that offer personalized products or services as it enables them to monitor the expenses associated with customer orders. Process Costing should be employed by businesses that make or sell similar items or services. Process Costing lets the organization track manufacturing process costs. The corporation can enhance its earnings by comprehending its operational expenses more effectively and enhancing its production procedures.
References
Fagerstrøm, A., Bendheim, L. M., Sigurdsson, V., Foxall, G. R., & Pawar, S. (2020). The marketing firm and co‐creation: The case of co‐creation by LEGO. Managerial and Decision Economics, 41(2), 226-233.
Hansen, D. R., Mowen, M. M., & Heitger, D. L. (2021). Cost management. Cengage Learning.
Indeed. (2023). What Are Cost Drivers? Definition and Examples. Retrieved May 17, 2023, from https://www.indeed.com/career-advice/career-development/what-are-cost-drivers
Isa, S. S., & Liem, A. (2021). Exploring the role of physical prototypes during co-creation activities at LEGO group using case study validation. CoDesign, 17(3), 330-354.
Weygandt, J. J., Kimmel, P. D., & Aly, I. M. (2020). Managerial Accounting: Tools for Business Decision-Making. John Wiley & Sons.
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