Please, write a main discussion post about the below topic and respond to the two classmate discussion posts attached. Thank you.
Topic: "It is not important for a company to distinguish between cost incurrence and locked-in costs." Do you agree? Explain with the use of appropriate examples.
Instructions for main post (Around 200 words) Please, write a main discussion post about the below topic: Topic: "It is not important for a company to distinguish between cost incurrence and locked-in costs." Do you agree? Explain with the use of appropriate examples. (Citations only needed for main post) Instructions for the two classmate responses (around 150 words each) Please, respond to the below two classmate main posts. (Please, the responses need to be a discussion, not an evaluation. You can agree with them and add/comment about their response.) Thank you Classmate post #1: Cheyenne Haley Distinguishing between costs is important to managers because it is more useful and helps a company at reducing costs. Cost-incurrence is when a resource is consumed to meet a specific objective (Datar & Rajan, 2014). Cost-incurrence costs describe when costs are sacrificed. An example would be manufacturing operating using a large amount of electricity during a month like January. The company will incur the cost in January and record it as an expense. With cost incurrence, the company will need to report a current liability for the amount owed to the utility for electricity it used during the month. This may require an accrual adjusting entry with an estimated amount. Cost incurrence is reflected by a debit to an asset account, a deferred account (Sharma, n.d.). Locked-in costs are costs that have not yet been incurred but will be incurred in the future based on decisions that have previously been made. Teams need to focus on design decisions before costs are locked in to reduce the time it takes to do a task, eliminate waste, and improve operating efficiency and productivity. To do this, one must understand customer requirements, value-added, and nonvalue-added costs, need to anticipate how costs are locked in before they become incurred and use cross-functional teams to redesign products and processes to reduce costs while meeting customer needs. Locked-in costs are those payments in which the company cannot reverse, at least not before a certain period of time. An example would be the payment to employ labors, investing money, or bank loans. The investment becomes locked in until the time of sales or in the manufacturing stage. I think that it is important to distinguish between cost incurrences and locked-in costs because it is difficult to reduce costs if the costs have already been locked in. if the company distinguishes between the two kinds of costs, it can potentially help the company reduce its costs and increase in margins. It can also help create more demand for the products, economies of large-scale production, more employment through industrialization and an all-round improvement in the standard of living. The company’s profit is increased through reduced costs as well, which can also provide a basis for more dividends to the shareholders. Classmate post # 2: Kari Grippo I do not completely agree with the statement that it is not important for a company to distinguish between cost incurrence and locked-in costs. According to the text, cost incurrence describes “when a resource is consumed (or benefit forgone) to meet a specific objective” while locked-in costs are costs which “have not yet been incurred but will be incurred in the future based on decisions that have already been made” (Datar & Rajan 2019, p.261). The majority of costing systems measure cost incurrence while also identifying locked-in costs. An example of cost incurrence might include a retailer such as Kohl’s who begins their operations of December 1 and their electric meter is read by the utility of the last day of each month. In this example, during the month of December Kohl’s will have incurred the cost of the electricity it used during December. In regards to locked-in costs, if Kohl’s were to decide to build a new factory in Florida, the costs of doing so would be “locked-in” as the decision to build the new factory has already been made and these costs will actually be incurred at a later date. Depending on the type of business processes in place, management may choose which costs they wish to recognize as locked-in versus which they choose to recognize initially as cost incurrence. For example, Apple may recognize the direct material costs of the MacBook Pro only when it is assembled and sold. In this case, however Apple’s direct material cost per unit is locked-in earlier when the Apple technician and designers specify the components utilized to develop the MacBook Pro. Cost incurrence and cost recognition are different from one another. Cost incurrence usually precedes cost recognition which is why locked-in costs should be distinguished from cost incurrence, especially when analyzing the financials at any given point in time and not just at year-end. When the benefits associated with cost (the goods or services received by the exchange) extends into the next year, cost incurrence will be reflected by a debit to an asset account, as a deferred cost (Sharma, 2019). Cost recognition will then be effected subsequently in the following year via the entry that is made debiting an expense (or loss) and crediting the deferred-cost asset (or contra-asset) in total or partially. In instances where the beneficial life of the incurred cost is short (i.e. not beyond the present year), both cost incurrence and cost recognition will be reflected concurrently in the current year and a debit to expense instead of asset is made and no entry will be needed in the next year (Sharma, 2019). The relationship between cost incurrence and locked-in costs is causal as locked-in costs will eventually be incurred. It is important to distinguish between cost incurrence and locked-in costs, however, because most costs are usually incurred during the manufacturing stage and have already become locked-in at the planning and design stage- which makes it difficult to reduce or change costs since they have already been “locked in.”