Now that we've got some of these concepts down, let's apply them in our GnG Landscapes setting. Now, in terms of GNG Landscapes, they would be very interested in understanding what their products cost them. And they would certainly use the traditional system of organizing costs according to materials, labor and overhead. Materials would be the seed, soil, pots and water. Labor would be the different wages and salaries that we paid our managers and employees. And overhead would be everything else. The rent for the facility, the use of the land, and so on. GnG would account for inventory at different stages. You can easily think about vegetables and flowers being in a raw material stage, a seed. And then, as that seed is planted and maintained, it grows into something in process. Eventually, it comes time where that plant or vegetable or flower is ready to be sold. And so, we would shift the value of the cost that we've incurred related to those units into finished goods inventory. And then, once they are sold, we would include them in cost of goods sold. We can also think about how GnG Landscapes uses different types of costing system in terms of organizing these product costs. They could use both a process costing system in one situation as well as a job costing situation in another. Terms of process costing, GnG Landscapes might use them to account for the different processes that are required to grow, maintain, and then eventually sell trees, bushes, and shrubs as well as flowers and vegetables. All different processes from the planting, maintenance and watering, customer sales and perhaps even implementation in customers' yards require different processes. These are pretty high volume products, so it's likely that GnG Landscapes would use a process costing system. In terms of job costing, you can imagine that the landscape design and implementation is a customized product for each individual. Some customers want something relatively simple and some customers want something more elaborate. Well these different jobs or engagements would cost GnG Landscapes different amounts. So it might be useful to organize these types of costs according to engagement or job via the job costing system. Now, suppose that GnG Landscapes managers are worried about cost accuracy. Currently they use a traditional, relatively simplified setting where they allocate overhead evenly between trees, bushes, and flowers. That is the rent, supervisors' salaries, the utilities that are used, all of those costs that are indirectly associated with the production are put into a single pool and then allocated on a tree by tree or bush by bush or flower by flower basis. However, when they think about the different activities required to produce each of these products, they realize that flowers take more watering and maintenance than trees and bushes. Trees grow over a number of years. There's not as much watering or weeding that's necessary on a daily basis compared to flowers, vegetables and other plants. So considering the actual use of watering and maintenance, if we think about those activities and how they incur costs. Well, if we estimate overhead and spread it evenly across all the different types of plants and trees, then the estimated costs for flowers are actually too low. We're watering and maintaining those flowers much more than the other types of plants. And if that's indeed the case, then allocating overhead smoothly over the different units doesn't cut it for flowers. Same thing could be said about trees. Except they're getting too high of a share of overhead. The estimated costs for tress and bushes are too high because their receiving the same amount as other types of plants, when in fact they don't used as much watering and maintenance. So does this is really matter? Well, it depends on how refined of costs information is necessary. And if it were to matter, then GnG Landscapes could use activity based costing. And they would benefit from this in a variety of ways. One, they would have more accurate cost information, which allows them to measure the profitability of each of their different types of products in a more refined and accurate manner. And, if this was the case, that would facilitate a large variety of decisions, like how to bundle these products and who to market them to. And, of course, this matters for pricing. If the estimated cost for flowers are too low, then it could be that GnG Landscapes is underpricing the flowers because the costs are lower than they actually are. And it could be that because estimated costs for trees and bushes are too high, they might be assigning too high of a price to those products. And, perhaps, they're not selling as well because of that. So, the more refined cost information could inform pricing decisions. Now, GnG Landscapes wouldn't stop there. They're making lots of decisions about the future. So understanding cost behavior is crucial to most product lines. There is a long lag between planting and sales. So we need to understand and be able to predict what our costs will be months, if not years in advance. Landscape design also involves a large upfront investment before the product is actually sold. So being able to predict how costs will behave in accordance with different decisions or activities that are engaged in is crucial to GnG Landscapes. So in many cases, they might use a separate costing system that organizes cost information according to behavior. And that would facilitate a lot of prediction or estimation oriented decisions that take place in the future. So as you can see, just in these simple examples, GnG Landscapes benefits from all different types of cost information. And so organizing this volume of cost information is extremely important. And as we've verified, there's no one method, and in fact, many organizations use a variety of costing systems and perspectives to learn about their costs and facilitate their decisions.
