W 4: Costs

The costs of making a balloon split between direct and indirect costs. For standard balloons, there is little in the way of design costs and the production costs will be a greater share of the price. However, for special shape balloons there is clearly a considerable amount of time goes into the planning and design of the product. Why not try this worksheet to see how well you understand the cost structure at Cameron’s?

A printable version of this worksheet is available for filling in answers.

Step 1 - Direct or indirect?

What is meant by the term

• direct costs?
• indirect costs?

If you are uncertain about either of these, you may like to go to an explanation of costs.

If you haven't done so already, try the photographic tour of the Cameron Balloons factory and try to find four examples each of direct costs and indirect costs of making hot-air balloons.

Step 2 - Have you absorbed costs yet?

Cameron Balloons have to try to work out the cost of each of their products. This is vital for them in setting their prices. There are three general methods of costing:

• Full costing
• Absorption costing
• Marginal costing

Look up each of these to find out what they are, and write a brief definition.

Cameron Balloons produce a wide range of different products. Go to the Cameron Balloons section, and note down from there their main product lines.

Given that this varied range of products are all being produced in the same factory, which method of costing would you advise Cameron balloons to use and why?

Step 3 - Measuring efficiency

Many of the processes involved in producing the balloon are highly specialised. For example, it may take up to a year for a machinist to be fully trained, and with experience their efficiency will continue to improve.

What advantages might this level of specialisation have?

What possible disadvantages might there be and what could the company do to avoid these?

What methods are available to us to measure efficiency? (If you are unsure, look at the production explanation.)

As we established in step 2, Cameron Balloons make a wide range of products. Why might that make it difficult to use either of these techniques to measure efficiency?

We may therefore need to look at the level of efficiency of each part of the balloon making process separately. Let's take as an example the sewing up of the envelope. This is done by a team of around 5 machinists. How could we measure the efficiency of this process?

What do you think Cameron Balloons need to do to improve efficiency further?

What disadvantages might your techniques have? Look at an explanation of how balloons are produced if you are unsure. Try to ensure your answer covers some of the following areas:

• the mix of labour and capital
• the level of indirect costs - could they be reduced? How?
• operational research techniques (if you have covered these)
• factory layout
• specialisation and standardisation
• automation / computerisation