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9-39 Choosing an Activity-Based Costing System
9-39 Choosing an Activity-Based Costing System
What are the features of activity based costing
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Strategic Cost Management
Executive Summary
From the A12 redesign proposal, it shows that the current standard cost system is unable to link the reduction in the number of parts to activity reductions and cost savings. The labor-direct-based standard cost system reflects the cost of A12 is distorted. Using the ABC system, according to the activities of A12 allocate the overhead cost to A12 that could find that the current overhead cost of A12 was overstated by the standard cost system. At last, A12 Junction Box could be identified it is an attractive and profitable product, at the same time, it demonstrates the value of ABC.
Introduction
Alice Johnson has to make a presentation to the management team that explains how ABC can add value to the decision-making process within Wilson Electronics. The presentation focuses on a cost-reduction proposal as a way to demonstrate that ABC is capable of aiding the decision-making process. This proposal is the redesign of the A12 junction box. The current used standard cost system is unable to link the reduction in the number of parts to activity reductions and cost saving, so it is a good chance to demonstrate the value of Activity-based costing system.
Discussion
1.What is the ABC cross model? Define what is meant by the product costing, process costing, and the “what-if” cost-modeling perspectives of ABC.
With the demands of keeping up with competitors and customers these conditions will help them to stay on top of the economy. Even though ABC cost system is a managerial cost tool, e-commerce companies can use EAD (expense activity dependence) and APD (activity product dependence) matrix. These are two tools associated with ABC costing will allow Groupon to use the data provided from the company to trace overhead expenses such as: web design and maintenance, order processing, product marketing, telephone support, product handling and product shipping. The main activities identified to trace Groupon’s overhead will be determined by the level of accuracy and reliability
Do a further analysis of production costs to improve efficiencies. If all else fails, either increase prices to the point where the contribution margin is positive, or drop the customer. 3. What is the difference between a'smart' and a Managerial Implications and Analysis Limitations Managerial Implications: What are the benefits of Moving from a traditional cost accounting system to ABC can reveal hidden costs and hidden profits on the basis of the identified activities (i.e. customers, orders, etc. ). Treating overhead costs as "fixed" can cause an unfair and highly misleading distribution of overhead costs, which are in fact variable.
New businesses will take longer to thrive with the United States falling economy. The faltering job market and the deepening slump in housing threaten to hurt consumer spending. Consumers are becoming more conscious of their spending and therefore using cash to pay for smaller necessary purchases. The cost of entertainment and other presumed luxuries may be pushed to the background by most families, when having to choose whether to pay for a bill or treat the family out. Thriving businesses will understand the need to provide a service or product at affordable prices.
A hybrid costing system is most suited for organisations producing in batches. Costs will be allocated to the batches. Hybrid costing is used for similar or identical products that have different modifications at the end. For example, laptops have screens and keyboards built in every unit but have different designs for each product type. With hybrid costing, managers find it easier to determine profits of individual jobs and also obtain some detailed statistics of production from different departments. Hybrid costing systems do not focus enough on costs that are based on activities, creating possibilities of understating
Comparing two cost systems, the new system added two new cost pools based on the traditional one, which usually allocated support costs to material, labor and supported related cost pools. The old system did not reflect the increasing support costs of specialty products so that it was unable to reduce costs and provide a good choice for the plant on how to choose profitable orders. From our calculations (Exhibit 3), the new system transferred engineering costs and Administrative costs to order processing costs pool and special components cost pool similarly. It shows that the new system is more clear and efficient on cost reduced and al...
Cost control and management. The study also identifies several other advantages of using the ABC
Others feel that ABC would be more widespread in industry if it were marketed better by the cost accounting profession itself [1]. As the dust has settled, ABC has turned out to be less a revolutionary technique than a useful refinement to proven systems. The costs of products and services must be accurate, or management can be misled. Decisions... ...
In life cycle costing, all sorts of cost will be list out, for instance, operating cost, production and implementation cost, maintenance cost and the cost or benefit of the ultimate disposal of the assets at the end of its life (Swaffield & McDonald, 2008). Besides, an overall framework which total incremental costs over the life span of a certain product is also taken into the account (Agarwal, R., n.d.).This helps management to better understand the difference between acquisition cost and operating cost which aids them in finding balance between investment costs and operating expenses (“Benefits of life cycle costing,” n.d.). For example, when one produce or sell a product, the first thing
One and only reason why ABC provides more correct product cost information is that old-style costing systems frequently allocate all overhead, including batch-level, product-level, and facility-level overhead, using an allocation base that is appropriate only for unit-level costs.
All these improvements will boost profitability by identifying at least or more that EUR 30 mio required by U.S.A headquarters. However, we believe it is not realistic to manage all this turnaround in 1 year’s time. It might take from 2 – 3 years.
Cost accounting system has two types, job order costing, and process cost system. These two cost systems are very different, almost every company uses order costing or process costing. Starbucks, is a coffee shop where citizens congregate to drink there morning coffee, study, and or socialize. Starbucks is one of the oldest and largest privately held specialty coffee retailer in the United States. (Starbucks) Their passion is to discover the flavors you love and always bring it home, delivering the look, taste and aroma of the world’s best coffee and teas. Job order costing is a very easy way in order to help Starbucks managers to know how much profit their company (Starbucks) made.
If asked what strategic planning is one could interpret it as simply a road map that can guide the organization in the right direction. It is very unlikely that an organization would know which direction to take without a sense of direction. Managers are faced every day with decisions that have a major impact on the direction the organization must take, therefore, strategic planning can play an important role in guiding managers in the right direction. In other words strategic planning is a tool that management can use to give them a sense of direction that will guide them in doing a better job and to ensure that all the members of the organization are working toward the same goals
Besides, an organisation can adopt a technique of activity-based costing (ABC) as an approach to support its sustainability objectives. ABC system is a technique of assigning overhead costs to products and services by identifying the cost drivers. ABC technique will first identify each activity cost that is involved in the process of production, then assign the cost to each product and service on the basis of each activity consumption in the production of each product and service (Drury, 2012, p. 253). ABC system is an effective method to account for costs of products and services. This is because ABC system allocates indirect costs based on a cause-and-effect relationship (Drury, 2012, p. 269). ABC system allocates overhead costs to cost
The second way is to achieve low direct and indirect operating costs is gained by offering high volumes of standard products and offering basic no-frills products. Production costs are kept low by using less parts and using standard components. Limiting the number of models produced to ensure larger producti...
They are facing a severe capital expenditure problem. They couldn’t run new software on the equipment they purchased 2 years ago and it is no longer useful. They require a reliable, predictable usage – linked cost structure. They want to buy fewer boxes but get maximum capacity and coverage to stay competitive.