Huge Company Case Study

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Huge Company Case Study

Today, more and more organizations prefer Activity-Based Costing System (ABC) to the functional-based costing system. ABC takes into account minute details regarding the activities and the factors that add up to the final cost. ABC is based on an activity hierarchy wherein the different activities influencing the cost build up are grouped into different categories. Such a costing method improves cost measurement by organizing information around activities (Thompson, 2003). The group will complete requirements (a) through (e) found at the end of the case. They will then, find three sources on the Internet, that compare and contrast activity-based costing and functional-based costing systems. And, to demonstrate, the group will discuss under what scenarios each system might lead to better decision making at Huge Company.

a.) Compute the costs of each job using the current cost system.

Total Labor cost $90,000,000

Total working hours per year $2,000

Total number of employees 1,000

Average cost per hour per person – 90,000,000/ (2,000 X 1,000) = $45.00/hour/person

Job 1: $45 X 22.50 labor hours = $1,000.30

Job 2: $45 X 160.00 labor hours = $ 7,200

Job 3: $45 X 21 labor hours = $945

Job 4: $45 X 120 labor hours = $ 5,400

Job 5: $45 X 60 labor hours = $2,700

b.) Recommend an alternate cost system that recognizes additional differences among jobs.

The activity based costing system improves the accuracy of product costs and addresses internal operating concerns. It provides for actual costs associated with each product produced by the organization. ( Dekker, 2003). Cost drivers are utilized replacing the general ledger that was heavily labor based. The ABC system provides for integration o...

... middle of paper ...

...tems. Hilton: Cost Management

Strategies for Business Decisions, Second Edition, McGraw-Hill, 2002.

Thompson, (2003) Activity-Based Costing, Retrieved October 29, 2004, from

http://www.bnet.com/abstract.aspx?scid=1770&docid-82061

Cross, L. (2003) Progress in ABC Costing. Graphic Arts Monthly, Retrieved

October 30, 2004 from http://www.gammag.com/Current/index2(6-30-

03).html

Tarr, J.D., (2004) Activity Based Management-Merging Process and

Measurement. ACA Group, Retrieved October 30, 2004 from

http://www.theacagroup.com/activitybasedmanagement.htm

Dekker,L. (2003) Activity Based Costing: A Concept Whose Time Has Come.

Retrieved October 30, 2004 from http://eee.bnet.com/abstract.aspx

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