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Literature review on benefits and challenges of activity based costing
Literature review on benefits and challenges of activity based costing
Literature review on benefits and challenges of activity based costing
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Wilkerson Company is facing fierce competition in the water purification equipment business that could potentially cannibalize their sales. In matching the lower prices set by the competition, Wilkerson’s profits and pre-tax margins have declined as a result. Despite lowering the prices of pumps, which are Wilkerson’s major product line, the product’s gross margin has fallen under 20% - which is 15% below the company’s expectations. In light of these challenges, Wilkerson Company decided to examine their overhead costs.
II. Standard Unit Costs vs. Activity Based Costing Analysis Wilkerson uses a simple cost accounting system in which each unit is charged for direct labor and material costs in addition to overhead costs, which are allocated depending on the percentage of production-run direct labor usage. Under this system, the overhead percentage set by Wilkerson was 300%. This standardized system, however, did not reflect the specific complexities of each
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Strategic Implications and Recommendations
The first implication that would arise from adopting the ABC system is that flow controllers will become an unprofitable product. In order to meet the “planned gross margin” of 35%, the company will have to charge $155 for flow controllers, which would be about a 48% increase from its current selling price. This could mean that flow controllers either will drop sharply in sales or will be eliminated altogether from the business, causing the company to lose a source of revenue. The accuracy of ABC results are also up to debate since set-up costs were calculated using production-runs as a cost driver while the case does not explicitly mention the dynamics or mechanisms of each product’s set-up. My recommendation for Wilkerson would be to keep their standard accounting system and to capitalize upon the relative inelasticity of flow controller’s demand by increasing their prices by about 10% in order to match the inherent labor-intensive nature of the
UST Inc. is a dominant player in the smokeless tobacco industry. We have been tasked with weighing the cost and benefits of having leverage in their capital structure and to advise the CEO whether or not to go ahead with the recapitalization. After solving for UST’s credit ratings and value given three different stock buyback scenarios, $700 million, $1 billion, and $1.5 billion, we would suggest that UST move forward with the recap at $1 billion.
Despite CAH's competencies, its US distribution faces serious challenges. CAH's exclusive US distributor fails to actively promote the sales of Curtis Lift. In fact, the lift is but a minor product within the wholesaler's complete product line and accounts for only 20% of its total lift sales. Given that US market currently accounts for 60% of CAH's sales and holds growth potential in future, the current US distribution system may hurt CAH's growth. Another problem is CAH's high production cost. Its cost of sales accounts for approximately 72% of sales, which is at least 20% higher than that of dominant players. The relatively low contribution margin leaves the company little flexibility in competition.
Rocket-Blast, LLC, a beverage maker, has seen its profit margins reduced which presents a real problem for the company going forward (Precord & Macdonald, nd). Management has decided that operating costs must be reduced in order to increase profit margins to
Wolford General Partnership (WGP) operates plumbing supply business which is also an exclusive supplier for certain stable construction firms. Because of its excellent reputations and services, WGP is able to an extremely profitable entity for the business. WGP uses an accrual method of accounting and has been using June 30 fiscal year for the tax report purpose after its election of §444 since its formation.
We have cumulated a profit of $206 million over this period, second of the industry. Our goal of escalating profit has advised us to increase automation level and for cutting costs, which enabled us to have the margins of all products above 30% in 2019 and an average margin of 53.4% in 2024. Additionally, we invested to keep our products updated to the market trend with an attention to customer buying criteria. Moreover, starting from recent years, we run our full capacity with second shifts whenever the market need has a possibility to accommodate our production. To achieve a greater profit, we based our pricing strategy on the market movements in general by decreasing our price by $0.50 every year except for our Low End product-Acre.
Issue: The issue here is about the copyright use of an intangible idea that was also in some tangible forms and what is all covered in the copyright law. Are the plaintiff’s ideas being copyrighted by Taco Bell, after the breach of an implied-in-fact contract? Within the copyright laws, can the plaintiff’s claim be valid? Why weren’t some of Wrench’s claims preempted under the federal copyright law?
Overhead based on direct labor includes the cost of the Product Development Support Center, interest expenses, and general and administrative expenses. The Product Development Support Center failed to account for hours spent on each product, which will not only complicate the product cost calculations, but also the calculation of capitalization expenses later on. The Development Support Center will be most used during the peak (i.e. most hours) time of development for each product, and hours worked will probably be the best way to divvy up the costs of the support center. The money invested in the company is being used on developing each product right now. I figured interest would best be divvied up by hours to attribute the interest expense to the product using the most of the investment. Similar to the reasons stated before general and administrative costs are going to be associated with the most prominent product, and that is best seen through hours. (Figure A)
Conclusion There are three main issues that the Deere & Company currently have. According to the analysis and the evaluation of the Deere & Company overall, it can use the space matrix evaluation to find out their future strategy. For the internal analysis, they have a financial position of 3.4 and the competitive position of -1.0. For the external analysis, they have a stability position of -2.8 and the industry positon of 6.0. As a result of the space matrix, they should implement the aggressive strategy to establish the long-term success.
The benefits of these assumptions are that while maintaining the current growth rate of 13%; we can maintain our COGS. One of the major factors contributing to the firm’s poor profit margin is operating expenses.
Signode Industries Inc. - Providing Packaging Solutions Executive Summary SIGNODE INDUSTRY: DILEMMA AT HAND: Mr. Gary Reed, President of Signode Industries packaging division, is in a dilemma as what he should be his course of action to meet the 6.8% increase in price of cold rolled steel- the raw material used in manufacture of Signode’s primary product, steel strapping. There are few options given in the case: Increase Signode’s strapping prices to offset the increased price of cold – rolled steel. Maintain Signode’s current book prices as increasing prices would affect sales force morale. Introduce price-flex model as proposed by Jack Davis i.e. a kind of selective discounting or premium charging for customized services. Recommendations Reason: (All data in accordance to 1983) In accordance to Exhibit 1: Sales of Packaging Division of the company = $285,950 In accordance to Table A: Sales of Apex = 33.3% of $285,950 Sales of BBM = 26.8% of $285,950 Sales of HDM = 33.4% of $285,950 Sales of Customized Products = 6.5% of $285,950 In accordance to Exhibit 4: Similarly, For Apex: As it has a capacity utilization of 71% now, Suppose a sale is $100. Then contribution is $39.15 Therefore variable cost is $60.85. Now if we increase the capacity utilization to 100%, Sales becomes $ 141 since production increases by [(100-71)/71] * 100 = 41% Variable Cost = 141% of 60.85 = $85.8 Fixed Cost = 69.38% * 12.3 = $8.53 Total Cost = 85.8+8.53 = $94.33 EBIT = Sales – Variable cost – Fixed Cost = $46.67 % of EBIT = [(46.67/141) * 100] = 33.09% Suppose the company sales 100x units, the total cost was 69.38. Thus per unit cost was .6938. Now the company sells 141x units, the total cost...
The overall purpose of cost accounting is to advise top administration and the management team on the most suitable and cost effective methods and actions to employ based on cost, capability and efficiencies of a given product or service. It can be defined as the method where all the expenditures used during execution of business activities are gathered, categorized, examined and noted down (Horngren & Srikant, 2000). Once these numbers are gathered and recorded the information is used to determine a selling price and/or to identify possible investment opportunities. Although the principal aim or function of cost accounting is to help the business administration with their decision making and business planning process, the cost accounting data
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 order to meet these goals in a competitive business arena, the management team, in agreement with the Board of Directors, has selected a cost leadership strategy with a product lifecycle focus. An article on The Business Models and Strategies blog (Michail, n.d.) highlights Porter’s view of the strengths of this business strategy against the five competitive forces.
(Target costing is “a structured approach for determining the cost at which a proposed product with specified functionality and quality must be produced to generate a desired level of profitability at its anticipated selling price.”) In order to properly achieve target costing a company must complete the following steps; determine a market price point for the proposed product, calculate the target cost by subtracting the desired profit from the target price, reiterate the product design to achieve target cost, and finally revise the market price following the redesigned product and current market conditions. This mistake in the implementation of target costing led to missed opportunities to reduce costs through the redesign of product components and tooling. The missed cost reduction opportunities resulted from the hasty decision making in the design phase, Billings accepted early component designs without additional cost reducing
Activity-based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs. Activity-based costing is mostly used for internal decision making and managing activities while traditional costing method is used to provide data for external financial reports. Most organization uses activity-based costing as an addition system for using traditional absorption costing as sometimes the traditional cost system misleads the product’s profitability. In a company, there are many products on sale, if one product is sold at a high price with low product margin and a product with high product margin at a low price, it may result in a loss. In addition, due to the reason that cost drivers and enterprises business may change, activity-based costing analysis also needs to be revised periodically. This amendment should be prompted to change pricing, product, customer focus and market share strategy to improve corporate profitability.