A) ABC DATA
GS-157
(19.30-12.50) * 120,000+ 816,000
HS-241
(17.50-11.67) * 90,000= 524,700
OS-367
(15.10-13.75) * 40,000= 54000 B) TRADITIONAL DATA
GS-157
(19.30-13.33) * 120,000 = 716,400
HS-241
(17.50-12.22) * 90, 000 = 475,200
OS-367
(15.10-10.00) * 40,000 = 204,000
C)
Traditional costs allocation is calculated by assigning average overhead rates among the business. It does not identify detailed overhead charges or resources used to produce a particular product. However, Activity-based costs allocation identifies costs and creates cost centers to charge other costs for the company other than costs that are directly related with production. Drilling Innovation had intially given traditional costs to all of the products based on machine
…show more content…
Therefore, it gives managers a clear picture on how the products generate revenue. With that being said, in this case study, the managers of Drilling Innovations should evaluate the resources that are being used by each product and determine what is driving the higher need of resources for producing the product. After doing so, the manager can complete a root cause analysis to determine what is the bottleneck driving this need and look for corrective actions that can be implemented to reduce this demand. This would reduce the total cost of production, using ABC as the need for resources will be …show more content…
High volume products should be allocated costs using the ABC method. This is because the traditional method may lead to the overall cost being lower than the actual cost. Highly specialized products, which involve additional engineering activities, set-ups, and settings, lead to an extra cost of producing such products. ABC system is, therefore, the best system in allocating costs to such products. When a traditional costing system is used, the cost per unit may be generalized hence leading to low product cost, which may be lower than the actual cost due to their usage of few machine hours. A product that also involves many machine steps should also use the ABC system to ensure accurate cost allocation and resulting more effective cost data. Generally, ABC costing method is the best costing technique since most overheads no longer correlate with product machine hours and labor hours. In addition, the traditional costing methods disregard the number of units while the ABC takes into consideration the number of units produced (Cooper, and Kaplan, 1991). This makes it evident that ABC is the best costing techniques for cost allocating despite the additional costs that may be associated with
On April 9, 1997, Rig 52 that belonged to Mallard Bay Drilling was towed to a location in the territorial waters of Louisiana, where it drilled a well over two miles deep. After the well was almost complete an explosion occurred killing four of the crew and injuring several others. Seeing that this was a marine casualty in navigable U.S. waters, under existing regulations the United States Coast Guard responded. When the investigation was over the Coast Guard did not find any violations of their regulations and noted it was an uninspected vessel and the operator held an Operator Uninspected Passenger Vessel (OUPV) license. Soon after the incident the Occupational Safety and Health Administration (OSHA) cited Mallard Bay Drilling for violations
John Deere Component Works (JDCW), subdivision of John Deere and Co. was in charged specifically of the manufacturing of tractor component parts. The demand for JDCW’s products had problems due to the collapse of farmland value and commodity prices. Numerous and constant failures in JDCW’s competition for bids, alerted top management to start questioning their current costing methods. As an outcome, the analysis has to be guided to research on the current costing methods with the intention of establishing legitimacy and to help the company in adopting a more appropriate costing system.
For instance, ABC might identify a distribution channel as non-remunerative or non-value adding. Such channeling might however be non-profitable, but aid in achieving some other strategic objectives. Conclusively, the review of activity based costing benefits and shortcomings suggests that although ABC has many uses and has aided in renovating many firms, the establishment of lean accounting methods such as Economic Value Added and Balanced Scorecards that focus on eradicating cost allocations and permit thorough accounting, measurement and control systems, has made activity based costing tend to become obsolete. However, ABC still has many supporters, notably in some business-intelligence software applications and the US Marine
Tubular Services revenue growth for Q3 2011 was $38.1 million, an increase of 9% compared to the prior quarter. This increase is derived from increased customer demand for shale resources. Casing Drilling revenue Q3 2011 was 5.3 million compared to 3.9 million in Q2011. Top drive operating margins were 25% in Q3 2011, which was a decrease from the prior quarter.... ... middle of paper ...
If done right, I believe that all of the costs can be allocated to each of the three products through both direct and overhead costs. The only direct costs that are being included currently are labor and manufacturing costs. I broke up overhead into overhead based off direct labor and overhead based on units sold.
Since more than 40 years, Toyota Company was thinking how to develop the traditional process costing system and the production system. Some of the companies believe that the increasing of the production is a big profit, while Toyota proved the opposite. The more you increase the products out of the need of the market, the more losses you are going to gain. This kin...
In the 1970s due to limitations in traditional costing systems, Greater competition and further inaccuracies in costing products effectively encouraged businesses to seek out alternative methods to enabling them accurate and causal cost allocation , at the same time Activity-Based Costing (ABC) method came about, being quickly adopted by enterprises of many and various types
Cost allocation is the process of identifying, aggregating, and assigning of cost to various separate activities. There is no overly precise method of charging cost to objects, hence resulting to approximate methods being used to do so. Amongst the approximation basis used includes square footage, headcount, cost of assets employed, and electricity usage amongst others. The main aim of cost allocation is to spread cost in the fairest possible method and also to impact the behavior pattern of the cost.
An organization costing system is a system that helps the management with the strategy planning while the system plays an important role in providing accurate cost information about the products and customers (Curtin, 2006). UPS utilizes the Activity-Based Costing (ABC) system. ABC assumes that activities cause costs and that cost objects create the demand for activities (Marx, 2009). The key to cost allocation under ABC is to identify the activities that are performed to provide a particular service and then aggregate the costs of the activities (Gapenski, 2012). This is a marked departure from the practice of sharing overheads costs equally or overheads becoming part of the overall profit-loss estimate instead of component product pricing (Nayab, 2011).
Every company has some kind of Revenue and they all have costs that are associated with running the company. It is also true that if a company wants to increase their Revenue, their costs will increase too. It is every company’s goal to maximize revenue and either through Production or Services, and minimize cost. These things are easy to figure out, but actually identifying the production and figuring out how it will increase or decrease with change is very difficult.
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... ...
Chapter 4: Application of ABC method. This part analyses the logistics activities of XYZ companies, cost drivers, costs and expenses related to each activity, distribution of expenses into activities and calculation of cost per unit of each activity
...h the full expenses included. Challenge overseeing and incorporating over a huge supply change and developing patterns.
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...
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.