Activity Based Accounting: Competition Bikes Case Study

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Part 1 Activity Based Accounting Activity Based Accounting (ABC) is a method in which costs are assigned and associated with resources and products based on their actual consumption by each individual product. The model assigns more indirect costs (the overhead) into direct costs. Using ABC, an organization is able to estimate individual costing elements based on product or service that may help decision making on pricing, elimination of certain products, market expansion by product, and efficiencies (Cooper, 2007). It does appear that Competitive Bikes should switch to activity based costing because titanium products use overhead differently than carbon products. Under tradition based costing, the total overhead of $471,400 splits almost evenly ($239,020 to titanium and $232,308 to CarbonLite; of 50.7% to Titanium and 49.3% to CarbonLite). This split is not indicative of the approximation of resources; the CarbonLite products use far more setup, quality, engineering, and other ancillary costs than the Titanium. For example, if we looked at set up time and resources, Carbon Lite uses over 10 times the amount than Titanium. Titanium bikes, however, cost the company more in utilities. Sales unites, in a company like CB, are made up of different products that allocate different resources. Unit Sales together, or the percentage of all sales skus combined, equal units which then result in total sales. In this case, because Titanium and Carbonlite use different resources that

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