Activity Based Costing Draft

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ABSTRACT This case details a fictional denim processing plant providing the service of custom finishing to denim pants for original manufacturers. The case is a lesson in how interdependencies among products in the production process and the costs associated with those interdependencies can be cost analyzed for management decisions. The retooling of a finishing machine change-over production from an existing stonewash process to accomplish a proposed distressed finishing process for a new customer, is the cost interdependency studied. We explain how marginal costing and full cost activity-based costing (ABC) are used by the controller to present management product optimal (profit-maximizing) production decisions on the proposed…show more content…
See Exhibit 2 at end of text. Kelsey then determined that this analysis could be flawed, because the stonewash finish had always proven to be profitable, but showed to be unprofitable in her analysis. Kelsey identified the problem with her analysis as the way she had treated the change-over costs as batch level. She determined they should be classified at the product-sustaining level, since they relate to switching from one finishing process to the other, and are not incurred when Unit#4 is running consecutive batches of the same finish. When treating change-over costs as product sustaining costs, the stonewash only was $.195 per garment and distressed was $.702 per garment. These cost seemed more reasonable. Both processes were profitable, but distressed seemed to be more profitable on a per garment basis in this analysis. However, this analysis still misses key interdependency costs. For her third and final analysis, Kelsey calculated the marginal revenues, or the additional revenue that would be generated for each additional finished unit, and costs of accepting the new order. This final analysis is presented in Exhibit 4. This analysis included subtracting the opportunity cost associated with the reduction in sales of stonewash garments, since accepting the Guess Who order would result in 50,000 lost sales of stonewash garments due to

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