Activity Based Costing – Glaser Health Products Case

The week four individual paper addresses the implementation of Activity Based Costing (ABC) by Super Bakery, Inc., a virtual corporation founded by Franco Harris. Specifically, management strategies, the reasoning behind an ABC system, and the alternatives of a job order cost system or a process order cost system are assessed for this enterprise.

Overhead costs are not in proportion to the production output because of the method they are using. This leads to inaccurate pricing and costing decisions. An Activity Based Costing System would help find the real relationship between the products produced and overhead.

The week four individual paper addresses the implementation of Activity Based Costing (ABC) by Super Bakery, Inc., a virtual corporation founded by Franco Harris. Specifically, management strategies, the reasoning behind an ABC system, and the alternatives of a job order cost system or a process order cost system are assessed for this enterprise.

This paper provides a brief presentation of Activity-Based Costing methodology, how is used as well as its short comings.

Activity based costing (ABC) is a cost management technique and more precisely it is a method that measures the cost and performance of process related activities and cost objects. It assigns costs to cost objects such as products or customers, based on their use of activities. Thus recognizing relationship between cost drivers and activities.(Lewis, 1995).

3. Under the new activity-based costing (ABC) system, compute the indirect cost allocation rates for each of the three activities:

To make it clearer, ABC method identified all sources of operational costs, then allocate these costs by product and service based on the volume of operations or transactions occurring during the provision of service or product. With ABC method, cost to serve a customer can determine with certainty. After deducting the cost of product and cost to serve each customer, to calculate customer profitability brings. Methods ABC costing and customer specific product costs help pinpoint profit per customer brings and help position products and services accordingly. (Averkamp, 2003)

In this report, I will provide a discussion of how activity-based costing (ABC) may assist Sierra Ltd to address its current issues. With the fragmented market in the recent past, companies are using different costing and pricing strategies to remain competitive. Organisations have implemented product diversification and automation. This trend has made the allocation of costs for production overhead an important aspect in calculating product cost. The important issues facing Sierra Ltd include the use of a traditional approach for product costing that distorts some of the organisation’s product cost. In addition, the company is experiencing problems related to generations of sales prices, hence, the company adds 30% margin to production costs of all products to get actual sales prices. Another issue is about engine component sales that have been unstable in comparison to transmission and clutch components. These issues will be addressed in this report by assessing Sierra Ltd current costing and pricing practices. The report will also discuss whether ABC is suitable for the organisation, and finally, the report will present important factors the management of Sierra should take into consideration to ensure successful adoption of ABC if they decide to go ahead with Baljit’s proposition.

Nowadays, we know that activity based costing system assigns overhead costs to products or services products that using a two-stage process, which focuses on activities. ABC is a relatively new and very important topic in managerial accounting. ABC allows us to find a way that we could determine the profitability of every product, profitability of every customer we serve, and the profitability of our process. Contents in brief, first that comparing potential advantages of ABC versus traditional costing methods. The

Activity-based management, activity-based costing and continuous improvement, all these help in the improvement of the efficiency in manufacturing, better control of overhead costs and the accurate costing of products. With this in mind, We disagree with the advice that Chuck Davis, the firm’s controller, gave Leonard Bryner. The traditional way of costing produce average costs that severely overstated or understated. Without the accurate costs, the firm would not be able to price properly their products and that would be damaging to the firm. With activity-based costing and management, all costs are accounted for with the help activity-drivers and overhead costs are decreased. In turn, the costs that the firm has for their products are more accurate and pricing is much easier.

Activity-based costing (ABC) is an accounting method that allows businesses to gather data about their operating costs. Costs are assigned to specific activitiesuch as planning, engineering, or manufacturingnd then the activities are associated with different products or services. In this way, the ABC method enables a business to decide which products, services, and resources are increasing their profitability, and which are contributing to losses. Managers are then able to generate data to create a better budget and gain a greater overall

At present PC4U apportions its production overheads based on direct labour hours. With a range of products available and opportunity for customising these products individually to meet the retailer’s needs, this report aims to assess the effectiveness of this traditional method of allocating production overheads. It will discuss the drawbacks of the current approach used by PC4U, as well as an alternative approach in the Activity-Based Costing system, which “is intended to overcome the weakness of the traditional method by having various pools of costs and then allocating each pool’s costs on the basis of its root cause.”(Averkamp 2007) As well as comparing the benefits and drawbacks of these costing systems to determine what recommendations should be given regarding the approach PC4U should adopt, the report shall also discuss the impact an activity based management system may have on the company.

Activity based costing (ABC) assigns processing overhead costs to products in a far more rational manner than the traditional methodology of simply allocating costs based on machine time. Activity based charging first assigns costs to the actions that will be the source of the overhead. After that it assigns the cost on those activities and then the merchandise that demand the actions.

Comparision two methods presents DRURY: “ Both use a two- stage allocation process. In the first stage a traditional system allocates overheads to production and service departments and then reallocates service departments costs to the production departments. An ABC systems assigns overheads to each major activity ( rather than departments). With ABC systems, many activity- based cost centres ( activity costs pools) are established, whereas with traditional systems overheads tend to be pooled by departments, although they are normally described as cost centres. (DRURY P.253) In other words the traditional method concludes that products cause the costs, ABC assumes that “ activities cause cost and that cost objects create the demand for activities” (Turney, p.51). Therofore, this system can be answer for companies seeking “true” cost information. Comparision of two methods is in ABC favour, as “is more accurate cost allocation method compared to traditional approach and, thus, is a better approach for managerial decisions such as pricing strategy, particularly, in heterogeneous product settings.” (RUHUPATTY P.5).

The implementation of an Activity-Based Costing system would in many ways help a company due to the simplistic process for which it accounts for materials and direct labor. According to James D. Tarr, MBA “Activity Based