Based on the ABC data below are the gross profit margins for each product produced.
ABC is short for activity-based costing. Companies follow a two-stage process when allocating indirect costs using ABC. The first stage entails assigning costs to pools based on the activities that cause the costs to be incurred. The second stage involves allocating the costs in the activity costs pools to products through the use of a variety of cost drivers. Furthermore, activity-based costing generates a suitable allocation since it disperses the applicable overhead costs to the appropriate products. Also, it enhances precision in ascertaining the costs of products and services. Therefore, it calls attention to the need to acquire a better
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With the ABC system, there is a variety of cost drivers used. Thus, a different cost driver is used for each category of overhead cost. Furthermore, with the ABC system, a larger amount of overhead costs are allocated to OS-367. Therefore, since OS-367 utilizes greater proportions of some of the resources than other products, the overhead costs for those categories are allocated to OS-367 in larger amounts. Hence, the total overhead cost per unit increased for OS-367 (Edmonds et al., 2011).
Furthermore, traditional costing does not classify the specific overhead charges or resource used to fabricate a specific product and distributes costs by assigning average overhead rates. However, ABC categorizes specific activities employed for producing each individual product and allocates them based on their consumption of resources. Drilling Innovations used traditional costing, which in turn, caused them to assign overhead based on machine hours and ignore other overhead activities used to produce each product. However, by using ABC, the costs were allocated based on the activities used to produce each individual drilling head. Therefore, the cost was more accurately spread based on the overhead consumption of each product individually. Costs that were incurred to produce OS-367 were being allocated to GS-157 and HS-241 with the traditional costing method. Once
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.
Activity-based costing can be defined as the managers allocate costs depending on the quantity of resources a product or service consumed in the manufacture of goods and services. The activity based
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.
Glaser Health Products manufactures medical items for the health care industry. Production involves machining, assembly and painting. Finished units are then packed and shipped. The financial controller is interested to introduce an activity-based costing (ABC) system to allocate (or distribute) indirect costs to products. Indirect costs, as distinct from direct costs, cannot be unambiguously linked to specific products. The controller would like to calculate product costs based on ABC for planning and control, not inventory valuation.
From the overhead analysis completed, it analysis six overhead items with associated costs. This analysis also compares numbers from traditional based costing vs activity based costing. With traditional based costing the analysis shows a total product cost number of 641,320 for Titanium bikes, where as ABC method shows a total product cost as 590,715. There is a difference for Carbon bikes as well. The traditional method shows a 679,380 where the ABC method shows a total product cost of 729,985. These numbers show that Competition Bikes could be overpricing the titanium bikes and could afford to lower the cost in order to be more competitive in the marketplace and maybe even bring in more revenue than previous years. As for the Carbon bikes the analysis states that using the traditional method that total product cost was at 679,380. Once the same analysis for total product cost using ABC method for Carbon bikes shows that number to be 729,985. This knowledge gained from getting a better understanding of each bikes specific costs can really help price the product better so that Competition Bikes remains more competitive in the industry.
Activity-based costing (ABC) methodology is an instrument designed to provide accountants and managers with valuable costing information that will allow them to make sound strategic decisions. It is used as a secondary methodology rather than a replacement for the company’s primarily costing system. The ABC methodology identifies activities in an organization and for each activity it assigns a cost. The cost reflects the actual resource consumption by each activity that has been identified.
In using ABC overhead costs are distributed differently across the three products, but in total they are the same, in total. However, ABC changes the information that managers receive to make effective business decisions, which will ultimately result in improved business results.
3. Under the new activity-based costing (ABC) system, compute the indirect cost allocation rates for each of the three activities:
The above cost system was efficient during the 1980s because it split up overhead over three cost pools, adding an additional pool, which has machine hours as its cost driver. This proved efficient because “[w]ith increased usage of automated machines, direct labor run time no longer reflected the amount of processing being performed on parts, particularly when one operator was responsible for several machines.” Packet, pg. 7.
Q3. How were the limitations of the existing cost system overcome by the ABC Cost System? What are the implications of the ABC system?
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,
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
In addition, it wrongly allocated its indirect costs at volume bases. The use of process technology mentioned in the case led to an increase in factory overheads Since direct labor hours was not a cost driver of them, allocating its large proportion of fixed factory overheads and other indirect batch-level costs on the basis of DLHs in this cost system did not accurately measure how resources were being used. As a result, these inaccurate allocations would have significant costs to Elkay. Moreover, it disregarded its cost structure in which most costs were “fixed” that would not vary in the short run and should be allocated based on its practical capacity. By using the “actual sales volume” as the allocation base for allocating its large corporate overheads, this standard costing system in fact over-pricing its products for its actual productivity was lower than the practical capacity under the intense competition. As a consequence of all problem within the standard costing system, PPD urgently needed an accurate costing system.
ABC refers to cost attribution to cost units on the basis of benefit received from indirect activities e.g. material ordering, material handling, machine setups, quality assuring, customer support services etc. For each such activity, it is necessary to identify a cost driver that causes incurrence of cost relating to that activity. For example, hours spent on testing for a quality assurance activity may be used as application base of cost driver for this activity.