Forrest Hill Paper Company

1121 Words Dec 22nd, 2013 5 Pages
TO: Professor and Manager
SUBJECT: Forrest Hill Evaluation of Profits and Costing Systems
DATE: November 1, 2013

Executive Summary

Throughout this report, our team will describe how we used activity based costing to allocate costs, illustrate why the traditional system is faulty, and recommend changes that Forest Hill Paper Company should consider implementing in the near future.
After closely reviewing the financial and production data, our accounting team has found that your traditional cost allocation is faulty and misleading. The costs of products A and C were over allocated and products B and D were under allocated causing deceptive information on the true profits of the company. Also, product B appears to be
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These findings are demonstrated in the bar graph below.


As consultants to Forest Hill Paper Company, we recommend that the company consider the following actions to potentially increase profits and effectively allocate costs.
Firstly, it is strategically beneficial for the company to continue to produce products A, C, and D. However, you should discontinue production of product B, as it is unprofitable and is losing the company money. Product B has been losing the company $2,307 per reel. If the company deems it is essential to keep producing product B in order to retain their customer base, we recommend changing the production schedule. For example, during times of lower demand, you can produce products such as B that do not make as much money, but you will still retain your customers’ business and satisfy their needs. During times of higher demand, by discontinuing the production of product B, the company will be able to produce the more profitable products such as A, C, and D.
Another way to change your profit if you deem product B essential to your company, is by producing more consecutive batches. The cost of doing a grade change for product B is currently $5,875 per reel. If you were to do two batches of product B in a row without doing a grade change, the cost of grade change would drop to $2,938 per reel, and a profit of $625 per reel.
After either discontinuing
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