JET2 Task 4 Report Essay

2312 Words May 9th, 2014 10 Pages
Competition Bikes, Inc. Costing Method and CVP Report

A1. Costing Method Recommendation

This report has been prepared to analyze the current costing method at Competition Bikes, Inc. (CBI) and provide a recommendation for improvement. To support this analysis, the differences between traditional based costing and activity based costing will be examined, along with the benefits and drawbacks for each method. A cost-volume-profit evaluation with break-even analysis for both sales units and sales dollars for the CarbonLite and Titanium bike lines will also be provided.
The main differences between activity-based costing and the traditional costing:
Traditional costing includes both direct and indirect components. Indirect costs
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Traditional costing method -Titanium line manufacturing overhead cost: $239,020 -Carbonlite line manufacturing overhead cost: $232,380 Total traditional manufacturing overhead cost: $471,400

ABC costing method -Titanium line manufacturing overhead cost: $188,415 -Carbonlite line manufacturing overhead cost: $282,985 Total traditional manufacturing overhead cost: $471,400
It’s important to note that the manufacturing overhead totals are identical when calculated using both traditional and ABC methods. This is because it’s not a difference in overhead, but instead a change in where the overhead is allocated. In the case of CBI, the allocation is quite different between methods.

For the Titanium line, the total manufacturing overhead cost with ABC costing is $50,605 lower than with traditional costing – a difference of 21%. In other words, CBI has overestimated manufacturing overhead for the Titanium line by 21% using traditional costing.
Looking at unit costs, the traditional method per unit cost is $713, while the ABC unit cost is $656. The higher unit cost in the traditional costing method makes sense given that the allocation for manufacturing overhead was higher. CBI may be overpricing this bike, which could result in a negative effect on sales. If they could lower the price to a number closer to the true unit cost, they will likely

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