Summary of the Problem of ABC Company

Assuming that the company’s goal is to maximize profits, the current cost system is not an appropriate tool for strategic planning. The ambiguity of the overhead costs per product makes it difficult to accurately analyze the cause and effect relationships of changes and/or improvements to specific product line.

The purpose of this report is discussing the case of Wilkerson Company that confronting tough competition in price cutting in pumps which caused to a big drop of pre-tax operating income from 10% to 3%. After observing the existing costing allocation, we found out there is an issue on the existing costing report that the manager could not be able to see the real situation. In light of this, there will be brought to the discussion on the feasibility of using an alternative costing method – Activity based costing (ABC) in the latter paragraphs.

Luke is an employee of ABC Company. He has been assigned to a construction of an adult entertainment retail store within a neighborhood his brother, Owen, lives in. The development of the retail store has not been made public yet and will be announced one month from today. This announcement will decrease the property values of the surrounding areas significantly. Owen is trying to sell his house. He told Luke that he recently received an ‘okay’ offer. However, in hopes that a better offer might be present itself in a few years after the real estate market improve, he has not taken the offer yet. Luke is very close to his brother, which makes him concerned about his confidentiality obligation to ABC Company.

If a good cost-measurement system was set up, cost-plus contracts will demonstrate the advantages of cost-management better than fixed price contracts do. With a robust cost-measurement system, managers are able to know the real revenue drivers, to recognize the most valuable customers, and to offer more reasonable price bid. That is to say, cost-measurement system’s strength lies in differentiating clients’ value, projects’ value and operation processes’ value case by case. Under this circumstance, cost-plus contracts would surely dig more utilization and benefit more from such a system, because CitySoft would be able to charge different customers and projects for different prices, which is critical for increasing profitability.

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One of the best aspects of the way the time-driven ABC system was put into place at Kemps was how efficiently and accurately management determined the main issues with the current cost system and responded with appropriate and relevant solutions. For example, one of the greatest problems the company was facing was that many of its operating costs were spread out equally over a customer base that was growing more diverse and demanding more personalized and varied service, effectively cutting or potentially eliminating entirely Kemps’ profit margins for a product. Therefore,

Essentially, with the current cost system, the managerial analysis is highly flawed due to a lack of crucial in-depth cost information, as indicated by:

We will examine the given data from the case and compare the unit costs from the company’s current costing system (traditional costing) and from activity-based costing. We will also highlight other qualitative data in consideration with the numerical factors that may result to a significant change on our recommendation.

Essentially, with the current cost system, the managerial analysis is highly flawed due to a lack of crucial in-depth cost information, as indicated by:

ABI is using a top-down process in this project, meaning that determination of the final budget comes almost strictly from a compilation of experiences and judgments of the top and mid-level managers in the company. The higher-level managers break down costs into major categories, pass down their cost estimates to the next lowest level, lower-level managers break the major categories down into subcategories and so on until the estimation process reaches the lowest level of the company. By the end, each level knows the specific amount of money that it is allotted to complete the project tasks required at that level. Because the project is so extensive in price and risk, it would have been smarter for them use a bottom-up process which would have involved the employees who would actually be part of the work team so that management could get a more accurate estimate of the time and money that would be required to complete the project.

2. Umble, M Michael; Umble, Elizabeth J; "How to apply the Theory of Constraints' five-step process of continuous improvement ", Journal of Cost Management; Boston; Sep/Oct 1998

The purpose of this paper is to answer a few important questions: Why do companies allocate costs? How do companies allocate costs? And how this cost allocation can affect the decision making of the company. It is important for the companies to find the proper method to allocate the costs. Cost allocation is an important issue in many companies because many of the costs associated with designing, producing and distributing products and services are not easily identified with the products and services that are created. It would have been easier for companies to allocate cost if costs were directly traceable with the products and the cost allocation would have been minor issue for the company. The decision-making

This paper will describe the differences between static and flexible budgets. Budgeting is a key component of financial management in any business. The most traditional form of budget is the static budget, which is one "that incorporates values about inputs and outputs that are conceived before the period in question begins" (Investopedia, 2012). This concept will be contrasted with a flexible budget. This technique allows for the values of inputs and outputs to be changed at any point, or at multiple points, during the period in question. The company would normally make such a change whenever it is realized that the change is needed. A new price from a supplier, for example, could be reflected immediately in a flexible budget, rather than at the end of the period. This and other differences between the two types of budget will be outlined in the course of this paper. The first section will explain the relationship between fixed and variable costs in a flexible budget. The second section will discuss the differences between static and flexible budgets. The third section will explain how flexible budgets can assist with cost-volume-profit (CVP) analysis.

The keen competition requires companies to consider the cost variable. But traditional budgeting method separates the cost into variable and fixed, put the emphasis on the variable cost and consider the fixed cost implacable.

There are different costs that respond to the different activities like variable costs are directly associated with the products sold. The cost behavior patterns of selling, general, administrative, and other operating expenses are determined, and these expenses are budgeted accordingly. For example, sales commissions will be a function of the forecast of either sales dollars or units. The historical pattern of some expenses will be affected by changes in strategy that management may plan for the budget period. In a participative budgeting system, the manager of each department or cost responsibility center will submit the anticipated cost of the department 's planned activities, along with descriptions of the activities and explanations of significant differences from past experience. After review by higher levels of management, and perhaps negotiation, a final budget will be established. Because of the necessity to recognize cost behavior patterns for planning and control purposes, overhead costs will be classified as variable or fixed.