Summary Report for Vice President

Western Governors University

A1.
To: Vice President
The following summary will provide information as to why Competition Bikes, Inc. should switch its costing method from a traditional costing system to activity based costing. The traditional costing system is used by many corporations and allocates production overhead to the units manufactured. Companies that utilize the traditional costing method typically believe that the volume metric is the factor that drives the manufacturing overhead costs. The traditional costing system does not accurately represent the manufacturing costs that are affiliated with the production of an item. It is designed more so for departmental focus, not process focus and focuses on cost incurred not cause of costs. On the contrary, activity based costing is designed to assign costs to activities. ABC is becoming more widely used since companies are growing more complex and need to allocate increasingly huge indirect costs to the correct area or activity. Simply put, activity-based costing is a process where costs are assigned due to the cause and effect relationship between costs and the activities that drive costs. Traditional costing systems have a tendency to assign indirect costs based on something easy to identify (such as direct labor hours). This method to assigning costs can be very inaccurate, as there is not necessarily a relationship between the costs that are being assigned, and the activity they are being assigned to (Bradford, 2008). Clearly, this causes inaccuracies in evaluating costs. By activity based costing reviewing and applying costs to the correct area, Competition Bikes will have a better idea of what is driving the costs of the products being manufactured.

A2. Based on an evaluation of cost-volume-profit, do the following: a. Analyze the breakeven point for