Competition Bikes (CB) is making CarbonLite and Titanium bikes. To streamline cost there need to be an investigation into which practice is most efficient and cost effective for the CB. Competition Bikes is using a traditional based costing (TBC). There needs to be a comparison between the current use of TBC and activity based costing (ABC) to decide which is most beneficial to the company. Also, the breakeven point to cost volume profit needs to be evaluated. There is a potential for a $50,000 increase in production and a 10% material cost increase.
A1 Costing Method
Traditional Based Costing is, “The allocation of manufacturing overhead (indirect manufacturing costs) to products on the basis of a volume metric such as direct labor hours or production machine hours.” (Traditional Costing, 2014) As manufacturing relies more on the combination of manpower and technology and the use of TBC will become more inaccurate. It will not be able to depict the true root cause for manufacturing overhead. The activity based costing (ACT) is a more reliable method of determining actual cost to produce a product. This method looks at the cost of each activity. Then it attaches a financial cost to that activity. Although ABC can be complicated to calculate it is flexible and helps companies determine more accurate budgets and true costs of producing products.
The ABC method does not directly make changes to the cost of producing the product. What it does do is take into account the overhead for manufacturing and nonmanufacturing aspects of product production. Using this new cost method will help CB have a better understanding of what it takes to produce a bike. By having this knowledge the company can possibly identify ways to streamline production and cut waste. This intern can affect the company’s profit and may give the clients a better product at lower cost. If CB decides