...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...
Words: 1149 - Pages: 5
...Texas MST Financial Analysis RJET Task 4 To: Mr. Vice President From: Jorge Felix, CBI Analyst RE: Summary report As directed by you, please read below my analysis and recommendations for Competition Bikes Inc. Since the company has retooled and is making both the Carbon Lite and the Titanium frame bikes. I will be analyzing the results of your directed activity-based costing analysis was undertaken in one of the company plants. After the study, a breakeven analysis was completed along with target profit projections. It will be in Company’s best interest to change from a traditional costing system to an activity-based costing system. In this summary report you will find evidence as to why this transformation it’s relevant and important since it will emphasize the differences between traditional costing and activity based costing systems. A1. Costing Method This method is defined as 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. As manufacturing becomes more sophisticated the manufacturing overhead costs usually increase while the direct labor hours or production machine hours decrease. Hence, the direct labor or machine hours are unlikely to be the root cause of the manufacturing overhead (Accounting Coach, 2012) This costing method is called traditional costing. This procedure will accept the fact that the direct labor is the major influential cost. All other...
Words: 1404 - Pages: 6
...ACCT5620W Contemporary Management Accounting Wilkerson Case Report * Contents Executive Summary 2 Competitive situation faced by Wilkerson 2 Wilkerson’s Existing Costing System Limitation & Possibility of Activity Based Costing 4 Cost Driver and rates under Activity-based Costing 6 Implication and Recommendations 8 Valves 8 Pumps 9 Flow controllers 9 Executive Summary Wilkerson traditional costing system seems to be too simplified. Using a single allocation base to allocate manufacturing overhead cost has understated the customized product (i.e. flow controller) cost while overstated the volume based produce (i.e. valves). Correct product cost can guide management a better strategic decision and better allocation of the company resources. We are going to analyze the difference between the traditional costing method and activity base costing and elaborate how the company management can react on it. Competitive situation faced by Wilkerson Wilkerson is a manufacturer of valves, pumps and flow controllers. Their target customers are manufacturers of water purification equipment. According to the case, the actual gross margin of flow controller; the most profitable production line, is 41%. It is the only production line outperforms the planned gross margin, which is 35%. Before studying the competitive situation, the followings are the descriptions of Wilkerson’s three products features, market situation and price setting. Valves Produced...
Words: 2667 - Pages: 11
...How Activity Based Costing differs from Conventional Costing Introduction Costing is used in business as a way of determining the cost of manufacturing/offering a product/service. Costing systems determine the overhead (indirect) cost of production and then allocate those overhead costs to a business’ products or services offered. There are two common methods for allocating these indirect costs to products. Activity Based Costing (sometimes referred to as “ABC” Costing) and Traditional Costing. Both these methods assess overhead costs and then attach these costs to products based on certain cost drivers. A cost driver is any component that costs money or any factor that is related to a cost occurring, such as the volume produced or the number of labor hours. Without going into the hard hitting mechanics of how ABS and/or Standard Costing works, this assignment will cover the key differences on how each costing system differs. Time is money Activity-based costing is more accurate with increased benefits because it takes important factors into account before assigning a cost to a product. However, for this same reason, it is a bit more complicated and time-consuming. It's also more thorough and considers nonmanufacturing expenses as well, such as administrative and managerial costs. source :cfo.com Traditional costing is a much easier way of determining the cost of a product, since it relies solely on assigning average overhead rates. This also means it won’t always...
Words: 653 - Pages: 3
...Time Driven Activity Based Costing Executive Summary Heryzin Baskerville National Graduate School of Quality Management Robert Kaplan introduced Activity Based Costing (ABC) in the late 1980s. It can be considered as the modern alternative to absorption costing, and allowing managers to better understand product and customer net profitability. Kaplan view is that the ABC target state will provide organization leadership with better information to make value-based decisions. Over the past 15 years, activity-based costing has enabled managers to see that not all revenue is good revenue, and not all customers are profitable customers. Unfortunately, the difficulties of implementing and maintaining traditional ABC systems have prevented activity-based cost systems from being an effective, timely, and up-to-date management tool. Many companies have abandon ABC because it does not capture complexities of their operation, takes too long to implement, and too expensive to build and maintain. ABC focuses attention on cost drivers, the activities that cause costs to increase. Traditional absorption costing tends to focus on volume-related drivers, such as labor hours, while ABC also uses transaction-based drivers, such as number of orders received. In this way, long-term variable overheads, traditionally considered fixed costs, can be traced to products. Some considerations that need to be examined prior to implementing ABC are fully understanding the resource implications...
Words: 336 - Pages: 2
...Summary for Activity-Based Costing and Capacity In this article written by Robert Kaplan, Activity -Based Costing method has been upgraded to a level that can better assist the need for an organization. The article began with the introduction of traditional Activity-Based Costing method, along with the emphasis on its two major pitfalls: lack of future elements and actual capacity levels. Then the author suggested two solutions to conquer the pitfalls by using budget cost and practical capacity to calculate Activity -Based Costing. I will attach some personal experience at the end of this summary to address my learning experience for this article. At first, the author summarized the basic steps of calculating activity-based activity: starting with the tracing the resource expense to activities, followed with obtaining the quantitative data on the output of each activity, ended with measuring how much of each activity's output was used by each product or customers. However, based on this historical method, the author pointed out there are two major pitfalls existed in this traditional ABC system. One is the actual cost-driver rate is not able to be calculated until the period is over, which leading the cost manager to be questioned by its ability to predict future cost by using the same system. The other pitfall is the cost -driver rate in traditional ABC system is not accurate when the resources performing the activity is under full capacity, which leading the cost of the...
Words: 714 - Pages: 3
...Introduction to Activity Based Costing (ABC) University of Pittsburgh Pittsburgh, PA Introduction to Activity Based Costing (ABC) Internet ABC Online Presentation This page and this presentation are created by Narcyz Roztocki. Click here to start Table of Contents Activity Based Costing (ABC) A typical situation in a small manufacturing firm Common beliefs Reality Why is a new cost management system needed? Why is the knowledge of the “true” cost of a product so important ? http://www.pitt.edu/~roztocki/abc/abctutor/index.htm (1 of 4)1/28/2005 5:20:20 AM Introduction to Activity Based Costing (ABC) Why is the knowledge of the “true” cost of a product so important ? (cont) Major factors for determination of market price Ways to determine object cost Total cost for a cost object Traditional Cost Accounting (TCA) TCA in a company TCA in a company (cont) Activity Based Costing (ABC) ABC Basic Premise When to use ABC ABC Steps ABC Illustration 1. Identify activities ABC Illustration 2. Determine activity cost ABC Illustration 3. Determine cost drivers ABC Illustration 4. Activity data ABC Illustration 5. Product cost calculation Product cost TCA vs. ABC Summary of ABC approach http://www.pitt.edu/~roztocki/abc/abctutor/index.htm (2 of 4)1/28/2005 5:20:20 AM Introduction to Activity Based Costing (ABC) If you want to improve the operation or quality of your business, or just learn more about ABC, Economic Value Added and...
Words: 987 - Pages: 4
...CASE 1: ZAUNER ORNAMENTS Table of Contents I. CASE SUMMARY 2 II. POINT OF VIEW 2 III. STATEMENT OF THE PROBLEM 2 IV. FRAMEWORK OF ANALYSIS 2 V. ANALYSIS 2 VI. DISCUSSION OF RESULTS AND RECOMMENDATION 4 VII. APPENDIX 5 VIII. REFERENCES 9 I. CASE SUMMARY Chia-yi Yu, the new controller of Zauner ornaments, decided to research Zauner’s current costing methods. She approached her senior analyst, Yung Chen, to prepare an analysis of unit-product costs for each of Zauner’s products, namely small glass ball ornaments, large glass ball ornaments, and specialty glass ball ornaments. Using information from the sales department, Chen calculated the cost per box using traditional volume-based costing system and as a result, small glass ornaments’ cost is more than twice higher than its selling price, which means the company is losing money. David Metz, the directory of Operations, analyzed the results and suggested to redo the calculations and to try allocating overhead to each product based upon direct materials and direct labor. Chen calculated the cost per box using Metz’ suggested approach and found that product costs are below current sales price. Yet, Chia-Yu was not fully convinced of this approach and realized that activity-based costing (ABC) system might reflect Zauner’s product costs more accurately and serve as a basis for better product-pricing decisions. II. POINT OF VIEW The analysis of Zauner Ornaments’ cost allocation per...
Words: 2201 - Pages: 9
...The implementation of Activity Based Costing (ABC) in Chinese refining manufacturers Table of contents 1. Introduction 2 1.1 Research background 2 1.2 domestic and foreign research status 4 1.2.1 Activity-based costing development process 4 1.2.2 Status quo of Activity-Based Costing Development and Application in China 6 1.3 research contents 8 2. Related theories 9 2.1concept of ABC 9 2.2 rationales 10 2.3 difference between ABC and traditional costing 12 2.3.1. Different calculating targets 12 2.3.2 Different calculation 12 2.3.3. Different Finished goods costs term 13 3. Research methodology 13 3.1 case study 13 3.2 The survey method 13 3.3 Literature 14 4. Research Results 14 4.1 problems of traditional costing method in oil refining enterprise 14 4.2suggestions for Chinese enterprises’ application ABC 15 Bibliography 15 1. Introduction 1.1 Research background With the rapid development of the national economy, enterprises’ competition is increasingly fierce; many companies are using advanced science and technology to achieve competitive advantage in the market. Market competition and technological progress are the two fundamental economic factors which generate activity-based costing. Since The beginning of 1980s of the 20th century, the activity based cost method is paid a wide range of attention; the developed countries gradually adopt it in a number of advanced enterprises...
Words: 4478 - Pages: 18
...Brass Production Company Contents Executive Summary ...................................................................................................................... 2 Problem Statement ....................................................................................................................... 2 Key Decision Criteria .................................................................................................................... 3 Alternatives Analysis ..................................................................................................................... 3 Recommendations ........................................................................................................................ 4 Action and Implementation Plan ................................................................................................... 5 Outcome Measure Specification ................................................................................................... 7 Textbook Questions ...................................................................................................................... 7 Appendix ....................................................................................................................................... 9 Exhibit 1. Net income in traditional and ABC systems. .................................................................. 12 Exhibit 2. Cost per unit based on ABC method .......................................
Words: 2693 - Pages: 11
...1. Executive Summary This report covers on the central problem the business encounters and offer solutions to reconstruct certain facets of the business. The main concern that Cambden Cakes faced is the inaccuracy of the method of costing used which results in a misstatement in its profit report. This report is to offer an alternative to the current costing method - Activity-Based Costing (ABC). The following detailed explanatory will be covered in the main body Limitations of original costing system and how ABC system overcome the limitations mentioned; The benefits of ABC system to the company; Comparison of calculated values and differences between the two methods; and lastly The implementation of ABC system and its issues 2. Background on Cambden Cakes Business in Cambden Cakes includes manufacturing and distributing of a variety of cakes and pastry products to supermarkets which are located all over Victoria, Australia. It has a factory in Clayton, Melbourne, Australia which both manufacturing and distributing process occurred, followed by delivery to Cambden Cakes' customers' warehouses which then send out to supermarket outlets. Chris Lee is Managing Director of Cambden Cakes. He showed keen interest in expanding the business and followed up on the interest by modernizing the manufacturing processes in the factory. This result in a shift from being labour-intensive in its original manufacturing...
Words: 1445 - Pages: 6
...Liberty University Abstract Activity based cost accounting provides companies with detailed and pertinent information that enables them to accurately cost the manufacturing products. Although it is at time confusing the use of an ABC system allows managers the details they need to make educated decisions about production and costs. The use of the ABC system is not always the most popular way for companies to go, but is it worth it? ABC Systems: Worth the Work? Activity Based Costing or as it is more commonly labeled “ABC” is a costing system that firsts assigns cost to activities and then assigns them to product based activities used towards that product. Costs are assigned to activities in a detailed manor so that detailed costs per activity are available. Once costs are assigned to activities they are than assigned to products based on the products use of that resource. ABC techniques allow businesses to decide which products, services, and resources are increasing their profitability, by providing more detailed information to management. The implementation of an ABC costing method it not right for all corporations; however for the corporations that fit the model for an ABC system, managers are more educated to make informed decisions about the true cost of a product. The use of this system allows more accurate and cost effective: pricing, costing, process improvements, product design, and manufacturing. Although the ABC method of costing has decreased over the last...
Words: 1314 - Pages: 6
...Management Accounting for Multinational Companies Solution to the Wilkerson Case Igor Baranov Executive Summary Taking into account the difference among product and high proportion of overheads, Wilkerson should abandon its existing cost system and move to activity-‐based costing. The profitability analysis indicates that the company earns healthy margins on pumps and valves. However, the margin of flow controllers at actual usage of capacity is negative. Wilkerson should consider action targeted at cost reduction (changes in flow controllers design or in their production and delivery process) or raising the price of flow controllers for customers. Since flow controllers are customized, the company can set different prices for different customers (groups of customers) based on the actual amount of resources spent (e.g. implement activity-‐based pricing). Problem Wilkerson has to estimate the profitability of its products in order to make long-‐term product mix decisions. These decisions should be based on estimation of product costs and might include decisions to continue / stop production of a particular product, pricing decisions, and decisions concerning product and process design, including customer...
Words: 1632 - Pages: 7
...TABLE OF CONTENT Executive Summary …………………………………………………………………...................2 1.0 Introduction …………………………………………………………………………………...3 2.1 Economic Theory ……………………………………………………………………………...3 2.2 Costs …………………………………………………………………………………………...5 2.3 Cost – plus Pricing …………………………………………………………………………….5 2.4 Production Mix Decision …………………………………………………………..................6 2.5 Target Costing …………………………………………………………………………………7 Conclusion …………………………………………………………………………….................8 2.0 The Role of Standard Costing …………………………………………………….................8 3.6 The Role of Variable Analysis ………………………………………………………………...9 3.7 The Values and Limitations of Variance Analysis …………………………………………..10 Conclusion ……………………………………………………………………………………….11 3.0 Advantages and Disadvantages of Introducing ABC System ………………………………11 Conclusion ………………………………………………………………………………………15 Recommendations ………………………………………………………………………………15 Appendix A - Elastic and Inelastic Demand ……………………………………………...........16 Appendix B - Summary of Variance Formulae …………………………………………...........17 Bibliography …………………………………………………………………………………….20 EXECUTIVE SUMMARY This report discusses the different models and concepts which could affect Manac’s pricing decisions and what we should consider when pricing. It also pays attention to the current standard costing approach adopted by the company together with Variance Analysis and the roles it plays in management accounting and how...
Words: 3583 - Pages: 15
...Advanced Management Accounting UMAC3J-20-3 Assignment 2012/2013 Monday 10th December 2012 09016707 The Development of the Techniques of Activity Based Costing, Budgeting and Management from the 1990s to the Present Day. Executive Summary: This report aims to explore the developments of activity based costing, budgeting and management from the 1990’s to the present day. This report aims to evaluate the criticisms made during this period by Kaplan and Cooper, and to use a range of theories and developments to assess whether these criticisms have been overcome. The use of case studies to evaluate these changes in practice will give supporting evidence to the changes that have been made. Introduction to Kaplan and Cooper’s Criticisms: Since 1987 when H. Thomas Johnson and Robert S. Kaplan wrote ‘Relevance Lost: the rise and fall of Management Accounting’, there have been significant developments in the traditional cost accounting methods used at the time; these mainly being absorption and marginal costing. Although these methods are “geared toward compliance with financial reporting requirements”1, they often resulted in misleading and inaccurate cost information used by managers. Traditional costing methods use a ‘blanket’ overhead recovery rate which meant when the number of overhead costs increased with more complex production schemes, cost allocations were inaccurate. This method was now “invalid relative to how the products and services consumed costs”2. With...
Words: 1246 - Pages: 5
