M4A1 Cost, Volume, Profit Analysis

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Running head: Activity Based Costing 1

Activity Based Costing 4

Activity Based Costing

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Question 1.What additional costs would you consider as manufacturing costs? How would you allocate those costs to your division?

Activity Based Costing (ABC) is a technique of assigning costs to services, products, tasks or acquisitions by the activities which go into them and any resource that is being consumed by this products. Traditional cost accounting and ABC can give the estimate of gross margin and cost of goods sold in a very a different manner for individual assets. Contradictory and undefined cost estimates can be a limitation to management when there is a need to know which good is being sold at a loss or profit. In applying ABC method different additional costs will emerge. Purchasing of materials, setting up and running machines and inspections of finished goods costs will accrue to the production costs. The pool cost of buying the materials will be inclusive of costs of items such as purchasing personnel salary, depreciation of office equipment and rent for department office space. The cost driver which are the costs associated with such activity is identified by gathering reliable information and interviewing the key personnel in those departmental areas. The estimated overhead costs are calculated and allocated to the products by multiplying the level of cost driver used by each product by the predetermined overhead rate for the activity. (Wild, Shaw & Chiappetta, 2002)

Question 2. Would activity-based costing give you a more or less realistic picture of your division's costs incurred to produce revenue?

The activity-based costing will provide a reliable picture of the incurred division costs. Through application and implementation of the ABC, the cost information is regarded more accurate than the traditional costing approaches. This enables the management to make wise resolutions in different extents such as product mix decisions(the amount of each product to yield, market and sell), product pricing and product line changes (elimination and additions of specific products). Increased production activities knowledge facilitates the improvement of the process and reductions in costs. ABC involves identification of activities involved in the process of production and assigning the cost to the activities identified and this provides a better view or detailed information on the activities required. Thus the managers are likely to focus on reducing the costs by improving the efficiency of the activities which are most costly. (Goektuerk, 2005)

Question 3.If you chose not fully to implement activity-based costing, what would you have learned about your department's costs that would help you operate more profitably?

The activity-based costing systems are costly to implement and requires a lot of teamwork across the organization. Besides, the process is also time-consuming as the manager has to assign costs, identify cost drivers and this requires a considerable amount of time in the accounting department. ABC will have provided the information on the additional cost that is related to the production of the commodities in the company. This would necessitate that better managerial skills and technology be employed in reducing the costs of production to maintain the value of the production cost while maintaining or improving the quality of our products. Increased production knowledge will enable the management to resolve to cheaper and technological methods of manufacturing that will enhance the production.

References

Wild, J., Shaw, K., & Chiappetta, B. (2002). Fundamental accounting principles. Irwin: McGraw-Hill.

Goektuerk, H. (2005). Activity-Based Costing (ABC) - advantages and disadvantages. GRIN Verlag.