managerial accounting case analysis

xxcourseherocaseanalysis1.docx

Home >Business & Finance homework help >Management homework help >managerial accounting case analysis

As a consultant for BUSI 2083 LLP , a detailed analysis has been made for the cost and revenues of two products R2D2 and BB8. Firstly they are using traditional costing system for analysing the profitability of two products whereby LABOR HOUR RATE has been used as a method of absorbing production overheads. Following analysis has been made

Model
	Total	R2D2	BB8
Sales	$11,125,000	90,00,000	21,25,000
Cost of Goods Sold	69,00,000	54,90,000	14,10,000
Gross Margin	42,25,000	35,10,000	7,15,000
Less: Selling and Administrative Expenses	36,75,000	34,50,000	2,25,000
Operating Income	$550,000	60,000	4,90,000
Number of Units Produced and Sold		30,000	5,000
LABOR HOURS per unit		2	3
LABOR HOURS	75000	60000	15000

PREDETERMINED ABSORPTION RATE	36	per labor hour
(BASED ON LABOR HOURS)

DETAILS OF TRADITIONAL COSTING SYSTEM
	R2D2	BB8
Direct materials	2250000	600000
Direct Labor	1080000	270000
PRIME COST	3330000	870000	4200000
Factory overheads	2160000	540000	2700000
TOTAL PRODUCT COST	5490000	1410000	6900000
Units	30,000	5,000
PRODUCT COST PER UNIT	183	282
(EXCLUDING Selling and Admistrative exp)
Add SELLING per unit	115	45
TOTAL COST PER UNIT	298	327
SELLING PRICE PER UNIT	300	425

As per traditional costing system, both products are looking profitable as selling price in both cases exceed the cost per unit.

ANALYSIS UNDER ACTIVITY BASED COSTING SYSTEM

Activity Cost Pool	Estimated Overhead Costs	Total	R2D2	BB8	COST DRIVER RATES	R2D2	BB8
Machine setups (number of setups)	3,12,000	1,600	1,000	600	195	195000	117000
Quality control (number of inspections)	5,40,000	9,000	4,000	5,000	60	240000	300000
Purchase orders (number of orders)	1,35,000	1,200	840	360	112.5	94500	40500
Soldering (number of solder joints)	6,75,000	2,00,000	60,000	1,40,000	3.375	202500	472500
Shipments (number of shipments)	1,98,000	600	400	200	330	132000	66000
Machine-related (machine-hours)	8,40,000	70,000	30,000	40,000	12	360000	480000
						1224000	1476000

	R2D2	BB8
Direct materials	2250000	600000
Direct Labor	1080000	270000
PRIME COST	3330000	870000
Factory overheads	1224000	1476000
TOTAL PRODUCT COST	4554000	2346000
Units	30,000	5,000
PRODUCT COST PER UNIT	151.8	469.2
(EXCLUDING Selling and Admistrative exp)
Add SELLING per unit	115	45
TOTAL COST PER UNIT	266.8	514.2
SELLING PRICE PER UNIT	300	425

From above ABC analysis it is very clear that BB8 is a loss making item. Its basic product cost (Even excluding selling costs) exceeds the selling price and after putting selling cost there is huge loss per unit.

RECOMMENDATIONS

There should not be any sense in increasing or expanding sales of a loss making item. BB8 sales should not be expanded.

Decision making using traditional costing can be very dangerous as traditional costing subsidizes cost of one product at the cost the other product. ABC gives better decisions.

“BB8 seems to sell itself” as they are selling it below cost. For consumers, it’s a win win situation but for seller it is not advisable.

In order to improve overall profits of the company the company should either increase the selling price of BB8 or discontinue its production and sale as every incremental unit of BB8 creates extra loss for the company

UTILITY OF ABC

ABC helps in bringing cost relationship with its cost drivers and hence is very useful in decision making. It explains the undercosting and undercosting created under the traditional costing. Activity based costing does not charge any general overheads on single basis but for every activity there is a separate most reasonable factor affecting it (called cost driver). ABC provides best support for managerial strategic decision making.