Question 1
ABC drove costing very deeply into the organization by identifying the actual costs of labor, equipment, and premises associated with each activity performed by the firm rather than relying on arbitrary formulas to allocate overhead. Activity-based profitability analysis is a granular form of costing. It identifies the actual costs of labor, materials, equipment, and premises needed to deliver a product, serve the customer, and sustain the business. ABC practitioners believe that making costs known creates opportunities for savings even though ABC methodology alone does not identify savings targets. Two advantages are claimed for ABC compared to conventional costing methods. First, ABC makes all costs explicit, reducing distortions caused by arbitrary allocations of overhead to products and customers (2002).
Second, ABC traces costs back to the economic events that cause them, making it possible to judge the reasonableness of costs in light of these events. Activity-based costing is less useful when costing decisions are made without objective information about their consequences (2002). Activity based costing is good for WallDecor because it makes cost specific and more understandable to the company. ABC provided assistance in helping the company determine what composes its cost and whether such cost is acceptable to the company or not. ABC is also good for the company because it can help in ascertaining whether the expenses and costs acquired by the company are acceptable or worth it.
Question 2
A predetermined or estimated overhead rate is preferred over an actual overhead rate because timing the actual rate is not determinable in time to quote customer prices. Another reason is Inaccuracy wherein the wide fluctuations in the actual expenditures for overhead would cause commensurate fluctuations in the actual rate. Even an annual period may have some shortcomings as a base for calculating overhead rates. Economic cycles have the effect of causing sales and production to be lower than normal for two or three years and then swing into a high cycle. Using one annual period may result in a predetermined rate that is either higher or lower than normal (1993).
Manufacturing companies may have numerous production plants the sites of that are determined by the location of raw materials, by the market destination or by other economic factors. Each plant has production costs that include factory overhead. In some small plants that perform only a few major operations, it may be expedient to develop an overhead rate based on one activity base, such as direct labor cost (1993).For the first activity the activity based overhead rate is ,000. For the second activity the overhead rate is ,000. For the third activity the overhead rate is 35,000. For the fourth activity the overhead rate is ,000. The overhead rate was computed by adding the steel framed no matting with the items on wood framed with matting. The focus of the computation was on the different activities. For the different activities the same computation is done to arrive at the overhead cost.
Question 3
The cost of a product influences channel structure directly. The unit cost of a forklift truck is high and may be considered investment spending. These types of products are used over and over again for many years. Financing the purchase may be a deciding factor in influencing when to buy and what brand to buy. Major equipment products, such as forklifts, are generally sold by exclusive retailers for specific brands or by company branch retailers. Because of the high purchase price, the direct incentives offered by the manufacturer to the user are of considerable importance (1992). In some instances, special options are offered and must be specified to the manufacturer in advance of product delivery. These market characteristics require a short line of communications, no storage or warehousing for wholesale distribution, and frequent involvement by the manufacturer with its retailers (1992).
There may also be periodic service or parts required to support the marketing channel structure. In this situation, the manufacturer is both the product source and the wholesaler. Products that cost only a few dollars, consumable supplies, and maintenance items may be purchased on impulse or with little thought concerning best-buy shopping, credit, or the service factor (1992). There are different costs for the various products pertaining to the company. The product cost of Lance Armstrong’s unframed print is 0.0000. The product cost for John Elway‘s print in steel frame is 0,000. The product cost for Lambau field print in wood frame is 0,000.
Question 4
The complexity of the overhead allocation problem can create difficulties for the analyst trying to decipher the mysteries of pricing structure from an arm’s-length relationship with the supplier. Trying to emulate, decipher, and otherwise comprehend on the basis of limited information leads only to frustration. The approach to be taken is one of indifference about how many overhead accounts the supplier has or what they are (1992). That is the supplier’s business. The analyst concerns himself only with the amount of money or percentage of price accounted for by overhead. Other methods can be used in overhead allocation such as allocation on the basis of machine hours of operation, allocation on the basis of labor and material, and allocation on floor space. The method is not the key element. The key is the magnitude of the overhead (1992).
ABC provided a clearer statement of what composes the product cost thus when it is computed the result was lower rates of overhead costs. The ABC system provided a better chance for the company to reanalyze its focus and financial goals. For the company this means that the use of ABC system can help it lessens the financial worries of the company thus the company can have more chance to try to analyze their goals and achieve the new perceived goal. Another implication for the company is it can make use of such information to create a better image for itself. This will help the company’s desire for a better standing in its competitive environment.
Question 5
The cost of website allocation was divided into two categories so that easier analysis and anticipation can be done on what the website will compose. It also will make the task of determining what type of information from the two categories will prove vital for the company. By dividing the cost of the website into two categories the company can determine which category will create more cost and what category may prove inapplicable to the website. Allocating the website cost based from the number of prints will provide information on how the number of print information will be used in the website and what are the cost for putting this kind of information.
Question 6
By splitting the cost between two categories, it would be easier for the company to determine what aspects of the website would give them more cost. The company can know what will give them additional cost. By splitting the cost between two categories the company would easily determine what information is important and if such information is worth the cause. One the other hand splitting the cost between two categories would make the company have difficulty in determining what data would be appropriate for a certain category thus the company gains more cost. Another negative effect of having two categories instead of three is additional cost in segregating the different data into each category. The company can incur more costs on time constraints and other related information.
Question 7
Cost drivers are the causal factors in cost. It is important to know what the cost drivers are because controlling the drivers allows a company to control cost. Traditional cost accounting systems, which evolved in the early part of the century, tended to assume that volume of production was the only cost driver. Volume of production in a one-product firm could be measured by units of production. If more than one product were produced, direct labor hours or direct labor dollars were used as proxies for the number of units ( 1993). When firms were highly labor-intensive, this simple assumption about cost drivers did not significantly distort product costs. The major costs involved in production were materials and labor, both of which could be traced directly to the units. If overhead expenses were applied to production by number of units or by a labor base, there was little to cause distortion (1993). The operating capacity used as a cost driver provides a better description of what will compose the cost category of the company. It can determine whether or not the company has achieved more cost or is having a negative operating capacity.
Question 8a
Those included in the unframed prints are ,000 for picking prints, ,000 for inventory selection and management and 100,000 for website optimization. Those included in the steel framed prints are ,000 for the picking prints, $ 30,000 for the inventory selection and management and ,000 for website optimization. Those included in the wood framed prints are ,000 for picking prints, ,000 for inventory selection and management and 9,000 for website optimization.
Question 8b
The total amount of overhead allocated was 13.44. The total amount of overhead allocated was computed through adding the different overhead allocations of Lance Armstrong, John Elway and Lambeau Field. The total overhead of 5,200 was not included because the said amount did not support in providing information for sales estimate. For the company this means that it should double its allocation so that it can have better competitive chances.
Appendix
Computations for questions 2 and 3
Question 2
Steel Framed Printing
Wood Framed Printing
Overhead Cost
Activity 1
15,000
+7,000=
22,000
Activity 2
30,000
+21,000=
51,000
Activity 3
16,000
+19,000=
35,000
Activity 4
32,000
+27,000=
59,000
Question 3
Product cost of Lance Armstrong Unframed Print
Activity of Picking Prints (80,000) * base cost of print () = 0,000
Product cost of John Elway print in steel frame
Activity of Picking Prints (15,000) * base cost of print () = 0,000
Product Cost of Lambeau Field print in wood frame
Activity of Picking Prints (7,000) * base cost of print () = 0,000
Credit:ivythesis.typepad.com
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