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8/12/2019 Finalise Ppt
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Group
members
Hong
Yan
Jia
Joel
Yong
Yeo
jun
seng
Group
members
Hong
Yan
Jia
Group
members
Hong
Yan
Jia
Yeo
Jun
Seng
8/12/2019 Finalise Ppt
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Presentation
Question
The manager of the companyhave been convinced that theyneed a better costing system.
They have heard about ActivityBased Costing and they believethat it will improve the accuracyof the costing of their products.Prepare a presentation to themanagement on whether you
believe there is a case toimplement Activity Based
Costing.
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Company’s Products
Mass produce:
• T-shirts
Special products:• Surf Pants
• Surf Boards
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POR : Budgeted Overhead 7140000 $170 per hourBudegeted direct-hour hours 42000 hours
Job-order system with direct labour hours
T-shirt urf Board Surf PantsAnnual Sales (units) 20000 1000 10000
Product Costs:
Direct Material 20 50 84
Direct Labour ($20/hr) 20 40 40Manufacturing Overhead ($170/hr) 170 340 340
Total Product Cost 210 430 464
Job-order system
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Current situation
• Surf pants- $220
- customers not buying
- competitors selling cheaper
• Surf boards
- $430
- too much customers buying
- product is too cheap
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Company’s Amendments
• Mark down the surf pants – $220 to $212
•Mark up the surf boards – $430 to $473
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Drawbacks of Job-Costing
• Utilize a single, volume based cost driver.
• The assumption of cost incurred does notwork for activities.
• Distorts the cost of products.
• Often report inaccurate product costs.
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What is Activity-Based Costing(ABC)?
• An alternative to traditional way of
accounting.
• Identifies the cost pools, or activity centers in
an organization.
• Assigns costs to products (cost drivers) based
on the number of transactions.
• To maximize shareholder value and improve
corporate performance.
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Identify Activities and Cost DriversActivities Cost Drivers
Purchasing No. of material orders
Material Handling Machine Time
Packaging Labour Hours
Depreciation Factory Space
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Product Lines
Activity Cost Pool Cost Driver T-shirt Surf Boards Surf Pants1) Purchasing No. of Material orders 39% 13% 48%
2) Material Handling Machine Time 47% 6% 47%
3) Packaging Labour Hours 47% 8% 45%
4) Depreciation Factory Space 42% 15% 43%
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Surfing T-shirt Job-order ABC
Cost per unit $210.00 $192.02Selling Price $231.00 $211.22
•Competitors selling Surfing T-shirt at $212
•Company lowers price to $220, but still failed to compete
•Actual cost is only $192.02, company can sell at $211.22 with 10% mark
up
•Product was previously overpriced
•Company will be able to gain a competitive advantage with ABC
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Surf Boards Job-order ABC
Cost per unit $430.00 $875.50Selling Price $473.00 $963.05
•Previous selling price is even lower than its actual cost
•The product was previously underpriced (a lot)
•Company plans to mark up price to mark up to $500 per unit, still
short of $375.50 compared to its cost
•Loss of $375500 will be incurred when 1000 units are sold annually
even if it’s sold at $500 per unit
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Surf Pants Job-order ABC
Cost per unit $464.00 $455.42Selling Price $510.40 $500.96
•Although only with slight deviation, this product is also overpriced
•The ABC can lower the cost of this product, hence lower the selling
price (competitive advantage)
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Result of Differences T-shirts?
• 210 and 192.02
– Result in lost of customers
– Price too expensive
– Customers look for alternatives
• Recommendations
– Reduce the price further to $200
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•430 and 875.5 – High Demand when sold at
500
–
Producing at a lost
• Recommendations
–
Increase the price to at least$900
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Conclusion
• ABC costing – Based on machine
hours
• Adept ABC costing
system
–Profitable
– Prevent unnecessary
losses
– More accurate
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References
• Answer.com. n.d. Activity based costing.http://www.answers.com/topic/activity-based-costing (accessed September 27, 2010).
• Peterson,S. n.d. Managerial Accounting.http://higheredbcs.wiley.com/legacy/college/jiambalvo/0471228761/ppt/ch06.ppt (accessedSeptember 27, 2010)
• Hilton, R. 2009. Managerial Accounting, 8th Ed.,International Ed.. New York: McGraw- Hill Irwin.
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