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7/30/2019 Acct 6130 Group 3 Project Presentation
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7/30/2019 Acct 6130 Group 3 Project Presentation
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I. IntroII. ABC Theory
III. Pros & ConsIV. Case Study: Alpine Inc.V. Recommendations & Conclusion
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Alpine Inc., a manufacturer of winter sportinggoods,
Management has questioned spiking costsduring off-season months.
Alpine needs a better way of determining thetrue costs of producing its products.
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Takes total cost and separates it by eachcomponent of the process
Does not separate cost by function or allocation Three steps
Accrue costs within a production or non productionsector
Allocate non-production costs to productiondepartments
Assign resulting production costs to various products,services, or customers
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Identify significant activities Assign costs of activities to cost pools
Identify cost drivers for each cost pool Use cost drivers to relate costs to products.
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Fixed costs buy a certain amount of productioncapacity.
Allocation rates should be based on amount of
practical capacity consumed by the itemproduced.
This effectively variabilizes some fixed costs,with the remainder going against an unusedcapacity account, not a particular product line.
This shows management what they are payingfor, but not using.
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ABC measures product and service costsmore accurately to understand product
profitability. ABC provides detailed information through
many cost drivers from many activities thathelp managers to better plan and controlcosts.
ABC helps management to analyze customerprofitability.
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Expense of developing and maintaining anABC system
Doesnt measure incremental costs.
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Manufacturer of snow sporting goods, with twoproduct lines: skis and snowboards.
Fixed costs consist of:
$200,000 depreciation on machinery $100,000 rent & utilities $500,000 administrative overhead
Seasonal production schedule, ramps up during
the winter seasons. For the coming season, Alpine plans onproducing an equal number of snowboards andpairs of skis.
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Allocate fixed costs on an allocation basis.Alpine currently uses units of production.
Since an equal amount of both product linesare produced, fixed costs are allocatedevenly, causing both lines to appear equallyprofitable.
When looking at the total cost of each unitproduced, the costs spike during the off-season.
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0
2,000
4,000
6,000
8,000
10,000
12,000
Jan Feb Mar Apr May J une July Aug S ept Oct Nov Dec
Production
$0
$50
$100
$150
$200
$250
$300
Jan Feb Mar Apr May June July Aug S ept Oct Nov Dec
Cost/Unit
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In order to determine the true profitability ofeach product, Alpine can switch to an ABC
system.Cost Pool Driver Skis Snowboards
Machine Depreciation Machine Hrs. 66% 33%
Rent & Utilities Floor space 50% 50%
Administrative Overhead Units of Production 50% 50%
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$0.00
$50.00
$100.00
$150.00
$200.00
$250.00
$300.00
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
Cost/Unit
Snowboards Skis
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That doesnt tell management the wholestory.
Alpine has purchased 60 machines, which canbe run 20 hours a day, 30 days a month. This gives Alpine a cutting capacity of 36,000
hours a month.
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Shift to a capacity-based ABC system.
Allows management to understand the drivers of
fixed costs. Draws attention to unused capacity within the
system
Does not burden product lines with fixed costs for
which they are not responsible.
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Alpine Inc has $1,000,000 of unused capacityacquired for peak production which remains
idle during the off-season. Management should consider harnessing
unused capacity to produce a new water skiproduct line.