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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



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.



Company’s Products

Mass produce:

• T-shirts

Special products:• Surf Pants

• Surf Boards



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



Current situation

• Surf pants- $220

- customers not buying

- competitors selling cheaper

• Surf boards

- $430

- too much customers buying

- product is too cheap



Company’s Amendments

• Mark down the surf pants – $220 to $212

•Mark up the surf boards – $430 to $473



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.



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.



Identify Activities and Cost DriversActivities Cost Drivers

Purchasing No. of material orders

Material Handling Machine Time

Packaging Labour Hours

Depreciation Factory Space



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%







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



Surf Boards Job-order ABC


•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



Surf Pants Job-order ABC


•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)



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



•430 and 875.5 – High Demand when sold at

500

–

Producing at a lost

• Recommendations

–

Increase the price to at least$900







Conclusion

• ABC costing – Based on machine

hours

• Adept ABC costing

system

–Profitable

– Prevent unnecessary

losses

– More accurate





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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