Answer in a 150 words
Activity-based costing (ABC) is a unique method used by companies when they need to allocate their overhead cost. With this alternative method, it can also distribute indirect costs to related products and services (Kimmel, Weygandt, & Kieso, 2016). Activity-based costing is very useful because it can help determine the final cost of activities that is needed to make a product. According to the video, the overhead cost can symbolize more than 50% of the product. Companies are utilizing this costing method in an attempt to precisely and properly assign the costs to the individual products so they can have a better understanding on the relative profitability of the individual products. Activity-based costing has four steps:
- Identify and classify the activities
- Identify the cost driver
- Compute the activity-based cost overhead rate
- Allocate overhead costs to products
A company of my choice that can benefit from using activity-based costing to improve managerial decision making would be the Domino Sugar Factory near my home. The company can benefit from it because this is a homebased factory that produces its products in one factory but distributes its products across the U.S. Using ABC, managers can get a clearer understanding of how and where to allocate excess funds.
Just like any other process in life, there are advantages and disadvantages to using the activity-based costing method. An advantage for a company would be the rise in the accuracy between the product and service pricing. This would aid in more accurate pricing decisions. Another advantage would be being able to identify any high-cost or even low-value activities. This can aid in omitting what is not needed to improve production efficiency. A disadvantage of using ABC would be the complexity of moving around certain overhead cost, like management salaries or equipment costs, to different products. Another disadvantage would be the analytic side of things. To use the ABC method, it would take accounting expertise and manufacturing representatives to be done properly.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2016). Accounting: Tools for business decision making (6th ed.). Hoboken, NJ: John Wiley & Sons.
Answer in a 150 words
The Cost Errors video explained the important’s of how costing can positively or negatively effect a company. When making costing errors it may give another business a competitive advantage because they may be able to buy services cheaper at another business due to the miscalculation. At my work we send all of our programmers to a financial course to learn how to cost out programming. Some employees would take wage and supplies costs and that is how they would base their calculation on. This poses a problem because there is overhead to consider or indirect costs. In the end the program would almost break even or loss money because of this costing error. For example, when considering costing a soccer program you have to provide all the information. The company I work for uses the formula below to help calculate costs.
Estimated Participants 8
Fee per participant 48
Projected revenue $384
Time 6 hours total
tax benefits (16%)
Other Direct Costs
Adm and facility 10% of total project cost = $14.35
Total Rev =384
Total Costs = 157.87
Total Profit = 226.13
This example gives you a full picture of all the true programs cost. When this program first started the price was $25.00. If we had 8 participants at 25 the total revenue would have been $200.00 and the profit would have been 42.13. At that rate we would not have a big enough profit margin to justify to run that program. This actually happened and in business you can’t just jump the price that high or else you will have unhappy customers or they may possibly go somewhere else to play soccer. This shows you how important it is to look at all your costing models before you proceed forward.