ZeektheGreek Only
Explanation Paper
Kyle Everhart, Louie Mendez, Samaly Rodriguez, Sarah Collum,
Svetlana Savina, Valanda Crew
March 13, 2017
Mr. Walsh
ACC/349
Explanation Paper
Introduction
As we all know making decisions based on snap judgments and untested theories can be a dangerous chance to take in business. With that in mind a client has expressed a desire to stop offer a service because they think another service is more profitable. For this we are submitting a plan for convincing the client to hold off making any decision without proper research. We shall then explain the ABC system and what data is to be gathered and how it can be applied. Lastly, we will explain the projected potential benefits and our decisions for the final recommendation.
The Argument
It is clear the tree portion of the business may be charged more than the sod portion of the business. It is however important that the business considers an activity based costing (ABC) method to allocate its costs to ascertain which production line is more profitable. The ABC method involves allocation of costs based on the resources used by a certain activity. It therefore considers the set-up costs, testing costs, electricity and stationery used by a certain production line. While a product may be low volume and high price, it may require more resources than it is necessary while when a product is high volume and low price, it may require less resources than necessary. It is therefore not sufficient to allocate machine hours to production costs since they do not give a clear correlation of the direct machine hours or labor hours. The ABC costing considers the specificity of products that are demanded by the customers and therefore it can work well in a production line that provides custom made products. In addition, it considers the economies of scale where producing in small batches may be costlier than production in large batches. It is therefore necessary that Mr. Beridon considers an analysis of the products which he sells to estimate which is a worthwhile venture. In this way, he will be able to trace the costs into their respective activities and find out which of the two products take in much of the costs of the company and select a product line that is low on cost and high on price.
Projected Benefits
There are several benefits that Mr. Beridon could gain from using an activity based costing (ABC) accounting method. This type of system will help organizations to identify any unprofitable activities, inefficiencies, or losses of any type in any form. This type of accounting method is useful as it will enable him to identify the exact reasons for any increase or decrease in regards to gains or losses of his business. It will also assist him in recognizing if his products are not as profitable or so that he can eliminate them or use other options to make adjustment to a product. The activity based cost system will provide important information that will assist Mr. Beridon with making important decisions that involves financial considerations within his business. Additional guidance may also be available to Mr. Beridon as he is faced with decisions such as, whether he should discontinue selling sod, whether he should solely focus on selling trees, or if he should continue selling both items. This system will help him develop cost reduction techniques, methods to improve his operation, and direction in reaching his objective.
ABC Method Creating Benefits
For the ABC method to create the above benefits, it must go through a process with many steps. The first of these steps is to identify the costs the company wants to allocate ("Activity Based Costing Abc, And Abc Management Explained", 2017). Identifying these items will help the cost of the process down because unnecessary items will be pulled out of the list. The next step is to “create cost pools for those costs incurred to provide services to other parts of the company, rather than directly supporting a company’s products and services” ("Activity Based Costing Abc, And Abc Management Explained", 2017). The company needs to breakdown the cost associated with those of service orientated and not the whole cost that comes from the entirety of the company. The next step is the create another cost pool but this one will show the costs the company has directly towards their production lines ("Activity Based Costing Abc, And Abc Management Explained", 2017). These production lines produce products and services the company is in business for. There are other steps in this process and the main theme of this process is to categorize certain items and use data and different cost pools to assign the correct amount of cost to each item.
Conclusion
Mr. Beridon determination to save money by discontinuing the sod portion of his business is well founded. He believes that his tree sector will deliver a more substantial profit in the long run. Our firm has provided him a detailed explanation of the activity-based costing (ABC) system so that he may better understand the information it offers and how it can help him make a better decision. He will have a better appreciation on how the cost associated with both the tree and sod sectors can and will affect his business. The system breaks down the cost of each product using manufacturing cost as well as an activity cost pool, for a more accurate product cost instead of the distorted costs that traditional absorption costing provides.
References
Activity Based Costing ABC, and ABC Management Explained. (2017). Retrieved from https://www.business-case-analysis.com/activity-based-costing.html
Boute, R., Bruggeman, W., & Vereecke, A. (2015). Cost management in the supply chain: an integrated approach–part 2. Cost Management, 40-48.
Mahal, I., & Hossain, A. (2015). “Activity-Based Costing (ABC)–An Effective Tool for Better Management”. Research Journal of Finance and Accounting, 6(4), 66-73.
