We will compute the overhead and total cost per product using the traditional costing method.
Thus, total cost = the cost for each product.
By implication, total cost (Widgets) = Direct labor cost + direct material cost +overhead cost (Cooper and Kaplan 43).
Therefore, the total cost (widgets) = 100,000 + 100,000 + 200,000 = $400,000
This computation solves problem 1 and 2.
We can calculate the ABC of the case study using the overhead rates.
ABC = overhead cost x total units per driver.
We can calculate the ABC of the case study using the overhead rates and expected cost drivers.
ABC = overhead cost x product expected cost
The sum of the overhead cost and cost drivers per product = total cost per product
Thus, we will use the total overhead cost in the above calculation.
The case study revealed that Smagets was under-priced, however, Gadgets, Widgets and Smidgets were mispriced. Smidgets were overrated by $590,000. Gadget was evaluated accurately. The value for TCA and ABC was $1,100,000. Various administrative troubles emerge from inaccurately budgeting distinctive product offerings.
Mispriced items lead to one-sided execution correlations (Compton 33). Traditional costing additionally doles out overhead expenses without shifting overhead requests between offices. The outcome is that administration has more trouble evaluating overhead costs that will diminish the firm’s general expense (Hicks 45).
The most consistent methodology is for the CFO to propose embracing activity based costing. The corporation would acknowledge $400,000 in investment funds, which could be utilized in executing the ABC framework. ABC costing would relegate spending plans different product lines and permit administration to evaluate proficiency and cost decreasing options.
The traditional costing strategy does not consider differing overhead prerequisites between items. Traditional costing utilizes one overhead rate in light of recorded overhead costs for the whole fabricating process. A solitary overhead rate cannot reveal the cost difference per unit overhead costs, which affect the budget process. Activity-based costing appoints overhead rates in view of particular overhead cost pools (Hughes 8). The technique then appoints the rates to the unit prerequisites of these cost pools per item. The outcome is overhead costs that mirror the contrasting overhead necessities for the individual item (Narong 11).
ABC model was created to help administrators plan separate producing lines (Sherratt 144). The framework has been famous as assembling procedures develop advanced to improve brand identity. ABC is more costly to actualize, obliging administration to research the individual overhead prerequisites per item. By implication, administrators that prefer the ABC model should survey whether traditional costing bodes well. Traditional costing is similarly compelling under numerous circumstances. Two conceivable circumstances characterize the traditional cost method. The cost technique is suitable for organizations with low overhead cost and direct labor cost.
Works Cited
Cooper, Robin and Kaplan Robert. “How Cost Accounting Distorts Product Costs.” Management Accounting 86.15 (2010): 45-50. Print.
Compton, Ted. “Implementing Activity Based Costing.” CPA Journal 77.9 (2009): 33-34. Print.
Hicks, Douglas. Activity-Based Costing: Making It Work for Small and Mid-Sized Companies. 2nd ed. New York: Wiley, 2002. Print.
Hughes, Andrew. “ABC/ABM – Activity-Based Costing and Activity-Based Management: A Profitability Model for SMEs Manufacturing Clothing and Textiles in the UK.” Journal of Fashion Marketing and Management 9.1 (2005): 8. Print.
Narong, David. “Activity-Based Costing and Management Solutions to Traditional Short Comings of Cost Accounting.” Cost Engineering 51.8 (2009): 11. Print.
Sherratt, Matt. “Time-Driven Activity-Based Costing.” Harvard Business Review 83.2 (2005): 144. Print.
