Introduction:
Activity Based costing is the method of accounting that identifies the activities that are performed by the firm and then allocate the cost on the basis of the activities performed by the firm. ABC costing system is usually used in most of the manufacturing companies as it enhances the cost classification and made the allocation of indirect easy (Heisinger, 2009). ABC Costing system is used in product costing, customer profitability analysis and target costing.
This present case is about the US Bright product company which produces cakes and pastries. They use Activity Based Costing as their costing system. In the first part they need to know the product cost on the basis of allocating the cost to the cost drivers. In the second part they want the billing amount as well as per unit cost of producing cakes and pastries of Lamington. Lastly the additional cost need to be determined which can be added in the product cost to arrive at the total cost of Lamington.
The cost per unit of activity driver is calculated by allocating the cost to their allocated cost drivers (Wiese, 2009). With this we can also calculate the cost of producing one unit by adding all the allocated costs. The cost drivers are assigned as per the nature of the cost. The allocation is done by dividing the cost with its cost drivers. The statement need to be prepared for allocating the cost to its cost drivers. That clearly shows the amount of cost and the activity driver.
|
Calculation of Cost per Unit |
|||
|
Activity |
Activity Cost |
Activity Driver |
Rate per unit |
|
Prepare annual Accounts |
5,000.00 |
||
|
Process Receivables |
15,000.00 |
5000 |
3.00 |
|
Process payables |
25,000.00 |
2500 |
10.00 |
|
Program production |
28,000.00 |
1000 |
28.00 |
|
Process Sales Order |
40,000.00 |
4000 |
10.00 |
|
Dispatch sales Order |
30,000.00 |
2500 |
12.00 |
|
Develop and test products |
60,000.00 |
||
|
Load Mixers |
14,050.00 |
1000 |
14.05 |
|
Operate Mixers |
45,900.00 |
200000 |
0.23 |
|
Clean mixers |
6,900.00 |
1000 |
6.90 |
|
Move mixture to filling |
3,450.00 |
200000 |
0.02 |
|
Clean Trays |
20,000.00 |
16000 |
1.25 |
|
Fill trays |
16,000.00 |
800000 |
0.02 |
|
Move to Baking |
8,000.00 |
16000 |
0.50 |
|
Set up ovens |
50,000.00 |
1000 |
50.00 |
|
Bake Cakes/Pastries |
1,30,000.00 |
1000 |
130.00 |
|
Move to packing |
40,000.00 |
16000 |
2.50 |
|
Pack cakes/pastries |
80,000.00 |
800000 |
0.10 |
|
Cost per unit |
268.57 |
The above table depict per unit cost of producing cakes and pastries as if company produce one cake then it will cost $ 268.57 to the company. The cost is allocated as per the cost drives according to the nature of the cost. The Activity Based Costing is used to allocate the cost to the cost drivers.
In this part the schedule of bill of activities in prepared for the Limington the batch size of Lamington is 1000 and the annual production volume is 100000. Further the cost per unit is also calculated as per ABC costing. The cost per unit is calculated by dividing total cost from annual production. The cost is calculated for estimating the hike in annual production. The total cost is calculated by adding all the costs which are derived by multiplying the costs to the cost drivers.
|
Bill of activities |
|||
|
Activity Consumed |
Annual Quantity of Activity Driver |
Cost per Unit |
Total Cost |
|
Process Receivables |
500 |
3.00 |
1,500.00 |
|
Process payables |
200 |
10.00 |
2,000.00 |
|
Program production |
100 |
28.00 |
2,800.00 |
|
Process Sales Order |
400 |
10.00 |
4,000.00 |
|
Load Mixers |
100 |
14.05 |
1,405.00 |
|
Operate Mixers |
30000 |
0.23 |
6,885.00 |
|
Clean mixers |
100 |
6.90 |
690.00 |
|
Move mixture to filling |
30000 |
0.02 |
517.50 |
|
Clean Trays |
2000 |
1.25 |
2,500.00 |
|
Fill trays |
100000 |
0.02 |
2,000.00 |
|
Move to Baking |
2000 |
0.50 |
1,000.00 |
|
Set up ovens |
100 |
50.00 |
5,000.00 |
|
Bake Cakes/Pastries |
100 |
130.00 |
13,000.00 |
|
Move to packing |
2000 |
2.50 |
5,000.00 |
|
Pack cakes/pastries |
100000 |
0.10 |
10,000.00 |
|
Dispatch sales order |
500 |
12.00 |
6,000.00 |
|
Total |
64,297.50 |
||
|
Develop and test product |
600.00 |
||
|
Annual Production |
1,00,000.00 |
||
|
Cost per Unit |
0.65 |
The cost of producing one unit is $0.65 that means that for producing one unit the company need to incur a cost of $0.65, the annual production is 100000 units and total cost incurred by the company is $ 64897.50. To arrive at cost per unit the total cost is divided by the annual production. This total cost is calculated by applying Activity Based costing techniques.
The company prepared the schedule for calculating the total billing amount as well as the cost of producing per unit of Lamington but the total cost cannot be arrived at without adding the cost of preparing annual accounts in the cost schedule (Johnson, 2014). Hence, the cost of preparing annual accounts must be added to arrive at the product cost of Lamington. As this cost is also a part of the company it is not product attributable or no cost driver is there to allocate this cost on product basis but still the company need to add this in its cost schedule to arrive at the product cost.
Conclusion:
The above case illustrates the use of activity based costing in the company’s production run and company need to allocate the cost as per the cost drivers attributable to the product. The cost of producing one unit is $ 268.6 this is arrived by allocating the cost on the cost drivers. The unit cost of Lamington is $0.65 and the total billing amount is $ 64897.50. The activity Based costing is used by the company to arrive at the cost per unit and total cost for producing cakes and pastries. They also want to know as if any other additional cost that can be added to the cost schedule to arrive at the total cost of the company and that will affect the decision of the company. The company’s additional cost is cost of preparing annual accounts which is not added in the total cost schedule but is very necessary to add this cost in the cost schedule as this cost is not product attributable but also is not an irrelevant cost that can be avoided. Through this complete analysis we came to know about the cost structure of US Bright and the per unit cost of producing cakes and pastries.
Introduction:
The present case is about Hawthorn Leisure Works which is a physical fitness centre and also offers tennis court facilities to its members. They are earning revenue by collecting membership fee and court fee from its members. Presently there are 2000 members of whom 1000 are families and 500 individuals and 500 students. The court fees charged by them vary from season to season as April to October is their peak season and remaining months there is off season.
As per the new plan the company will only charge membership fee from its members and that two if different if members ready to pay the lump sum fee then they will get some discount and those who are paying the lump sum fee are only 45% of the total members (Lalli, 2011). The company is estimating that they will earn higher revenues with the new plan as compared to the old plan in this study we will briefly analyse the old and the new plan and then will conclude as if which of these plan is better.
|
Annual membership fees(old plan) |
|
|
Individual |
$ 45.00 |
|
Student |
$ 30.00 |
|
Family |
$ 100.00 |
|
Total Members |
2000 |
|
Family |
1000 |
|
Individual |
500 |
|
Student |
500 |
|
10 Courts and 12 hours per day |
|
Peak tennis season |
October to April |
Court fees |
|
Days |
181 |
|
|
Capacity (5pm to 9pm) |
90%-100% Avg. 95% |
$12 per hour |
|
Capacity(9am to 4pm) |
50%-60% Avg. 55% |
$8 per hour |
|
Off season |
May to September |
|
|
Days |
184 |
|
|
Court usage(Capacity) |
20%-40% Avg. 30% |
$ 6 per hour |
|
Old Plan( Revenue) |
Amount |
|
Membership Fees |
|
|
Individual |
$ 22,500.00 |
|
Student |
$ 15,000.00 |
|
Family |
$ 1,00,000.00 |
|
Court Fees |
|
|
Peak Season |
|
|
5pm-9pm |
$ 82,536.00 |
|
9am-4pm |
$ 63,712.00 |
|
Off Season |
$ 39,744.00 |
|
Total Revenue |
$ 3,23,492.00 |
In the new plan the members reduced from 2000 to its 70% but the membership fee increased and also promotional benefit given to the members 45% members adopted the promotional bonus. The new membership fee increased the revenue and we should implement the new plan from July. The new plan only based on the membership fee no extra court fee is charged from the members on the basis of the usage of the court.
|
New Plan of annual membership fees |
|
|
Individual |
$ 300.00 |
|
Family |
$ 500.00 |
|
Promotional( for complete year) |
|
|
Individual |
$ 250.00 |
|
Family |
$ 450.00 |
|
New Plan (Revenue) |
Amount |
|
Membership Fees |
|
|
Normal |
|
|
Individual |
$ 75,000.00 |
|
Family |
$ 1,25,000.00 |
|
Promotional |
|
|
Individual |
$ 1,12,500.00 |
|
Family |
$ 2,02,500.00 |
|
Total Revenue |
$ 5,15,000.00 |
Part (b)
The sales revenue will increase resulting from the planned change in the fee structure for next financial year. The sales revenue under old plan was $ 3,23,492.00 and the sales revenue under new plan $ 5,15,000.00.
The assumption made by me is regarding the calculation of court fees as the percentage range is given for the occupancy of the court. So, I took the average of the given range. As either we need to take any of the upper or lower range or average of the range one fixed criteria need to be followed.
Part (c)
HLW should accept the new plan as the revenue will increase and the complexity of managing the fee structure will decrease on part of the management. The members will also be happy as there will be no separate fee regarding court usage. The fall in the no. of members will be combat by the new fee structure very soon as the membership fee increased as compared to the old plan.
Conclusion:
As per the analysis being done regarding the acceptance of new plan or continuing with the old plan it is recommended to accept the new plan as the revenue got increased. The revenue under old plan was $ 323492 and the revenue as per the new plan is $ 515000. The benefit is clearly there and no other contention is required to support the new plan.
References:
Heisinger, K 2009, Essentials to Managerial Accounting, Cengage Learning.
Johnson, P. F. 2014, Purchasing and Supply Management, McGraw-Hill Higher Education.
Lalli, W. R. 2011, Handbook of Budgeting, John Wiley & Sons.
Wiese, N 2009, Activity Based Costing, GRIN Verlag.
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