Activity Based Costing: Allocation Of Indirect Costs And Profitability Analysis

Cost per unit of Activity Driver

Assessment Task A

Introduction:

Activity Based Costing is the method of costing that pools the activities on the basis of their type and the quantum. The Activity Based Costing is about the allocation of cost on the basis of the cost drivers. This costing system is used by all the manufacturing units as this is actually the proper allocation of the cost (Edmonds, Edmonds, Tsay and Olds, 2016). With the help of ABC Costing we can analyse the product cost and do the profitability analysis of the company.

Our case is about US Bright Product Company they are manufactures of cakes and pastries, they use Activity Based Costing Technique for allocating their indirect cost to the product. Our analysis is also based on the allocation of indirect cost with the help of Activity Based Costing Techniques. The companies Indirect costs are given, what we need to do is to allocate these costs on the basis of cost drivers available to us. The first part is all about allocation of indirect cost on the basis of cost drivers. The second case is about one of the division of US Bright that is Lamington; we need to draw a Statement of Bill of Activities of Lamington and then we need to calculate its product cost. Lastly we need to tell them about the additional costs that need to be added in the Lamington cost to arrive at the Lamington product cost.

Part (a)

Cost per unit of Activity Driver

The cost per unit means the cost incurred by the company for producing one unit. How much they need to expand on one product from beginning to end as from raw material to finished product. In this part we need to calculate the cost per unit using the information given to us regarding the indirect cost and the cost drivers. We need to make a statement where we present the indirect cost categories their cost pools and the allocation of cost on the basis of cost pools. The statement below depicts all activities and their allocation:

This table is about the indirect costs their activity pools and the cost per unit of the product. The cost per unit is $ 268.57 which we got by adding all the costs which we allocated on the basis of cost pools.

Part (b)

Bill of Activities:

In this part we need to prepare a statement for the bill of activities of the Lamington. The annual production volume of Lamington is 100000 and the batch size is 1000 batches. We also need to calculate here the cost per unit which we calculate by dividing the total cost from annual production volume. The above table explains the cost per unit of producing cakes and pastries of Lamington division. The total cost or we can say the billing amount is $ 64897.50. The annual production volume is 100000. The cost per unit is calculated by dividing $ 64897.50 form 100000 and the cost per unit is $ 0.65. That means the cost of producing 1 unit of Lamington is $ 0.65.

Statement of Cost per unit (of activities listed)

Part (c) 

Additional Cost:

We prepared the schedule for the billing amount and also calculated the cost per unit of Lamington but there arises a point as all the indirect costs are included for the calculation but the cost of preparing annual accounts is not added for the calculation of cost per unit. It is necessary to add the cost of preparing annual accounts to arrive at the product cost of Lamington. The cost of preparing annual accounts is not a product attributable cost so that is why we need to add this cost to the total of indirect cost

Conclusion:

The above analysis is all about the costing techniques used by US Bright for producing cakes and pastries we did used activity based costing to perform a detailed analysis for the allocation of the indirect cost of US Bright Product Company. The cost per unit of manufacturing cakes and pastries is $ 268.6 we calculated this cost by adding all the cost. The indirect costs are allocated on the basis of cost per unit and then they all are added together to arrive at the unit cost of producing.

Lamington is a division of US Bright and we did prepared a bill of activities of US Bright and the total billing amount is $ 64897.50. We did also calculated per unit cost for Lamington and the unit cost is $ 0.65. The additional cost which can be added in the company’s cost to arrive at the total cost by the company is the cost of preparing annual accounts although this cost is not product attributable but still we cannot consider it as irrelevant cost. We cannot avoid the cost of preparing annual accounts it is relevant for decision making. The complete analysis is all about the cost structure of US Bright and Lamington and about per unit cost of producing cakes and pastries. 

Assessment Task B

Introduction:

This case is about the budgeting forecast of Hawthorn Leisure Works (HLW) which is a fitness centre and also has some space for sports activities like tennis court. The case is about the revenue structure of HWL as there revenues are majorly from membership fee paid by the members and the court fee for the court usage. They are willing to change their revenue structured and also offered some promotional discounts to its members as well.

There new structure consists of only membership fee and no court fee is charged form the members for the usage of court. There were total 2000 members out of them only 70% members are willing to continue their members with HWL. Among those 70% members 45% are opting to adopt the promotional offer given by them.In this case we need to perform a comparative study in-between the new plan and old plan of membership of HWL.

Bill of Activities (Lamington)

The old plan was based on the membership fee and the court fee depending on the court usage. The new plan only consists of membership fee no court fee is charged by them under the new plan. The comparison is all about to know the revenue of under the old plan and in the new plan as they want to analyse that the revenue under new plan is better or not in comparison to the old plan. Here we present the old plan of HLW and the revenue structure under the old plan:

 Part (a)

Revenue under new plan:

In this we need to analysis the revenue that can be generated by HLW if they implement the new plan. The total members who are under the new plan are 1400 and the members who opt the promotional offer of HLW are 45% members. Here we present the new plan structure with the revenue generated from the new plan: Here we see that from the new plan HLW earns $ 515000. Although the no. of members are decreasing as we compare from the old plan but the revenue increases with the implementation of the new plan.

Part (b)

Comparison between Old and New Plan:

The planned change in the fee structure affected the revenues of HLW. Here we present the revenue from the old plan and the revenue under the new plan:  The assumptions that we need to make for calculating the above figures are:We need to take the average of the court consumption as there need to be a standardised criterion for evaluation (Weygandt, Kimmel and Kieso, 2015). Either we can take the upper range or the lower range for the calculation of court fee.

Part (c)

Decision Making

The above analysis is all about the revenue structure of HLW as they want to change their revenue structure so we did a brief analysis and compared both the old and the new plan. The revenue derived from the old plan $ 323492 and the revenue derived from the new plan $ 515000. We can see that the revenues from the new plan are much better than the old plan. Hence we should accept the new plan of revenue and membership of HLW as it is more profitable.The key factors that we need to take into consideration are:

• The fall in the no. of members
• No court fee is there in the new plan.

Both the above factors we did consider in our analysis and they both have no major effect on our decision.

Conclusion:

The above case is about the acceptance of the new plan of revenue of HLW as they need a comparison between the revenue from the new plan and from the old plan. We did analyse both the plans and we came on to the conclusion that the revenue from the new plan are higher than the revenue from the new plan. Hence, they should implement the new plan.  

Statement of Cost per unit (of activities listed)
Activity	Activity Cost ($)	Annual Quantity of activity Driver	Rate per unit ($)
Prepare annual Accounts	5,000.00	None	–
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	None	–
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
Bill of Activities (Lamington)
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
Product Cost	64,297.50
Develop and test product	600.00
Total Cost	64,897.50
Annual Production (units)	1,00,000.00
Cost per Unit (Lamington)	0.65
Annual Membership Fees(Old Plan)
Individual	$                   45.00
Student	$                   30.00
Family	$                 100.00
Total Members	2000
Family	1000
Individual	500
Student	500
Peak Tennis Season	October to April	Court fees	Average
Days	181
Capacity (5pm to 9pm)	90%-100%	$12 per hour	95
Capacity(9am to 4pm)	50%-60%	$8 per hour	55
Off season	May to September
Days	184
Court Usage(Capacity)	20%-40%	$ 6 per hour	30
No. of Courts	10
Court Hours (per day)	12
Old Plan( Revenue)	Amount ($)
Membership Fees
Individual		22500
Student		15000
Family		100000
Court Fees
Peak Season
5pm-9pm	($ 12 per hour)	82536
9am-4pm	($ 8 per hour)	63712
Off Season	($ 6 per hour)	39744
Total Revenue		323492
New Plan (Annual Membership Fees)
Non Promotional (for complete year)	Amount ($)
Individual	300
Family	500
Promotional( for complete year)
Individual	250
Family	450
New Plan (Revenue)	Amount ($)
Membership Fees
Normal Offer
Individual	75000
Family	125000
Promotional Offer
Individual	112500
Family	202500
Total Revenue	515000
Old Plan( Revenue)	Amount ($)
Membership Fees
Individual		22500
Student		15000
Family		100000
Court Fees
Peak Season
5pm-9pm	($ 12 per hour)	82536
9am-4pm	($ 8 per hour)	63712
Off Season	($ 6 per hour)	39744
Total Revenue		323492
New Plan (Revenue)	Amount ($)
Membership Fees
Normal Offer
Individual	75000
Family	125000
Promotional Offer
Individual	112500
Family	202500
Total Revenue	515000

  

References

Edmonds, T.P., Edmonds, C.D., Tsay, B.Y. and Olds, P.R., 2016. Fundamental managerial accounting concepts.

McGraw-Hill Education.Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John Wiley & Sons.