Activity-Based Costing Analysis For BBQ And Balloon Stand

Unit Learning Outcomes assessed

Question 1

Question 2

Part 2.1: Labour cost per friend and total labour costs

Part 2.2: Determination of Activity Rate

Part 2.3: Most expensive activity

Inflating the balloons has the highest total cost and cost per unit because John, Paul and George are involved in these activities and are cumulatively devoting more than other activities. Also, there are only 1000 balloons to be sold in market so high cost allocation has been done to identify per unit cost.

Part 2.4: Determination of Profit Margin

Question 3

Part 3.1

Question 4

Part 4:1

This report presents the case of a firm selling BBQ and Balloons at a stand put outside the shopping centre. In the firm, there are four members: John, Paul, Ringo, and George.  Among them, John spends 70% of his total working hours in preparing barbeques and Paul spends 70% of his total working hours in the inflation of balloons. Rest two other members were busy in selling and administrative activities. Ringo spends 50% of his time in cash collecting activities and George spends 70% of his time on attending the customers. Presently, all of the members of the firm are getting equal pays at the rate of $ 400 per member. The argument of Paul to split the firm’s income among him and John because of involvement of George and Ringo in the non-operating activities is not correct as income of the business is determined by deduction all the production related and other operating expenses (Hilton & Platt, 2013). Although, George and Ringo are not involved in the core activities of their business, yet they are contributing to the organisation’s earnings in an indirect way by performing the support activities. The activities performed by them are required to support the primary activities of business and hence they are entitled to the salary. However, the decision of paying equal amount to all the members must be altered and each member must be paid in accordance with the time devoted by them in each individual activity of the business whether such activity is primary or secondary (Zimmerman & Yahya-Zadeh, 2011).  The pay per activity must be based on the purpose and complexity involved in the activities performed by the members.

Part 4.2

The statement of Ringo that the selling of Balloon is a bad idea is correct. This can be justified by applying the activity based costing technique for the allocation of different costs to two different BBQ and balloons. Under ABC approach, the cost to each product is allocated on the basis of actual quantum of activities involved in producing and selling these products separately (Garrison et.al., 2010). The allocation of common cost is done on the reasonable basis so as to determine the actual cost involved in their individual production (Homburg, 2004). In the present case, ABC is applied and it has been found that the balloon product is generating the total profit of only $ 3.3 in total but the total net margin of BBQ is $ 2396.67 which is quite higher than that of balloons. If profit per unit is considered, the sale BBQ is offering profit margin of 1.20 units and the sale of balloons is generating no or negligible profit per unit and continuing its production is not a good idea for the firm. It must rather save its resources used in balloon units and consume them for the BBQ units as it will lead to higher profitability of the firm.

References:

Garrison, R.H., Noreen, E.W., Brewer, P.C. and McGowan, A. (2010). Managerial accounting. Issues in Accounting Education, 25(4), pp.792-793.

Hilton, R.W. and Platt, D.E. (2013). Managerial accounting: creating value in a dynamic business environment. McGraw-Hill Education.

Homburg, C. (2004). Improving activity-based costing heuristics by higher-level cost drivers. European Journal of Operational Research, 157(2), 332-343.

Zimmerman, J. L., & Yahya-Zadeh, M. (2011). Accounting for decision making and control. Issues in Accounting Education, 26(1), 258-259.