Running head: Competition Bikes, Financial Analysis

RJET Task 4 Sacha B.R. Almanza Student ID: 000280685 Program & Start Date: M.B.A. Health Care Management; 10.02.2012 Western Governor’s University

Running head: Competition Bikes, Financial Analysis

A1. Costing Method The purpose of the following Executive Summary is to illustrate Competition Bikes Inc.’s need to alter our current costing method by utilizing the activity based costing (ABC) method. Traditional based costing (TBC) is a method a company may use to find the cost of a product in relation to the revenue it creates. It is used to designate manufacturing overhead to units made (Chron, 2013). Activity-based costing identifies activities that a company executes, then designates indirect costs to each product. The ABC determines the cost for each activity and allocates the cost to their respective activities. The cost assigned per activity is also assigned to respective products required for each activity. With traditional costing methods manufacturing costs are only assigned to goods that have been sold rather than accounting for nonmanufacturing costs. There are steps to activity-based costing:   Identifying the cost of each activity and estimated the total cost and indirect cost Estimate the cost driver for each activity and the total quantity for each driver’s allocation base   Calculate the cost appropriation per each activity Appropriate the cost to cost object

Though the activity based costing consumes more time to calculate the cost of each activity, it provides a more accurate estimate of true costs for each activity and in turn earns money back (CPE Accounting Tools, 2013). Traditional based costing doesn’t account for all cost as it only accounts for manufacturing overhead cost and excludes costs that involve nonmanufacturing costs such as administrative cost. By adopting the