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Financial Analysis: Jet 2 Task 4

In: Business and Management

Submitted By winter160
Words 3145
Pages 13
JET2 – Task 4
Financial Statement Analysis

Managing Internal Cost & Controlling Finances

Summary Report

In response to a request from the Vice President of Competition Bikes for an analysis and recommendation regarding Activity Base Costing, as well as a request for a break-even analysis with projections of the company’s target profit, I have developed the following report.

1. Costing Method Evaluation

Traditional Costing and Activity Based Costing (ABC) are the two systems we will evaluate in relation to Competition Bikes’ operations. To do so, we will need to look at the advantages and disadvantages of both systems. Costing systems are used to help predict the profitability of a product and help establish the cost of a product correlated to the income it generates. Traditional costing allocates overhead according to the amount of a particular cost driver, for example, how many direct labor hours are required to manufacture a product, while activity based costing looks at each activity and assigns a cost to it.

Traditional costing separates costs into direct and indirect categories. The costs of labor or of raw materials would be examples of direct costs. Then, traditional costing divides the total cost of a product by the direct labor cost. This gives us the estimated cost of the product per item. However, increasingly in today’s business environment, the proportion of direct costs have fallen in relation to the proportion of indirect costs. This makes the traditional costing model less effective, especially when used in multi-product production setting, as is the case in Competition Bikes’ re-tooled Carbon Lite and Titanium frame production environment.

Also, the traditional costing model does not look at causes of cost, which means this costing model it is more likely to cost an item incorrectly, and...

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