JET TASK 4
A1: Costing Method
Report to the Vice President recommending whether the company should change its cost method - to activity based costing.
Activity based costing is a method used in identifying activities companies perform thereby assigning indirect costs to products. Activity based costing (ABC) system recognizes the relationship between costs, activities and products, assigning indirect costs to products. (Investopedia, 2014)
Competition Bikes, Inc. report to the Vice President follows on cost method change from traditional costing to activity based costing. Traditional cost entails one rate, activity based costing involves multiple steps. In activity based costing each activity and estimate of cost total and indirect must be computed. The cost driver for all activities will be estimated with the total quantity of each driver’s allocation base. When the driver’s allocation base is established the cost of each activity is determined. Then the cost to cost objectives are established. Activity based costing focuses on the company’s activities. Utilizing the measures the cost of the products and services are then determined. Activity based cost allows for a more accurate forecasting of the future cost of the product and service. Product cost will be more time consuming utilizing activity based costing, but it provides more accuracy of actual cost. Activity based costing will assist in making the profit margin increase in making better decisions for pricing. Activity based costing does not replace traditional accounting. The company can have an accurate time line of cost drivers for accumulated cost and resources needed. Management will be able to track revenue and view how to make the product profitable.
Activity based costing for overhead analysis has identified six items with the cost. Identified items were factory setup for