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Financial Analysis - Term Paper Example
Author : nlabadie
Finance & Accounting
Pages 5 (1255 words)
Activity Based Costing The activity based costing technique is a methodology that assigns costs to individual activities based on their consumption of resources. This technique allows for a more accurate allocation of associated costs to the product or service which have been used…
In the case of Competition Bikes Inc., they have been using traditional costing methods and have recently given ABC a try. The following is the data for the overhead costs of six items: From the figure above, we see the difference in production costs due to the cost allocation method. Under the traditional approach, the manufacturing overheads were overpriced for the Titanium model at $239,020 whereas the actual costs is $188,415. Consequently, the total manufacturing cost is also affected. Using the ABC approach would reduce the manufacturing cost of Titanium products, hence, helping the company get better margins. Similarly, for the Carbon DL model, the manufacturing overhead is underpriced at $232,380 whereas using ABC, we found it to be $282,985. Therefore, the product cost is less than the actual cost incurred. Hence, based on the above findings, we can conclude that Activity Based Costing method is the right approach for cost allocation as it allocates costs to individual activities making cost identification better. Moreover, it also helps in making operational improvements as with ABC, we have a clear idea of the cost centers. Evaluation of Cost-Volume-Profit Cost-volume-profit analysis also sometimes termed as breakeven analysis is the point at which revenues equal costs (both fixed and variable costs), i.e. a point of no loss or no gain. ...