Farm Financial Standards Council Case Study - Essay Example

Activity based costing on the basis of identified and mutually agreed activities and grouped under Production Cost Centers, Support Cost Centers and Profit Centers is definitely a more logical and inclusive approach as it traces the flow of all agricultural inputs and outputs. It is similar to process costing methods used in the manufacturing industries where the cost of every subsequent department is added to the previous ones and after elimination of waste products, we are left with the final cost of the finished products as they emerge from the last department into the finished goods inventory.

For a farm the finished product would be the different crops produced. Although the first solution is more amenable to the situation at John and Mary’s Farm, the second is proposed as a better starting point for any type of agricultural enterprise. The benefits of the first solution are that it uses well regarded units such as acres for corn crop and bushels for soybean marketing which are logical and make very good sense (Case Study, pp 6-7). The reports generated in the first solution are also quite detailed and show quarter-wise production costs and expenses for each crop planted and reaped.

There are also reports of inventories of different crops produced and sold, which includes cost per bushel or acre as well as in dollar terms. Such type of management reporting and control is a farmer’s dream. He is able to know the costs and expenses on all that he has grown so that he can price it better in the marketplace. Of course the second solution just proposes an alternative and more logical starting point for all types of agricultural enterprises, and would be an invaluable guide to using the ABC method for newly established farming organizations.

It is definitely more detailed and logical. ABC information can even be used to reengineer processes and make other improvements to quality while still cutting costs (www.prosci.com/abc1.htm). 2. If the Farm Council Case did not use Activity Based Costing, identify several dysfunctional decisions that could be made using traditional cost allocation. Which solution do you prefer, the initial or alternative solution proposed in the case? Explain the difference between the suggested solution and alternative solution.

As we already know, activity based costing and volume based costing are the two alternative methods in use today, in many enterprises across the world. The drawbacks of the traditional or volume based costing methods are well known. It seeks to allocate indirect costs or overheads on arbitrary bases like machine hours used or labor hours consumed that are not truly representative of costs incurred on various activities or products produced (Roztocki, 1998). ABC method on the other hand focuses on indirect costs or overheads, tracing each expense to a particular cost object.

It makes indirect expenses more directly attributable to products and activities. ABC is particularly preferred when overheads are high and products are diverse. The basic premise of ABC is that cost object consume activities and activities consume resources. Resource consumption drives costs, and understanding the relationship between resource consumption and activities is critical to managing overhead. If the farm chose to use traditional costing methods instead of activity