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Activity Based Costing - Research Paper Example

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The allocation of overhead cost is one of the core challenges of businesses. If not properly allocated, decisions made by the company may be true or could lead to improper analysis…
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Activity Based Costing
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Activity Based Costing

The total customer and distribution cost allocated to the various customers is as follows: Departmental stores=400+400+800=1600 Mid size specialty stores=3600+15600+19200=38400 Small gift shops=36000+64000+40000=140000 Total customer support and distribution cost =180000 Contribution margin less customer support and distribution cost will be as follows using the two approaches. Revenue approach Description Department store Specialty shops Gift shops Contribution margin 0.5*150000=75000 0.75*100000=75000 0.8*250000=200000 Less: Customer and distribution cost 54000 36000 90000 21000 39000 11000 ABC approach Description Department store Specialty shop Gift shop Contribution margin 75000 75000 200000 Less: Customer and distribution cost 1600 38400 140000 73400 36600 60000 The main core of a profit making company is to increase its returns and reduce costs. Management and cost accountants have to put up measures that reduce costs and ensure profit maximization (Bhimani, Horngren, Datar & Foster, 2008). In the above case, the customer who should be preferred is that whose contribution margin less Customer and distribution cost is high. It must be noted that fixed cost is not used in making decisions since the company has no control on the fixed cost. Considering the revenue approach of cost allocation, the company will prefer specialty shop because of the high return of 39000. The department’s stores with the return of 21000 and lastly the gift shop with a return of 11000 would then follow this. In the case of activity based costing allocation method, the department store will be more attractive compared to the other customers. The gift...
Activity costing being one of the methods of cost allocation. There are four major steps in cost allocation using this method. First is the determination of the major activities of the business that result in cost increases. The cost centers of the activities are then determined. The third stage is the determination of the cost drivers i.e. the factors responsible for the increase in cost in the various cost centers (Horngren, 2009). The costs are then charged to the various cost centers considering the driving factors. The main core of a profit making company is to increase its returns and reduce costs. Management and cost accountants have to put up measures that reduce costs and ensure profit maximization. In the above case, the customer who should be preferred is that whose contribution margin less Customer and distribution cost is high. It must be noted that fixed cost is not used in making decisions since the company has no control on the fixed cost. Considering the revenue approach of cost allocation, the company will prefer specialty shop because of the high return of 39000. The department’s stores with the return of 21000 and lastly the gift shop with a return of 11000 would then follow this. In the case of activity based costing allocation method, the department store will be more attractive compared to the other customers. The gift shop will be second while the specialty shop will be the least attractive. ... Read More
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