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ABC at Scotty Accents Company - Case Study Example
Finance & Accounting
Pages 6 (1506 words)
To: … From: … Subject: ABC at Scotty Accents Company… Date: 20th May 2013 Report 1.0 INTRODUCTION The treatment of overheads has always been a sensitive area in business with different methods providing different results. The traditional approaches including overheads absorption costing, which is the method used in this case, do not identify the specific activities involved in the production of the different models of kitchen taps - Brass and Chrome…
This has been proven in the case of Scotty Accents where one costing system - absorption costing indicates that the production of Brass was not as profitable as Chrome while the other – activity based costing (ABC) indicates that it is the other way around. Therefore, different costing methods provide different results and can lead to different decisions being taken in terms of pricing and product mix. This problem is known as product-cost cross-subsidization where the over-costing of one product in Scotty Accents case leads to under-costing of the other product (Horngren et al 136). 2.0 IDENTIFICATION OF KEY BACKGROUND INFORMATION The income statement that has been generated at November 2011 indicates that the Chrome model kitchen taps which was just introduced generates a higher net income than the Brass model which the company has been manufacturing for over seven years. However, the decision to concentrate marketing resources on the Chrome model and begin the process of phasing out the Brass model should not be taken at this time. ...
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