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. The reason is that a calculation produced by the controller Jimmy Nader who proposes another costing system (ABC) indicates that the Chrome model is less profitable. While I understand the concern expressed by the president, decisions on what to produce and the quantities to produce should be based on a system that generates reliable information. Not all activities are driven by volume and so it is easier to identify costs based on activities associated with a product. This method identifies activities such as soldering, shipments, quality control, purchase orders, machine power and machine set-ups. The cost objects – Brass and Chrome are then assigned costs based on the activities that relate to their production. Each activity has its own cost allocation base and in this case the cost allocation base for soldering is the number of solder points; for shipments – number of shipments; quality control – number of inspections; purchase orders – number of orders; machine power – machine hours; and machine set-ups – number of set-ups. Although, Nader admits that there are shortcomings with the allocation base for some of the activities that is the best that could be done at this time. ABC is a very objective measure but Mason wants some subjectivity to be introduced in order to suit her desires. However, this is the first time that Chrome has been introduced and the process can be refined to gain efficiency improvements in the production of this model. ABC is a widely recommended approach that has the advantage of identifying causally related cost drivers. In fact, some of the advantages include: ABC places emphasis on individual activities as main cost objects – each activity having a specific purpose (Horngren et al. 140) Higher levels of accuracy can be achieved using ABC since the method involves calculating the cost of each activity and assigning costs based on the activity which led to the production of the item (Horngren et al. 140) ABC systems facilitate more favorable pricing and product-mix decisions (Horngren et al 136) Process improvement and product design can be facilitated so that decisions relating to cost control can be made
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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…
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ABC and ABM – Together or separate? Contents Contents 2 Introduction 3 Activity Based Costing 4 Activity Based Management 6 ABC and ABM – Together or separate? 8 Conclusion 10 References 11 Introduction Globalisation has brought along radical changes in the ways in which businesses are carries out.
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