Question

Leighton Beridon owns "Jeemp Farms", located near Weimar, TX. The farm produces pecan trees and sod. He has so many orders from the Houston metropolitan area that he is able to sell all his inventory each year, but he is not netting as much as he has in past years. His daughter, Liesl Beridon, came home from college over Thanksgiving and mentioned ABC costing, which she learned about in her cost accounting class. Mr. Beridon does not really know what ABC costing is and is skeptical as to whether it would be right for his business. He has hired your company to educate him about ABC and whether or not he should use an ABC system. Over the next few weeks, you will work towards helping Mr. Beridon decide what is the best route for his company to take. Shortly after you get started, Mr. Beridon sends you an email stating that he feels he needs to discontinue the sod portion of his business and focus on his tree sector, as he can charge more per tree than he can charge for a foot of sod. He sends you an email stating, "I can charge so much more for a tree than a foot of grass. Therefore, I am planning on discontinuing the sod portion of the business immediately as I make so much more on the trees! I am going to plant all my sod acres with trees". Write a 700- to 1,050-word paper plan for your boss explaining how you will analyze Jeemp Farms. Include the following: Prepare an argument convincing him to hold off on his decision and see the results of your analysis first. As you have not had time to do any analysis yet, you need to convince Mr. Beridon to wait on whether to discontinue his sod business. Project potential benefits Mr. Beridon could gain from using an ABC system. Explain how ABC creates these benefits. Your team is planning on conducting an analysis of whether ABC would be beneficial to Mr. Beridon. Create a process for conducting this analysis. Include the following:

How could you apply the data in the company's general ledger?

Answer 1

Any project should be analyzed based on the cost and the returns. Mr. Beridon should therefore not be hasty in deciding on which method is more profitable. Despite the fact that the pecan trees seems more beneficial, it is important that a financial analysis is carried out to analyze the profitability of the organization. The cost of producing the pecan trees may cancel out profit generated. Apart from the relationship between the cost and the benefit, it is also important to compare the other factors such as the break even period.

Activity-based costing refers to a method that ensures that the costs are allocated according to the cost of producing the given product or service. This method of accounting provides that the resources are allocated according to its productivity. The production becomes customized based on the real cost and the profit.

ABC accounting system identifies all the costs including the indirect costs that are related to the production process. The indirect cost may be a lot hidden and difficult to identify since they are values that are brought about because of the production. The costs given are allocated as per products, the allocation begins with the emergence of business processes that are performing well and which ones need to be improved. ABC can also be used to notice the non-valued added activities and can assist in better allocation of resources to achieve efficiency and profitable activities. The use of ABC can also increase the value to the progressive improvement of business processes.

The ABC accounting method includes the costs are the same to the method used in production and the work that is performed, allowing the production process to be a business that ensures the understanding of how the overhead costs are accounted for. The data used can identify wasteful products and unnecessary costs so that resources can be utilized productively. The method can also help to rectify the price of products or services that wasteful or useless. The overall commodities and services quality can better the ABC’s data in the production and cost analysis can be resolved.

The method of ABC cost accounting ensures that the cost that is involved in the production of a product is accounted for in totality. The comparison of the profits generated therefore is made possible and more informative. A production can have more hidden costs and therefore feign to provide more profit to the business man compared to other products. The ABC accounting method will, therefore, confirm the claim that the trees are more productive compared to the sod. Profits also include the time frame within which they are obtained. The production of trees and grass will be analyzed in totality factoring in the time within which the profit is attained for each and therefore point to the better option. It is possible that sod returns low profits, but the profits are accomplished within a short time. This would then make the sod more profitable than the trees. On the other hand of the trees give a higher profit at the same time as the sod, then the trees would prove to be more profitable.

The information in the company’s general ledger would be substantial as cost accounting includes all the costs that are involved in the production including both the hidden and the direct costs. The general ledger is important in identifying this kind of costs. The questions that would be asked Mr. Beridon include;

The time within which the profits are attained

The unregistered costs that he undergoes during the production of both sod and the trees

The amount of his supervision that labor for the two different products require

The maintenance costs that are not registered in the financial books

The amount of tax payable for each production

Some inputs necessary for each of the products

The other information would be gathered from the financial books of the farm so as to include all the costs involved in the production of each. The final recommendation would be based on the net profit which means some returns earned by an each product less the direct and indirect cost that are associated to each. The more profitable business in the one that gives a higher profit. The benefits analysis would also include the time within which it is realized.