Question

Mr. Beridon received your requests for information and returned data which you have compiled in an Microsoft® Excel® spreadsheet (see document template). He also said, "We grow sod and trees at Jeemp Farms. We sell the sod mainly to home builders in the area, although we sell to some individuals who are purchasing square footages to re-sod their yard. Many home builders will purchase to sod an entire subdivision. They then may come back to us to purchase trees for the yards. It really is a package deal. For builders like that, we are a one-stop-shop. In most cases, however, we sell the trees to orchards and some individuals. The purchaser is responsible for all shipping costs related to their product." "Our production process is different for each product. For sod, we plant the seed, irrigate, cut, and roll the sod and then transport it. For the trees, we plant the root stock, graft the tree, water until a particular maturity and then dig it up and sell it. We inspect the plants as needed to make sure we are producing a quality product that is disease-free." "We have delayed purchasing some machinery that reduces time for the planting of the trees because it is a large up-front cost and we don't want to have a huge outlay of cash if our profits keep going down." "The grass does not require as much irrigation as the trees, as it is at a lower elevation than the tree acres and is closer to the creek; it gets a lot of the run off." "Historically, we have always been able to sell everything we produce. Hopefully, that will continue since Houston is expanding rapidly."

- Describe other methods of analysis you could use to help you come to a decision? with references.

Answer 1

As per the provided data:

In this given example the traditional method of costing (Activity based costing) method is deployed. the limitatuin of both the costing methodologies are providedas follows.

limitation of absorption costing(traditional costing)

• under this costing method both the cost(fixed&variable) is used to determine the total cost.
• this method compketely ignore that sales volume & profitability factor
• therefore, if these costing methodology is adopted and if the sale volume is dropped then the cost will be much higher and it will not be possible to sale the products at profits.

Activity Based Costing(ABC XOSTING)

• The traditional method of costing (absorption costing) is now a days being replaced with ABC costing methodology.
• The process involves identifying activity of each product, the cost is derived.
• Also there is a possibilioty that all the hourly rate is also dependent upon the estimated production volume.
• In the both above mentioned costing methods, the chamge in sale volume may impact the cost derived through these process.
• The alternative costing method(marginal costing)is the process which will provide the management a better idea about change the cost for each change production volume.
• This will help the management to price the products suitably.
• since this process does not consider pr all cost(fixed cost) , the costing will be favourable under this cost method.
• However, the net profit will remain same.