Question

Detailed Instructions:
In a business setting, we are often asked to write a memo to communicate with internal and external professionals. Therefore, I felt it especially beneficial for you to practice writing a memo dealing with our managerial accounting concepts.

Background:

Currently, you work at Technology on Demand (TOD), which manufactures mobile technology such as flip phones, smartphones, notebooks, and smartwatches. The company slogan is Connection, Communication, and Coordination...access when and where you need it! You are a senior accountant in the accounting department and have been with the company for five years. Since the company's inception eight years ago, TOD has operated under a traditional costing system based on machine hours. Company growth has really taken off in the last three years. Michelle Dodd, the controller hired last year, is always open to new ideas. In fact, she welcomes communications to discuss how the company is doing and what, if anything, the company could or should be doing differently. This is your chance to make a good impression on the controller and management! It is your understanding that Brad Jones, the company CFO, has submitted paperwork for retirement. Therefore, there will be opportunities for people to move up or change positions within the company. You would have an interest in the controller position. You want to propose to the current controller the idea of evaluating TOD's costing system. Perhaps, it is time for a change. You briefly mention your idea to the controller. Michelle is excited about your initial comments and asks that you send her something in writing. The controller asks that you put your ideas in a memo to her only. In turn, she will consider and include you on more research/analysis for the two of you to present to the senior management of the company.

In consideration of the background, prepare a memo in a Word document to submit to the controller. Compare a traditional costing system with an Activity-Based Costing (ABC) system. Include the similarities, differences, advantages, disadvantages of the two costing systems. Why are you suggesting the costing system be evaluated now? What do you feel this could mean for the company?

Answer 1

To Date: September 04, 2020

Michelle,

Subject: Change in Costing Method

Change is the need of nature and law perhaps, Our vision Connection , Communication and Coordination …… access when and where you need it!, Then we lag behind in implying the same.

On the review of traditional costing system for our manufactured products which is only based on Machine hours just ignoring the other facts like setup cost cost, assembling cost, order processing , batch processing etc. as all these factors have different engagement level in each type of product we manufactured.

On a part of transparent pricing , dealing in cost centre ABC costing is best method as it clearly envisaged the cost drivers against each of the goods manufactured and accordingly resources utilized by each of them instead of blindly charging on the basis of machine hours.

With the help of ABC it will transparently provide the detail of product over pricing and underpricing till date. ABC helps to curb out the variance at which process level is severe or not.

Simply pricing on the basis of machine hours ignored the other factors as well as including the factors which are hardly related with them.

Coming to our product diversity Flip Phones, Smart Phones , Notebooks and smart watches market is booming and usage will enhance drastically , In order to compete with other competitors pricing need to be looked upon.

With this costing assurance in pricing and development and market expansion will also be optimistic.

At the end I can say, “ With ABC we will be Free”

Looking over the other entrants in other industry following the same method for correct analysis and improvement thereof.

And when I look back into our products, wanna then also to reach the global heights it not only depends upon the product features exclusively but also on the correct price at which they are delivered to the end users.

Traditional costing is not incorrect but its not reflecting as entity as whole, thrives the units as profit center rather than cost center.

Thanking You