Question

Read the following scenario below:

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".

Questions:

• Project potential benefits Mr. Beridon could gain from using an ABC system.
• Describe any factors that could skew your results. In other words, explain if there is one method of costing that could make a product look more favorable than it really is
• Explain ABC costing and how it is different than traditional costing.
• Explain the advantages/disadvantages of using ABC costing.

Answer 1

1. Project potential Mr Beridon could benefit from ABC costing-

A. We will be able to determine product service costs

B. We will prepare statement activity based and comparing it to value which will give us fair idea which activity should be invested with time to earn maximum return.

C. Through ABC costing we will be able to know which product is no longer giving us actual return so that we can shut that products down and focus on return generating product.

2. ABC analysis is accounting methodology that assigns costs tobactivities rather than products or services. This enables resources and overhead costs to be more accurately assigned to products and services that consume them. It is technique which involves identification of cost with each cost driving activity and making it as the basis for appointment of costs over different cost objects/ products/ jobs / customer or services.

3.Difference between activity based coating and traditional based costing .

A. In Activity based costing - overheads are related to activities and grouped in activity cost pools where as in traditional they are relates to cost centres / departments

B. In activity based costing- cost are assigned to cost objects where as jn traditional it is assigned to cost units.

C. Activity based costing- are they are more realistic as based on activities where as in traditional they are related to cost centres and hence not realistic of cost behavior.

4 advantages and disadvantages of ABC costing -

A. Advantages

1. More accurate costing of products.

2. Overhead allocation is done on logical basis.

3. It enables better pricing policies by supplying accurate cost information.

4. Utilizes unit cost rather than just total cost.

5. Help in identify non value added activities which facilitates cost reduction.

B. Disadvantages

1. It is not much helpful for smaller organization.

2. It is not applied to organization with limited product.

3. Selection of most suitable cost driver may not be useful.