Question

Question:

imagine that you are a business manager. Your board of directors has requested that you report on the significance and impact of utilizing activity-based costing (ABC) over a single plant-wide predetermined overhead rate (POHR). Using your required readings this week, you will create a brief presentation for your investors analyzing the pros and cons of using ABC, including a comparison of at least two of the activity rates versus the single plant-wide POHR with calculations. Here is the relevant information you need:

*The product that you produce requires four different activities to complete.

*The single plant-wide POHR is $25 per unit, and we produced 10,000 units.

*Activity 1: Design Team – The estimated time spent on new ideas is 15,000 hours; we have 4 members of the design team that are paid $40,000 each.

*Activity 2: Production Team – The estimated time spent producing the item is 30,000 hours, with 100,000 machine hours with associated costs of $150,000, and we have 8 employees who work 40 hours a week, 52 weeks a year, and they are paid $12 an hour.

*Activity 3: Finishing Team – The estimated time spent finishing the product is 15,600 hours, with 20,000 machine hours with associated costs of $75,000, and we have 10 employees who work 30 hours a week each and are paid $20 an hour.

*Activity 4: Quality Inspections – There are 200 estimated inspections; we have 2 inspectors with an annual salary of $75,000.

In your responses to your peers, imagine that you are the intended audience for their presentations (i.e., an investor). Does the selection and sequence of material presented make sense? Look at the comparisons and the significance of what was presented to justify the use of ABC: Is this clearly and effectively communicated to you? Are you left with any lingering questions or confusion about the narrative, and if so, what are they?

Answer 1

Activity-based costing and management is an accounting and management approach for determining accurate costs especially the overhead costs.

Activity-Based Costing/Management (ABC/M) can overcome some of the limitations of traditional cost accounting for decision-making in order management

The combination of ABC in orders management decision-making models of can improve the quality of decision.

Most of order management decision support models only consider material flow and capacity constraints and don't consider the profitability factor.

This paper proposes multi objective mixed integer programming model to could take into account profitability for managing order decisions effectively, subject to capacity constraints by using ABC.

COMPUTATION OF ESTIMATED COST OF PRODUCT

Particulars

Amount

per hour / per inspection

Design Team

160000

10.66666667

Production Team

Machine cost

150000

5

Employee cost

199680

12

Finishing Team

Machine cost

75000

4.807692308

Employee cost

312000

20

Inspection cost

150000

375

1046680

In the ABC costing there are some cost drivers. 1st we have find out what are that cost drivers in overhead costs.

Then we have to find out per cost driver rate. Like in this question inspection is a one cost driver.

So, we have to calculate cost per inspection. There after we have allocate that cost per cost driver to product based on the usage.

ABC costing is useful if company is producing more than one product.

If company is producing only one product then there is no question of ABC costing.