Question

Potter Corporation has gained considerable market share in recent years for its? specialty, low-volume, complex line of? products, but the gain has been offset by a loss in market share for its? high-volume, simple line of products. This has resulted in a net decline in its overall profitability.

Requirement

Advise management about specific changes that may be required in its cost accounting system and explain why the existing system may be inadequate.

Potter Corporation should

1.      Keep its current costing system

2.      Switch to activity-based costing

3.      Switch to traditional costing

Answer 1

As in the given situation company overall profit has been decrease because of its inefficient cost allocation and price setting of products .cost of both product is not divided between these two product i.e simple line and complex line product.Division of overhead cost between products should be depends upon the activities taken on the particular line of product.

Under the current system of costing the product of complex nature is being sold at profit because the cost is less charged to complex line product. And the simple line product lost it's share because higher cost charged to this product.

Company should go for activity based costing as it will allocate overhead costs on the basis of activities taken to complete a product on predetermined rate of recovery.

Company should not go for traditional method of costing it may create the same problem as in the existing system of company.

Conclusion:switch to activity based costing .