Forrest Hill Paper Company
TO: Professor and Manager
FROM:
SUBJECT: Forrest Hill Evaluation of Profits and Costing Systems
DATE: November 1, 2013
Executive Summary
Throughout this report, our team will describe how we used activity based costing to allocate costs, illustrate why the traditional system is faulty, and recommend changes that Forest Hill Paper Company should consider implementing in the near future.
After closely reviewing the financial and production data, our accounting team has found that your traditional cost allocation is faulty and misleading. The costs of products A and C were over allocated and products B and D were under allocated causing deceptive information on the true profits of the company. Also, product B appears to be making a profit, however, it is losing $2307 per reel.
As suggested, the assets of Forest Hill Paper Company have not been used to the greatest advantage. For instance, the most lucrative product was found to be D with a profit of $5,299 per reel; whereas the least profitable product was B with a loss of $2,307 per reel.
It was also found that slitting costs were being allocated to all of the products when in reality, slitting should only be allocated to products A and C. This is important because slitting contributes an estimated $2,300 of costs per reel; a cost that should not be assigned to products B and D.
Our team has reviewed several alternatives for Forest Hill to consider to generate a higher profit margin. For instance, it may be effective to discontinue the slitting service if it wouldn’t drastically affect your current customer base. Additionally, the FHPC accountants should become more familiar with ABC costing system to have a better understanding of the company’s cost allocations and profits.
Analysis of Costing
After analyzing the company’s costing procedures, the traditional costing system has a very different outcome for the profit as opposed to the activity based costing system. To get the profit for
FROM:
SUBJECT: Forrest Hill Evaluation of Profits and Costing Systems
DATE: November 1, 2013
Executive Summary
Throughout this report, our team will describe how we used activity based costing to allocate costs, illustrate why the traditional system is faulty, and recommend changes that Forest Hill Paper Company should consider implementing in the near future.
After closely reviewing the financial and production data, our accounting team has found that your traditional cost allocation is faulty and misleading. The costs of products A and C were over allocated and products B and D were under allocated causing deceptive information on the true profits of the company. Also, product B appears to be making a profit, however, it is losing $2307 per reel.
As suggested, the assets of Forest Hill Paper Company have not been used to the greatest advantage. For instance, the most lucrative product was found to be D with a profit of $5,299 per reel; whereas the least profitable product was B with a loss of $2,307 per reel.
It was also found that slitting costs were being allocated to all of the products when in reality, slitting should only be allocated to products A and C. This is important because slitting contributes an estimated $2,300 of costs per reel; a cost that should not be assigned to products B and D.
Our team has reviewed several alternatives for Forest Hill to consider to generate a higher profit margin. For instance, it may be effective to discontinue the slitting service if it wouldn’t drastically affect your current customer base. Additionally, the FHPC accountants should become more familiar with ABC costing system to have a better understanding of the company’s cost allocations and profits.
Analysis of Costing
After analyzing the company’s costing procedures, the traditional costing system has a very different outcome for the profit as opposed to the activity based costing system. To get the profit for