JET2 Task 4
To: Vice President
It would be in Competition Bikes, Inc.’s best interest to change from a traditional costing system to an activity-based costing system. In this summary you will find information as to why this change is important as it will highlight the differences between traditional based costing and activity based costing systems. This summary will also give you further findings on Competition Bikes, Inc. breakeven point when evaluating the sales units and the sales dollars and also the influence direct materials and fixed costs have on the breakeven analysis performed.
Costing Method
The traditional costing method is a distribution of manufacturing overhead costs to the actual products manufactured. By using this method the factory’s indirect costs are assigned, on a scale of volume, to the items manufactured (Averkamp, 2013). This may include items such as the direct hours of labor or the number of bikes produced.
This volume metric, however, is not the driving factor for manufacturing overhead expenses in fact this method is designed more for departmental focus. It can also be very inaccurate as there is little to no relations between the actual costs and the activity these costs are being signed to. This method often causes inaccuracies. It is in the company’s best interest to switch, as many companies are doing, to an activity-based costing system.
Activity-based costing system will be used to identify the costs of Competition Bikes, Inc.’s activities and services based on actual consumption. This system consists of four steps in order to build its cost point. First, Competition Bikes, Inc. must recognize activities guesstimate their overall costs. Second, the cost driver must be estimated for each activity and done so on the basis of the overall quantity of the driver’s allotment. Third, Competition Bikes, Inc. must calculate how much of the costs should be distributed to each activity. Fourth, costs must be
It would be in Competition Bikes, Inc.’s best interest to change from a traditional costing system to an activity-based costing system. In this summary you will find information as to why this change is important as it will highlight the differences between traditional based costing and activity based costing systems. This summary will also give you further findings on Competition Bikes, Inc. breakeven point when evaluating the sales units and the sales dollars and also the influence direct materials and fixed costs have on the breakeven analysis performed.
Costing Method
The traditional costing method is a distribution of manufacturing overhead costs to the actual products manufactured. By using this method the factory’s indirect costs are assigned, on a scale of volume, to the items manufactured (Averkamp, 2013). This may include items such as the direct hours of labor or the number of bikes produced.
This volume metric, however, is not the driving factor for manufacturing overhead expenses in fact this method is designed more for departmental focus. It can also be very inaccurate as there is little to no relations between the actual costs and the activity these costs are being signed to. This method often causes inaccuracies. It is in the company’s best interest to switch, as many companies are doing, to an activity-based costing system.
Activity-based costing system will be used to identify the costs of Competition Bikes, Inc.’s activities and services based on actual consumption. This system consists of four steps in order to build its cost point. First, Competition Bikes, Inc. must recognize activities guesstimate their overall costs. Second, the cost driver must be estimated for each activity and done so on the basis of the overall quantity of the driver’s allotment. Third, Competition Bikes, Inc. must calculate how much of the costs should be distributed to each activity. Fourth, costs must be
References: Averkamp, Harold. (2013). Accounting Coach. What is the Traditional Method used in Cost Accounting? Retrieved from http://blog.accountingcoach.com/taditional-method-cost-accounting/ Investopedia. (2013). Breakeven Point-BEP. Retrieved from http://www.investopedia.com/terms/b/breakevenpoint.asp Johnson, Rose. (2012). EHow Money. The Cost-Volume-Profit Analysis. Retrieved from http://www.ehow.com/info_10040118_costvolumeprofit-cvp-analysis.html Wikipedia. (2013). The Free Encyclopedia. Activity-based Costing. Retrieved from http://en.wikipedia.org/wiki/Activity-based_costing