The traditional costing method is a distribution of fabricating overhead costs to the existent merchandises manufactured. By utilizing this method the factory’s indirect costs are assigned. on a graduated table of volume. to the points manufactured ( Averkamp. 2013 ) . This may include points such as the direct hours of labour or the figure of motorcycles produced.
This volume metric. nevertheless. is non the drive factor for fabricating overhead disbursals in fact this method is designed more for departmental focal point. It can besides be really inaccurate as there is small to no dealingss between the existent costs and the activity these costs are being signed to. This method frequently causes inaccuracies. It is in the company’s best involvement to exchange. as many companies are making. to an activity-based costing system.
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Activity-based costing system will be used to place the costs of Competition Bikes. Inc. ’s activities and services based on existent ingestion. This system consists of four stairss in order to construct its cost point. First. Competition Bikes. Inc. must acknowledge activities guesstimate their overall costs. Second. the cost driver must be estimated for each activity and done so on the footing of the overall measure of the driver’s allocation. Third. Competition Bikes. Inc. must cipher how much of the costs should be distributed to each activity. Fourth. costs must be distributed to the cost object.
Although this method is clip devouring and dearly-won the activity-based costing method will by and large gain this money back plus some as it has a much more precise forecast of the correct costs that are related with each activity. This system frequently generates more operating expenses into direct costs so compared to the traditional costing method. It is believed by exchanging from a traditional costing system to an activity-based costing system. Competition Bikes. Inc. will derive greater cognition and be able to specify the drive forces and costs of the merchandises being manufactured.
Harmonizing to the overhead analysis. while utilizing the traditional costing method the Titanium theoretical accounts costs $ 713 per unit and the CarbonLite theoretical accounts costs $ 1. 359 per unit. Under the activity-based costing method Titanium theoretical accounts cost $ 656 per unit to bring forth and CarbonLite theoretical accounts cost $ 1. 460 per unit. This shows us the difference in the two bing methods.
Traditional bing method over-valued the costs of Titanium motorcycles and under-valued the costs of CarbonLite motorcycles. which is evident when looking at the activity-based costing method. Again due to the manner activity-based costing method interruptions down the activities and allocates each 1. this method is much more accurate than that of the traditional.
Competition Bikes. Inc. can now analyse these costs and look for ways to better operational consequences now that the costs have been broken down and allocated to different activities. Using the activity based bing method the CarbonLite theoretical accounts is at a much higher rate than that of the traditional costing method yet the Titanium theoretical accounts have the opposite affect as the entire merchandise costs are lower utilizing the activity based bing system than that of traditional costing methods.
Monetary values vary greatly between the two motorcycle theoretical accounts. which were non seen before under the traditional costing method. The company should be able to now measure these costs and happen ways in which they can take down them to acquire them more in line with one another.
As stated above the activity-based costing method besides allows Competition Bikes. Inc. to merely place fluctuations in merchandise costs and nail the fluctuation straight to the beginning. This helps the company maintain control of the company’s costs and disbursals. This assists in maintaining net incomes comparatively steadily.
The current operations can besides be improved by implementing a just-in-time stock list direction system. This is where the company merely buys the stuffs that it needs to bring forth the units that are really sold. This cuts down on dollars that are tied-up in stock list held in natural stuffs stock list. This is a considerable sum for Competition Bikes. Inc. and will be lowered tremendously as fewer stuffs are placed in natural stuffs.
This will be billed in the same month in which they are produced making fewer dollars to be tied up in stock list. This will so be converted to hard currency to be used as working capital.
Harmonizing to Investopedia the breakeven point is the point at which additions equal losingss. For Competition Bikes. Inc. accomplishing the breakeven point is a spring in the right way. This will let them to be one measure closer to being a profitable concern. Here we will analyse the gross revenues units and the gross revenues dollars of the Titanium and CarbonLite motorcycle theoretical accounts in order to configure the breakeven point.
In order to build the breakeven point we must utilize the weight mean part border. This is calculated by spliting the combined part border ( gross revenues monetary value per unit subtracted by the variable cost per unit ) by the entire gross revenues mix-in units. The part border per unit is equal to $ 221 for the Titanium theoretical accounts and $ 111 for the CarbonLite theoretical accounts. Now we multiply these Numberss by the entire gross revenues mix-in units to make the part border. The entire part border ( $ 127. 200 ) is divided by the entire gross revenues mix-in units ( 700 ) in order to have a weight mean part border of $ 181. 71.
At breakeven the entire part border subtracted by the fixed costs will be 0. The gross revenues units multiplied by the weight mean part border equals the fixed cost. From the informations given the estimated fixed costs is $ 400. 000. The fixed costs divided by the weight mean part border of $ 181. 71 can assist Competition Bikes. Inc. determine the breakeven point of 2. 201 gross revenues units.
Now Competition Bikes. Inc. can cipher gross revenues units and gross revenues dollars with these Numberss calculated. By separating the gross revenues at the breakeven point by the merchandise mix-in does this. Competition Bikes. Inc. must sale 1. 415 Titanium and 786 CarbonLite theoretical accounts in order to hit their breakeven point and addition profitableness.
The gross revenues dollars at the breakeven point are computed by multiplying the breakeven gross revenues units by the gross revenues monetary value per unit. This equals $ 1. 273. 584 for Titanium and $ 1. 175. 314 for CarbonLite theoretical accounts giving us a overall sum of $ 2. 448. 899.
Breakeven Analysis Change
We will now discourse how the alterations in direct stuffs and fixed costs to the production installation based on an rating of cost-volume-profit will impact the breakeven analysis.
If the costs of direct stuffs increased by 10 % . Competition Bikes. Inc. will detect a alteration in the breakeven point as the variable costs would so increase from $ 679 per unit to $ 709 per unit for the Titanium theoretical accounts and $ 1. 384 per unit to $ 1. 451 per unit for the CarbonLite theoretical accounts. Because the variable cost per unit has changed so will the part border per unit.
This will hold a big lessening on both the Titanium and the CarbonLite theoretical accounts as Titanium motorcycles would hold a part border of $ 191 per unit and CarbonLite motorcycles would besides hold a part border to $ 44 per unit.
We so multiply these alterations by the gross revenues mix in values. The part border for the Titanium motorcycles is $ 85. 950 and $ 11. 000 for the CarbonLite motorcycles. This gives Competition Bikes. Inc. a entire part border of $ 96. 950.
The weight mean part border is now calculated by spliting the part border of $ 96. 815 by 700 the entire figure of gross revenues mix-in units. This totals to $ 138. 5. Before the 10 % addition this figure was much higher at $ 181. 71.
If Competition Bikes. Inc. added $ 50. 000 in the fixed costs towards the production installation. alterations would happen in the gross revenues units at the breakeven point. The computation would be $ 450. 000 compared to $ 400. 000 divided by the new weight mean part border of $ 138. 5. This totals to 3. 249 units. Titanium theoretical accounts would number 2. 089 in gross revenues units at the breakeven point and CarbonLite would number 1. 160 gross revenues units at the breakeven point. The entire breakeven point in gross revenues dollars now increases to $ 3. 614. 620. This is an excess $ 1. 165. 721.
Competition Bikes. Inc. would necessitate to remain on top of these extra costs and in order to make so they must increase their gross revenues each one-fourth. Based on direct stuffs addition of 10 % and the extra $ 50. 000 in fixed costs. Competition Bikes. Inc. will necessitate to fabricate 1. 048 extra units in order to breakeven.
Averkamp. Harold. ( 2013 ) . Accounting Coach. What is the Traditional Method used in Cost Accounting? Retrieved from
hypertext transfer protocol: //blog. accountingcoach. com/taditional-method-cost-accounting/
Investopedia. ( 2013 ) . Breakeven Point-BEP. Retrieved from
hypertext transfer protocol: //www. investopedia. com/terms/b/breakevenpoint. asp
Johnson. Rose. ( 2012 ) . EHow Money. The Cost-Volume-Profit Analysis. Retrieved from hypertext transfer protocol: //www. ehow. com/info_10040118_costvolumeprofit-cvp-analysis. hypertext markup language
Wikipedia. ( 2013 ) . The Free Encyclopedia. Activity-based Costing. Retrieved
from hypertext transfer protocol: //en. wikipedia. org/wiki/Activity-based_costing
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