Huge Company Case Study
Today, more and more organizations prefer Activity-Based Costing System (ABC) to the functional-based costing system. ABC takes into account minute details regarding the activities and the factors that add up to the final cost. ABC is based on an activity hierarchy wherein the different activities influencing the cost build up are grouped into different categories. Such a costing method improves cost measurement by organizing information around activities (Thompson, 2003). The group will complete requirements (a) through (e) found at the end of the case. They will then, find three sources on the Internet, that compare and contrast activity-based costing and ...view middle of the document...
47 (per center/hour). A machine is a center.
Job 1: 789.47 X 7.5 = 5,921.05
Job 1: 789.47 X 10 = 7,894.70
Job 1: 789.47 X 8.75 = 6,907.86
Job 1: 789.47 X 12.5= 9,868.38
Job 1: 789.47 X 6 = 4,736.82
d.) Explain the differences in decision making at TBU.
The management of Huge Company’s tooling business unit is concerned that his unit costs do not accurately reflect actual unit work performed because other business units send them their work. TBU management computes a combined labor and overhead cost per labor hour and charges each job based on the number of labor hours used. This labor- based charge is then added to the materials cost to calculate the total job costs. This method does not provide an accurate cost per unit and can lead to over-costing or under-costing per unit.
e.) Identify TBU’s internal customers that might be influenced by the use of the alternative cost system.
Activity based costing systems can be utilized by the entire company, individual departments or units within the company. There-fore all of the company’s internal customers can be influenced by the use of the ABC systems. Managers over the company’s major products as well as other business units within the company can be influenced by ABC systems.
CONTRASTING ACTIVITY AND FUNCTIONAL-BASED COSTING SYSTEMS
Activity-Based costing (ABC) addresses internal operating concerns by capturing the current cost of performing an activity. It also targets high cost activities and provides a context for establishing and monitoring performance measures. It provides the link between activity modeling and economic analysis. This method would prove useful with management of TBU with concerns of current method of costing unit work when other business units send them their work. Also when TBU’s principle focuses on scheduling its resources the ABC costing system would reflect cost related to scheduling and projections. This method of costing is useful for forecasting financial baselines. It provides for an accurate costing of services or products.(Briner, 2003). TBU would utilize ABC systems in computing labor, overhead which are presently being combined to get each job cost. The ABC system is a more sophisticated costing system by providing for a more accurate description of how costs are absorbed by activities and products. The improved information it provides regarding pricing and product variety helps management make better decisions regarding production and purchases. Because TBU uses several types of material as well as 19 different work centers the ABC system would breakdown individual costs for each station as well as individual totals of types of parts produced. This method can also be utilized for inventory valuation with financial statements (Tarr, 2004). The Activity-based approach strives for the ideal and so the standards are the ideal. Progress is measured over time with the expectation that performance should be continually improving. TBU’s...