The intent of this study is to place the existent cost for Robin and King theoretical accounts by utilizing Activity-Based Costing System. The information that has been provided in fixing this study includes the income statement, direct stuffs and labor used, machine costs per hr and the fabrication operating expense other than machine costs. Zenre Technology manufactures two types of telecasting, viz. Robin which was being produced since 2004 and King which was merely introduced in 2007. Based on the analysis performed, the company should concentrate on the Robin theoretical account since it is more profitable as compared to the King theoretical account which is incurring losingss. Therefore, the King theoretical account should be phased out or happen a manner to better efficiency to guarantee that it is profitable. It is advised that Zenre Technology should follow the Activity-Based Costing System in order to obtain more precise costing information on their merchandises. This will help in the riddance of uneconomical usage of resources which consequences in an addition in productiveness.
2.0 Introduction
This study is prepared for the rating of Activity-Based Costing ( ABC ) system in finding the costs of assorted merchandises manufactured by Zenre Technology and to infer if the said system should be implemented. In this study, we analyse the information given and compare between the two bing systems. In add-on, the differences between the two systems are clearly outlined and the effects of the ABC system are evaluated based on the cost of the theoretical accounts produced. The definition of ABC would be the polish of the costing system by recognizing the single undertakings used in the production procedure as cost objects.
2.1 Failings of the current costing system
In the instance examined, it is found that Zenre Technology uses a traditional costing system, besides known as the works broad costing system. The common feature of these systems is that they allocate direct costs to the cost object and allocate indirect costs based on a individual works broad cost allotment base. In the instance of Zenre Technology, they calculate the operating expense cost utilizing machine hours, etc. The failing of utilizing a individual cost pool, where the cost is allocated based on the machine hours used may ensue in inaccurate costs, which may take to the inability of the company to supply accurate costing in a multi-product company ( Rac & A ; Petkovics 1990, p.748 ) . This may ensue in the overcosting or undercosting of a merchandise. In add-on the failing of the traditional costing system is that it besides does non include non-manufacturing costs ( Traditional Costing System 2006 ) such as disposal costs ( constructing security, rent etc. ) .
3.0 Activity-Based Costing ( ABC ) System
3.1 Principle
Activity-Based Costing ( ABC ) system is one of the many types of bing systems available for concerns to utilize. It refines a costing system by placing single activities that are required to bring forth both Robin and King theoretical accounts as their cardinal cost objects ( Horngren, Datar, Foster, Rajan & A ; Ittner 2009, p.170 ) . Cost pools for each activity identified are set up for the intent of delegating overhead costs based on its costs driver. The following are the activities carried out by the company with its cost allotment base every bit good as their several cost hierarchy.
Activities Cost Allocation Base Cost Hierarchy
Soldering Number of Solder Point Output-unit Level Shipments Number of Shipments Batch Level
Quality Control Number of Inspections Batch Level
Purchase Orders Number of orders Batch Degree
Machine Power Machine-hours Output-unit Level
Machine Setup Number of Setups Batch Level
3.2 Benefits
Activity-based costing ( ABC ) system allows Zenre engineering to farther better on its truth in the procedure of bing for both Robin and King theoretical accounts. ABC system better aids in the procedure of polishing the assignment of indirect costs to be objects as it breaks up the indirect cost pool into finer pools of costs with different allotment bases ( Horngren et al 2009 ) . Therefore, ABC system concentrates on the cost pertaining to each activity alternatively of concentrating on a individual cost pool used in traditional costing to forestall merchandise overcosting and undercosting. Furthermore, ABC system accurately represents the ingestion costs as it does non delegate costs of idle capacity to its merchandises ( Rac & A ; Petkovics 1990, p.750 ) . Inaccurate and misdirecting cost informations may represent to erroneous feeling of a merchandise ‘s profitableness. Besides, ABC is peculiarly helpful in placing concern activities which are non value adding as it provides fiscal and non-financial information about activities and cost objects ( Gunasekaran 1999, p.118 ) . Last but non least, the system AIDSs in the procedure of benchmarking which constitutes to quality control system ( Chen, Firth & A ; Park 2001 ) .
4.0 Calculations
Activity
Entire Activity Cost
Cost-Allocation Base
Robin
King
Soldering
( figure of solder points )
$ 942,000
= $ 942,000/1,570,000
= $ 0.60
= $ 0.6 x 1,185,000
= $ 711,000
= $ 0.6 x 385,000
= $ 231,000
Cargos
( figure of cargos )
$ 860,000
= $ 860,000/20,000
= $ 43
= $ 43 x 16,200
= $ 696,600
= $ 43 x 3,800
= $ 163,400
Quality control ( figure of reviews )
$ 1,240,000
= $ 1,240,000/77,500
= $ 16
= $ 16 x 56,200
= $ 899,200
= $ 16 x 21,300
= $ 340,800
Purchase orders ( figure of orders )
$ 950,400
= $ 950,400/190,080
= $ 5
= $ 5 x 80,100
= $ 400,500
= $ 5 x 109,980
= $ 549,900
Machine power ( machine-hours )
$ 57,600
= $ 57,600/192,000
= $ 0.30
= $ 0.3 x 176,000
= $ 52,800
= $ 0.3 x 16,000
= $ 4,800
Machine apparatuss ( figure of apparatuss )
$ 750,000
= $ 750,000/30,000
= $ 25
= $ 25 x 16,000
= $ 400,000
= $ 25 x 14,000
= $ 350,000
Sum
$ 3,160,100
$ 1,639,900
ACTIVITY-BASED COSTING SYSTEM
Unit of measurement Cost = +Direct Material+Direct Manufacturing Labor+Machine Cost
ROBIN = + $ 208 + $ 18 + $ 144
= $ 513.64
KING = + $ 584 + $ 42 + $ 72
= $ 1,107.98
Gross Margin per unit = Selling Price – Unit of measurement Cost
ROBIN = $ 900- $ 513.64
= $ 386.36 per unit
KING = $ 1,140- $ 1,107.98
= $ 32.02 per unit
Gross Margin Percentage per unit =
ROBIN =
= 42.93 %
KING =
= 2.81 %
5.0 Analysis
Based on computations as shown above, Zenre Technology should go on with the production of Robin theoretical account and discontinue with the production of King theoretical account. There are 3 chief grounds to warrant our statement. First, the unit cost for Robin theoretical account is cheaper than that of King theoretical account. Harmonizing to the traditional costing system ( simple bing system ) , the unit costs of Robin and King theoretical accounts are $ 570 and $ 798 severally. The ABC system shows that the unit costs for both the theoretical accounts are $ 513.64 and $ 1,107.98 severally ( shown in 4.0 computations ) . It is shown here that Robin theoretical accounts are overcosted where as King theoretical accounts are undercosted.
Second, Robin theoretical account has a higher gross border per centum than King theoretical account. Based on the traditional costing system, gross border for Robin and King theoretical accounts are 36.67 % and 30 % severally ( Refer to Appendix A ) . On the other manus, ABC system shows that Robin theoretical account has a gross border per centum of 42.93 % while King theoretical account has a mere 2.81 % ( Refer to Appendix B ) . Gross border per centum is defined as the per centum that a company retains as gross net income from the merchandising monetary value.
Last, with mention to Appendix C, the operating income derived from Robin theoretical account is $ 121.36 but for King theoretical account, it is – $ 212.48. Therefore, Robin theoretical account consequences in a net income but King theoretical account makes a loss. Operating income is calculated by the tax write-off of merchandising and administrative disbursals from the gross border.
Therefore, Zenre engineering should go on with Robin theoretical account and discontinue with King theoretical account.
6.0 Accuracy and Limitations of an ABC System
The truth of ABC system lies in the finding of the existent cost driver as the cost-allocation base of each activity. Mason was concern about the cost drivers used in Nader ‘s finding of the costs to delegate to each of the allotment bases. Nader had used figure of apparatuss and figure of reviews as allotment bases but Mason suggested that if Nader were to utilize setup hours and review hours alternatively, the decision derived would be different. Hence, the usage of proper cost driver is critical in the measuring of the system ‘s truth.
Besides, the figure of activities included affects the truth of ABC system. Some activities are non considered to be economically executable in the procedure of telecasting production. For case, the sum of prison guards needed to piece the telecasting parts. Therefore, as non all of the activities can be determined, the entire costs calculated would non be reasonably accurate as good.
The restrictions of ABC system is that the informations aggregation procedure for this system is really clip devouring. Besides, the cost to implement and keep ABC system is high, ensuing in high capital outgo in the long-run. Furthermore, the execution of ABC system is non easy as some administrations may be extremely immune to alter. Last, ABC system is a transparent system which some directors may non O.K. of as they would prefer to maintain some things out of the position of the company proprietors.
7.0 Ethical Issues
With mention to the instance at manus, there appears to be a struggle between two parties, James Nader, Zenre ‘s Controller and Sandy Mason, the divisional president. The ground for this struggle is the dissension with the type of allotment bases to be used to measure costs in production of the theoretical accounts and the method of application. This is due to Mason ‘s desire to take down costs in order to reflect a higher net income as her fillip is affected by net income. In the current state of affairs it is the inquiry of ethical criterions that would impact the company ‘s profitableness, and hence Nader must do his determination based on competence, credibleness and unity.
With the application of the ABC system, there may be unfavorable effects, but Nader should describe the exact information to the relevant parties as the issue is endangering the hereafter of the company. Therefore, Nader should continue the values of unity and credibleness of his profession as an comptroller to describe the existent consequences. Even if Nader faces the hazard of losing his occupation, he should implement his answerability to the house and unwrap the true cost Numberss to the company.
There are several suggestions that Nader should make in response to his supervisor – Masion ‘s instructions. The first would be to describe the state of affairs to the immediate director above his supervisor ( Horngren et al 2009, p.42 ) . If the director seems to be in the cringle of the same sentiment, so the following option would be to describe to the CFO or the CEO or tantamount and explicate the quandary and its consequence on the hereafter of the company. If presuming the CEO is involved excessively, so Nader would hold to seek advice from the IMA Ethics Counsellor so that he would hold a clear position of the possible classs of action that he could take ( Horngren et al 2009, p.43 ) . Last, Nader would besides be advised to confer with his legal lawyer in relation to the ethical quandary he is sing at his workplace.
8.0 Decision
Zenre Technology manufactures two telecasting theoretical accounts, Robin an older merchandise and King, a newer theoretical account introduced in 2007. However, James Nader, Zenre ‘s fiscal accountant decided to integrate the ABC system which resulted in less that savory consequences in the costing which lowered net incomes compared to the bing traditional costing system. Therefore, it is recommended that Zenre Technology discontinue the production of King theoretical account, or research on a more cost efficient manner to bring forth the merchandises, and implement the ABC system in the corporation.
9.0 Appendix
Appendix A
Traditional Costing Sytem
Gross Margin per unit =
1. ROBIN =
= $ 330
2. King =
= $ 342
Gross Margin per centum per unit =
1. ROBIN =
= 36.67 %
2. King =
= 30.00 %
Appendix B
Traditional Costing System
ABC System
Robin
36.67 %
Robin
King
30.00 %
King
Gross Margin Percentage for both bing systems
Appendix C
Traditional Costing System
ABC System
Robin
King
Robin
Operating Income ( $ )
1,430,000
390,000
19,800,000 – ( 513.64 x 22,000 ) – 5,830,000 = 2,669,920
Number of Units Sold
22,000
4000
22,000
Operating Income/unit ( $ )
65.00
97.50
2,669,920/ 22,000 = 121.36
Entire Operating Income of both bing systems
