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Discussion Question - Activity Based Costing

View Solution # 27246

Price: $6.00

DQ1b. A friend has asked for your help, having heard you are now studying some accounting. He invites you for dinner and says,

"Why is our business not making any profits? We are setting our prices to cover all of my costs and include a profit mark-up, but my accountant has just told me we've incurred yet another loss for last year. I don't understand this at all and think she must have got her figures wrong. She mentioned that we should now pay her even more, to investigate us introducing something called ABC. What's that? How on earth could it help me? Is this a gimmick?"

You establish that your friend's current costing system throws up considerable overhead costs, which are then allocated to his business products at each year-end on the basis of labour hours. This has been the case for many years and has never been challenged.

Discuss whether and why your friend's accountant might be correct and how he should decide whether to move to an ABC system. Base your answer on research, your readings and your own experiences.

Solution

The solution discusses in detail about the issue in hand.

A sample...

The accountants view about the company’s costing is right and the company requires changing the costing system. For the benefit of the owner of the business it is essential to understand the various costs that are incurred within the organization. It is important to understand that the traditional costing systems when introduced were good enough then however there have been a number of changes and the costing systems that are needed now are different since the company operates in a capital intensive market. As already advised by the accountant, Activity Based Costing (ABC) is the best as unlike the traditional method of coating ABC separates the overheads into portions and allocated the over heads to the products, whereas the traditional method of costing considers all the overheads and spreads them across all the products...

No. of Words: 800 words Help

References: 5 Help

Price: $6.00

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