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1. The organizations that develop physical products and maintain inventory, have production labors and specific manufacturing site come under the categorization of manufacturing organizations(Linton 2014). Plum electronics is a manufacturing organization as it develops tangible products that are Mammoth and Maximum Tele Vision sets.
2. The main products of organization are two models of large screen TV sets
3. At present the company is employing traditional methods to allocate costs. These methods employ in-direct methods to allocate costs. Such as, drivers of costs are used in order to allocate costs to the products including labor hours and machine hours. A fixed rate is calculated and applied to all products. In case of Plum electronics, they are using labor hour rate (13.20 Dollars) as well as the rate of machine hours (19.80 Dollars) to allocate the direct cost. The allocation base for manufacturing overhead is (27.50 Dollars) in case of indirect allocation. Cost driver includes anything that causes the cost to incur or that are related to occurring of cost in any way. In this case cost for Mammoth and Maximum are being calculated on same machine hours and labor hours. In this manner, more overhead cost is allocated to the item those employees more machine hours. More indirect cost will be allocated to mammoth as it needs more machine hours (8*27.50=220 Dollars) while half will be allocated to Maximum (4*27.50=110 Dollars). Despite more direct cost is allocated to Maximum, the allocation of indirect cost is more for Mammoth based on same rates of allocation of indirect cost under simple system of cost allocation.
4. At present the company is using simple system of costing on traditional basis according to which the Mammoth line is not profitable given its overall costs. While the Maximum line that is newly introduced is shown to be having profitable as the cost is lower. The organization deduced that it will focus on Maximum while phasing out Mammoth, as the former is generating more profits. The controller advised that the company should consider using “Activity based costing” method in which the allocation of costs is done on the basis of the activities that are undertaken in the process of developing TV sets. But under this system of cost allocation the Maximum line was shown to be un profitable. As per the manager of division these estimates were misleading and if they are presented to senior management, it will result in plashing out the Maximum line. In addition to this, he stated that Jacob has not added all activities that are undertaken in the process of developing TV sets. Even after using more accurate activities, the profits were similar. This shows that activity based costing was showing more precise estimates. The bonus of Clark is based on the division revenues and the company cannot phase out any of these produces. Thus, the issue is what is that the traditional costing system is not representing the actual estimates of profits and it might result into wrong cost allocations and making of decisions related to products.
5. ABC costing is used as alternative costing to process the amount as whole. Activity based costing assumes to be the step by step process that must provide manufacturing productions to determine the overhead costs and incurred planning. Each overhead costing method is available for variable and fixed assigned costing practices. The allocation that is done on the basis of resources incurred in developing a product offers better estimates of the resulting cost. It gives additional information regarding the procedures that are performing well and those that are not. It helps the management in identifying which of the steps add value and which steps don’t add value. It indicates that where the waste is occurring and which steps are causing the overhead cost to enhance. Activity Based Costing” (ABC) system is proposed as an alternate system to allocate costs. In this type of system costs are allocated on the basis of the activities performed to make the products and the resources that are used by them (Horngren, Datar and Rajan 2011). It is different from the conventional method to allocate costs in in-direct manner. This gives more accurate and precise allocation of costs and results in more accurate amounts that offer better decision making basis. It gives a more realistic picture of production costs and allows the management to make better decisions to cut unnecessary costs and improve the revenues. It offers better organization of costs and can be used in all process of organization
These cost categories are activity cost pools. Cost drivers are actually based on casual for total costing system in order to increase the values. The number of times material ordered, the production line in factory, number of supplies, number of shipments, and other costs that incurred. Activity based costing method is a pool of activities that are divided by total number of units and activities to determine cost per unit.
Formula of cost per unit is:
ABC activity cost per unit = total activity cost/ total number of units for activity
Purchase order costs
Activity cost per unit for Maximum = $ 1,045,440/ 109,980 = 9.5 $
Activity cost per unit for Mammoth = $1045,440 / 80,100 = 13.5 $
After calculating the cost, it is evaluated that ABC costing method is important alternative that allocate the cost of system that based on various activities and perform to make the resources. Mammoth has higher cost of purchasing than the Maximum, so Maximum will get productive cost and improve the productivity.
6. Activity Based Costing” (ABC) system is proposed as an alternate system to allocate costs. In this type of system costs are allocated on the basis of the activities performed to make the products and the resources that are used by them(Horngren, Datar and Rajan 2011). It is different from the conventional method to allocate costs in in-direct manner. This gives more accurate and precise allocation of costs and results in more accurate amounts that offer better decision making basis. The allocation that is done on the basis of resources incurred in developing a product offers better estimates of the resulting cost. It gives additional information regarding the procedures that are performing well and those that are not. It helps the management in identifying which of the steps add value and which steps don’t add value. It indicates that where the waste is occurring and which steps are causing the overhead cost to enhance. As a result it gives a more realistic picture of production costs and allows the management to make better decisions to cut unnecessary costs and improve the revenues. It offers better organization of costs and can be used in all process of organization (Tunce, et al. 2005).
7. The process of management account must keep in view the values and ethics. The manager must be honest and ethical in allocation of costs to products in a manner that maximize the organizational profits rather than the manager’s own interests (Vitez 2015). In this case the potential dilemma is the choice of using cost allocation methods. The bonus of manager depends on the amount of profit that organization earns. The manager can use traditional method of allocating costs in a way that hides the actual financial position by misallocation of costs. In this way he will be able to enhance his bonus rather than using the cost allocation method that results in better organizational profits by correct allocation of costs.
Horngren, Charles, Srikant,Datar, and Madhav,Rajan. Cost Accounting: A Managerial Emphasis. Printece Hall, 2011.
Linton, Lan. 2014. "Five Differnces between service and manufacturing Organzitaions", smallbusiness.com.https://smallbusiness.chron.com/five-differences-between-service-manufacturing-organizations-19073.html (accessed September 19, 2016).
Tunce, Gonca, Derya Eren Akyol, Gunhan Mirac Bayhan, and Utku Koker. "Application of Activity-Based Costing in a Manufacturing Company: A Comparison with Traditional Costing." Computational Science – ICCS 2005, 2005: 562-569.
Vitez, Osmond. 2015. "Ethics in Managerial Accounting", Smallbusiness.com. https://smallbusiness.chron.com/ethics-managerial-accounting-3737.html (accessed September 19, 2016).
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