Activity based costing (ABC)
This is a costing methodology that recognises the activities of an organization and allocates the cost for each activity associated with the resources to all the services and products as per the consumption by each of the activities (Kaplan and Anderson 2013).
- Improves over all procedures: During the implementation of ABC system, all the used procedures are taken into consideration and after a short span of time, a broad picture emerges that states which procedures are well working and which are not.
- Identification of waste: the overhead cost generally involves the wasteful products, with the application of ABC system, these wastes can easily be identified (Kaplan and Atkinson 2015).
- Pricing strategies: With the application of ABC, the business can identify the cost associated with the production of a single unit, which in turn, assist the managers to develop an appropriate pricing strategy.
- Can be applied for the entire business: not only the production cost but all the overhead costs that are associated with the business can be minimized with the help of the ABC system (Balakrishnan, Labro and Soderstrom 2014).
- High cost for implementation: If the overhead cost of the business are low, then the ABC system may not be considered as best as the implementation cost is high
- Required time: ABC system requires long period of time to be applied in the business. All procedures related to production, employee aspects and actions related to the business have to be scrutinized for the extended time period with regard to get a clear idea related to the issues.
- Flow of data: ABC system requires various individuals and departments for collection and input of data. Even the smallest defect can cause damage to the whole procedure and the result will be spoiled. This risk is one of the biggest while ABC system is adopted (Ruiz-de-Arbulo-Lopez, Fortuny-Santos and Cuatrecasas-Arbós 2013).
From the given scenario it is identified that Louis Franco is concerned regarding the non-familiarity of Julius Franco, the manufacturing manager about which industrial award system will be best suited for his staffs. As they belong to the manufacturing industry, the “Manufacturing and Associated Industries and Occupations Award 2010” seemed to be most appropriate for them. The said award started on 1st January 2010. A monetary obligation is imposed on the employers by the award and can be absorbed into the payments of overaward. This award does not require an employer to increase or maintain any payment for overaward (Manufacturing and Associated Industries and Occupations Award 2010 2017).
The wages under this award will be paid based on the experience of the particular employee on the relevant work and level of qualification. As in the given case either the qualification or the experience of the staffs are not mentioned, if it is assumed that the staffs are with no qualification and are with 0 years of experience then the payment will be as follows –
- Overtime-Saturday-1stthree hours-day worker at the rate of $33.09
- Overtime-Saturday-1stthree hours-day worker at the rate of $44.12
- Overtime-Sunday at the rate of $44.12
- Overtime-Continuous shift worker at the rate of $44.12
- Overtime-Public holiday-Continuous shift worker at the rate of $44.12
- Call back-first 3 hours at the rate of $33.09 (Skyring and Slaytor 2015).
If the selling prices of Casual and deluxe table increases with increase in the cost of raw material XX and YY, then the profit percentage will increase as in the process of manufacturing some fixed cost like product design, marketing cost and distribution cost are also involved that will not increase with the increase in production. Therefore, the per unit fixed cost will reduced with increase in production. On the contrary, if the cost of selling of tables decreased then the profit will be reduced. Further, the Company is exposed to the changes in the products prices. This exposure is linked with the variation of the sales price and raw materials prices and other inputs that are used in the process of production, especially as the Company operates in a commodities market.
The problem that are faced by Frank Morton that his time exceeds the allowed time of 40 hours per week and that lead to exceeding the labour cost budget of the company. To solve this problem Frank may be offered an incentive that will be less than the overtime rate for finishing-up his work before time. For instance, let assume that Frank takes 5 hour extra for finishing the task and at the rate of $20 for overtime he gets 5 * $20 = $ 100. However, if he finished-up 2 hours early and gets incentive of $15 per hour saved, then the company will have to pay only 2 * $15 = $ 30. Further, the saved 2 hours can be used for production of more units.
Balakrishnan, R., Labro, E. and Soderstrom, N.S., 2014. Cost structure and sticky costs. Journal of management accounting research, 26(2), pp.91-116.
Kaplan, R. and Anderson, S.R., 2013. Time-driven activity-based costing: a simpler and more powerful path to higher profits. Harvard business press.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Manufacturing and Associated Industries and Occupations Award 2010. (2017). 1st ed. [ebook] Australia: www.fwc.gov.au. Available at: https://www.fwc.gov.au/documents/documents/modern_awards/pdf/ma000010.pdf [Accessed 7 May 2017].
Ruiz-de-Arbulo-Lopez, P., Fortuny-Santos, J. and Cuatrecasas-Arbós, L., 2013. Lean manufacturing: costing the value stream. Industrial Management & Data Systems, 113(5), pp.647-668.
Skyring, S. and Slaytor, E., 2015. The new rules on annual leave for award-covered employees. Governance Directions, 67(8), p.494.