Essay Available:
page:
2 pages/≈550 words
Sources:
1
Style:
APA
Subject:
Accounting, Finance, SPSS
Type:
Coursework
Language:
English (U.S.)
Document:
MS Word
Date:
Total cost:
$ 11.23
Topic:
Switching to Activity-Based Costing and Its Impact on Selling Price
Coursework Instructions:
For this assignment you will be writing a professional memo to a co-worker explaining how the switch from traditional costing to Activity Based Costing will impact the selling price of your company's products or services. Be sure to indicate the type of company you are discussing in the memo. As part of your justification, provide a specific, relevant example using Excel that relates to the company you are discussing and shows a numerical comparison between the 2 methods (traditional and ABC).
Coursework Sample Content Preview:
To: Recipient Name
From: Your Name
cc: Name
Date: 24th July 2023
Re: Switching to Activity-Based Costing and Its Impact on Selling Price I am writing this memo to discuss with you the possible switch from traditional to activity-based costing and the possible impacts on the prices of items and services in our company. We operate a company in the manufacturing industry, and this transition would significantly impact our pricing strategy and the overall long-term financial performance. Like many other companies in the manufacturing industry, we have long relied on the traditional costing method to allocate overhead costs for the company’s products. The model often relies on a predetermined allocation pattern (Cardos & Pete, 2011). Ideally, the labor or machine hours are used to distribute costs for all products. Considering this pattern, there may be discrepancies in the allocation of costs and the pricing of products, as the production processes are sometimes complicated. Exploring activity-based costing, it is better placed in determining the overhead costs of products in the production phases. Ideally, the approach allocates the specific activities involved in production and specific costs for every product. This eliminates the possibility of misallocation of resources, thus helping to improve the company's profit margins further. The overhead costs are more precisely allocated and can aid in identifying actual resources utilized in producing each product. Impact on Selling Price Adopting activity-based costing compared to traditional costing would be the best option for our company. The product costing for all overhead costs will be more precise, which may impact the selling price per product. The selling price may, however, increase or decrease in some cases. Adopting Activity Based Costing will make our product costing analysis more precise, which may impact our selling price (Jurek, et al., 2012). In some cases, the selling price of certain products may increase, while others may decrease. Here is a specific example to illustrate this point: Example: Let's consider two products, Product A and Product B, currently manufactured using traditional costing. The cost allocation for these products is as follows:
From: Your Name
cc: Name
Date: 24th July 2023
Re: Switching to Activity-Based Costing and Its Impact on Selling Price I am writing this memo to discuss with you the possible switch from traditional to activity-based costing and the possible impacts on the prices of items and services in our company. We operate a company in the manufacturing industry, and this transition would significantly impact our pricing strategy and the overall long-term financial performance. Like many other companies in the manufacturing industry, we have long relied on the traditional costing method to allocate overhead costs for the company’s products. The model often relies on a predetermined allocation pattern (Cardos & Pete, 2011). Ideally, the labor or machine hours are used to distribute costs for all products. Considering this pattern, there may be discrepancies in the allocation of costs and the pricing of products, as the production processes are sometimes complicated. Exploring activity-based costing, it is better placed in determining the overhead costs of products in the production phases. Ideally, the approach allocates the specific activities involved in production and specific costs for every product. This eliminates the possibility of misallocation of resources, thus helping to improve the company's profit margins further. The overhead costs are more precisely allocated and can aid in identifying actual resources utilized in producing each product. Impact on Selling Price Adopting activity-based costing compared to traditional costing would be the best option for our company. The product costing for all overhead costs will be more precise, which may impact the selling price per product. The selling price may, however, increase or decrease in some cases. Adopting Activity Based Costing will make our product costing analysis more precise, which may impact our selling price (Jurek, et al., 2012). In some cases, the selling price of certain products may increase, while others may decrease. Here is a specific example to illustrate this point: Example: Let's consider two products, Product A and Product B, currently manufactured using traditional costing. The cost allocation for these products is as follows:
| product A | |||
| Item | cost | ||
| Materials | $50 | ||
| Direct labor | $30 | ||
| Overhead | $20 | ||
| Total | $100 | ||
| PRODUCT B | |||
| ITEM | COST | ||
| Materials | ... Updated on|||