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22753 Cost Management and Analysis: Group assignment costing challenge

Overview(Task Description)

Your consulting firm has been contracted to solve a cost accounting challenge described below. You are expected to apply your skills and knowledge from the course to solve the challenge and professionally communicate your results. You are expected to deliver:

  • Final report: Your solution to the challenge will be submitted as a final PDF report. This report should clearly show how you have answered all the components of the challenge and be presented in a professional, polished manner
  • Appendix (Microsoft Excel): Your final report should be accompanied by a single Appendix file showing your work in Microsoft Excel

Solution

Executive Summary

The Climbing World Ltd is a manufacturing business that is working on high-quality abseiling equipment that is facing issues in cost management, analysis and product pricing. The report is working with evaluation with the three types of costing analysis the Plant-wide rate method, the method of overhead cost pool and ABC (activity-based costing). The study focuses on each alternative with the implications on the overall cost, the positional impact it can have on the gross margins, and the analysis. Thus, the overall analysis of the report is on the recommendation of the ABC system of costing as it is more accurate and appropriate for cost allocation and enables impactful decision-making. Also, the report has given recommendations on enhancing the company’s profitability and addressing the issues of the CEO. An established producer of abseiling equipment, Climbing World Ltd., is tackling the problems with pricing and cost control to stay competitive in the fast-paced and changing business environment. The report will analyse Yolanda Gadsby’s work and evaluate three different costing systems that can be combined, including an analysis of the plant-wide rate, two overhead expenses, and activity-based costing.

Introduction

Climbing World Ltd is a renowned abseiling equipment manufacturer that is working to grapple with the issues of pricing, and cost management and thus working hard to align with the dynamic and fast-base business landscape. Ben Blakely, the CEO is working towards the sales volume, and to embrace the gross margins and pricing the products rightly to sustain the position and stay in the dynamic business landscape. With the demands of the CEO, the CFO starts to work and takes the emphasis towards the methods of cost allocation and analysis. The report will study Yolanda Gadsby’s work and evaluate the three variants of the costing system that can be integrated, which involves the study of the plant-wide rate, Two Overhead costs, and Activity-based Costing.

Mapping the Alternatives

Plantwide Rate

In this method of cost analysis, the overhead costs are allocated based on the direct labour hours. This method works on the assumption that all the products utilize the resources in a similar proportion (Kitsantas, et al., 2020). This might in a case not deliver an accurate reflection of the resource usage of different products, which can lead to a distorted product cost.

This method helps calculate the cost throughout the product and works with the way to align with the plant-wide rates throughout for the machine rates and the labour costs that need to be incurred (NOTA, et al., 2020). The cost is allocated on the level which is helpful to work with the position and get with the costs overall, in all the possible ways to get with the cost analysis and to work with the method (Rankin, 2020).

Two Overhead Cost Pools

The suggestion of Jude is to utilize this method in which the costs of supervision, rent and lighting are continued to be allocated based on the labour hours, while the other costs such as power and deprecation are allocated on the machine hours (MOHSIN, et al., 2021). This method is offering on the more nuanced allocation but might still be lacking in precision (Shea, et al., 2018).

In the cost pool method, the costs are made in a way that it can help the business to work with the allocation of cost with drivers and help the cost analysis to work with the cost processes (MOHSIN, et al., 2021).

Activity-Based Costing

In the ABC method, the allocation of the costs is made based on the activities and their cost drivers. This is accurately tracing the product costs by taking the resource consumption with the activities as given. This is among all the most precise, and accurate methods of allocation.

The cost analysis with ABC is made with the process of cost allocated on each of the cost drivers aligned with the cost work and to make it accessed with the machine and labour hours (Hadid, 2019). Even the plan is to work with cost methods to lead the alternative and allocate the costs.

Similarities in approach

  1. The first similarity noted in all three methods is that these are applied to allocating the OH costs to products, activities, and departments and determining the total costs for products and business services.
  2. All three methods depend upon the allocation basis of cost distribution. This makes the factor analysis with the hours of the machine, and labour and with the other metrics.
  3. The cost accuracy with the help of cost controls, processes, and performance analysis is adhered to.

Differences in approach

BasisPlantwide methodTwo Cost PoolABC
AllocationA single determined overhead rate is used for the allocation of costs.Two pools are identified and the cost is given on that basis, one fixed and the other flexible.Each cost is allocated to the identified cost driver that is most suitable for the cost allocation.
PrecisionThe least precise method assumes and relies on a single cost driver.A slightly high precision and is done with one fixed and one variable cost.The most precise of the three methods is allowing the cost analysis on OH and drivers and working with the process of production to ensure accuracy.

Product Costing

Plantwide Rate

In this, the cost is allocated to the plant, and not to any activity or driver. In this, the plant’s costs are not so accurate and thus worked with the overall category.

Plant-Wide Cost
Total Monthly OH21100
Total Labour Minutes15.68
Predetermined\ OH Rate1345.663265

Two-Cost Pool Method

Total Cost for each workstation
Power UsageDepreciationSuppliesFloor Space
Cold roll and cut4703241.67117.1612.5
An Oven and drop-forge9626.6733.3393.7330
Bore3229.4125225.110
Deburr and Polish1424.275147.97.5
Crimping564.813.3360.5510
Lock Assembly994.6416.769.4820
Package557.46.9171.0810
Total Cost for Figure 816311.2
Total Cost for Carabiner19957.36
Total Cost for Stop Set4351.6

Activity Based Costing

CostCost Driver
Machine related costsMachine Minutes/ month
Labour Related CostsLabour minutes/ month
Power Usage CostsPower Usage (kWh)
Depreciation CostsDepreciation/ month
Supplies CostsSupplies/ month

The Gross Margins can be marked at the three levels includes:

Gross margin: (Gross Profits/ Net Revenue) * 100

Gross Profits: (Net Revenue- COGS)

= 159,700- (42160 + 48437)

= 69,103

Thus, the Gross profits are $69,103.

Gross Profit Margin= (69,103/ 159,700) * 100

= 43.27%

Gross Profits Per Unit

Sales information
ProductSales VolumePrice/unit
Figure 84200$10.00
Carabiner2800$34.00
Stop set1000$22.50
Total$66.50
Materials informationProduction volumeCost/unit
Figure 84200$3.45
Carabiner2800$6.40
Stop set1000$9.75
Total$19.60

Recommendations

Thus, to take on the analysis, Climbing World should focus on adopting the Activity-Based Costing system which provides high-end accuracy for cost allocation, which is helpful to making effective business decision-making and pricing strategies (Aljabr, 2020). Recommendations that can be aligned include:

  1. Cost drivers are to be identified closely with a proper allocation on each driver in calculating the accurate cost and overhead allocation.
  2. The product minutes should be more clearly calculated to make the Climbing World calculations accurate.
  3. The pricing strategies are to be planned with ABC to deliver appropriate costs.

Strategic Analysis

To enhance the profitability of the business, Climbing World should focus on the following strategies to grow:

  1. Cost Reduction- Identification of the areas of chances to reduce costs in the process of manufacturing, with machine work optimization and reduced power consumption.
  2. Product Diversification- Exploring product lines in new markets to align with the demands and work with improved efficiency and effectiveness.
  3. Market Expansion- Targeting new market areas to embrace the sales volume and grow the market for business in new regions.
  4. Pricing Strategies- They work with strategies that will help work with competitive pricing and adjust the prices with the market demands and supplies to grow (Kamalov, 2022).
  5. Quality Improvement- The focus should be on the quality of the product and work with innovation with multiple competitors to grow and sustain in the market.
  6. Supplier Negotiations- The negotiations should be made with the suppliers to get in with the reduced costs on inputs and work with the low outflows.
  7. Customer Feedback- Businesses should work on inviting the position to act over the received for improving the offerings of products and enhancing customer satisfaction level.

Conclusion

Business Climbing World faces the issues of cost management that can impact the overall strategies of profitability and pricing. The focus shall be on adopting the ABC and aligning with the strategies and recommendations to grow, the company can enhance the cost allocation with accuracy, improve profitability position and address the concerns of the CEO.

References

Aljabr, A., 2020. The influences on Activity-Based Costing adoption as an optimal costing system design: Evidence from Saudi Arabia. Journal of Accounting and Management Information Systems19(3), pp.444-479.

Hadid, W., 2019. Lean service, business strategy and ABC and their impact on firm performance. Production Planning & Control30(14), pp.1203-1217.

Kamalov, A., 2022. DEVELOPING THE ELIGIBILITY CRITERIA TO IMPLEMENT ACTIVITY-BASED COSTING. 

Kitsantas, T., Vazakidis, A. and Stefanou, C., 2020. Integrating activity-based costing (ABC) with enterprise resource planning (ERP) for effective management: A literature review.

MOHSIN, N.M.R., AL-BAYATI, H.A.M. and OLEIWI, Z.H., 2021. Product-Mix Decision Using Lean Production and Activity-Based Costing: An Integrated Model. The Journal of Asian Finance, Economics and Business8(4), pp.517-527.

Nota, G., Matonti, G., Bisogno, M. and Nastasia, S., 2020. The contribution of cyber-physical production systems to activity-based costing in manufacturing. An interventionist research approach. International Journal of Engineering Business Management12, p.1847979020962301.

Rankin, R., 2020. The predictive impact of contextual factors on activity-based costing adoption. Journal of Accounting and Finance20(1), pp.66-81.

Shea, V.J., Waldrup, B.E., Xu, H. and Williamson, S., 2018. Error Rate Impacts On Decision Efficacy: Activity-Based Costing Systems In Small Business. QRBD, p.59.

Tran, T. and Thao, N., 2020. Factors affecting the application of the ABC costing method in manufacturing firms in Vietnam. Management Science Letters10(11), pp.2625-2634.

Vetchagool, W., Augustyn, M.M. and Tayles, M., 2020. Impacts of activity-based costing on organizational performance: evidence from Thailand. Asian Review of Accounting.

Appendix

Two-Cost Pool Method
Power UsageDepreciationSuppliesFloor Space
Cold roll and cut4703241.67117.1612.5
Oven and drop-forge9626.6733.3393.7330
Bore3229.4125225.110
Deburr and Polish1424.275147.97.5
Crimping564.813.3360.5510
Lock Assembly994.6416.769.4820
Package557.46.9171.0810
Total Cost for Figure 816311.2
Total Cost for Carabiner19957.36
Total Cost for Stop Set4351.6
Plant-Wide Cost
Total Monthly OH21100
Total Labour Minutes15.68
Predetermined OH Rate1345.663265
Figure 8
Minutes1.98
POR1345.663265
OH Cost2664.413265
Carabiner
Minutes9.5
POR1345.663265
OH Cost12783.80102
Stop Set
Minutes4.2
POR1345.663265
OH Cost5651.785714
Activity Based Costing
Machine Minutes12.93
Total Machine Costs933.33
Activity Rate72.18329466
Labour Minutes15.68
Total Labour Costs118750
Activity Rate7573.341837
Power Usage Costs21103
Total Power Usage21103
Activity Rate1
Figure 8
Machine Related CostsProduct Related CostsLabour-Related CostsPower Usage CostsSupplies
Minutes2.881.984703241.67117.16
Cost102.497843.75111
Overall295.171215530.6254703241.67117.16
Overhead Costs20887.6262
Carabiner
Machine Related CostsProduct Related CostsLabour-Related CostsDepreciationSupplies
Minutes7.959.59626733.3393.73
Cost102.497843.75111
Overall814.795574515.6259626733.3393.73
Overhead Costs85783.4805
Stop Set
Machine Related CostsProduct Related CostsLabour-Related CostsDepreciationSupplies
Minutes2.14.2210075147.9
Cost102.497843.75111
Overall215.22932943.75210075147.9
Overhead Costs35481.879

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