JET2 Financial Analysis Task 4 WGU
Competition Bikes Inc. Storyline
Managing Capital & Financial Assets
04/12/2014
WGU JET2 Financial Analysis
Task 4 - PASSED To: Vice President
The following is a summary report to recommend whether Competition Bikes should change its traditional costing method to activity based costing, and an analysis of the breakeven point with regards to sales units and dollars for both CarbonLite and Titanium bikes. It also discusses the impacts to the breakeven point. The cost-volume-profit evaluation and the traditional vs activity based costing method overhead analysis were used for the review and analysis.
Traditional Based Costing vs Activity Based Costing
Traditional Based Costing Method (TBC). TBC uses one rate, the overall cost of production, to estimate costs based on the revenue production created. Unlike ABC, manufacturing costs in TBC are only assigned to sold merchandises and do not account for nonmanufacturing costs such as administrative costs. This method is general not as accurate as ABC as it does not account for costs specifics to the level of products. For Competition Bikes, the company can see its manufacturing overhead is $239,020 for the Titanium bikes, and $232,380 for the CarbonLite bikes for a total of $471,400 in overhead costs. This means the unit cost for each is $713 for Titanium bikes, and $1359 for the CarbonLite bikes.
Activity Based Costing Method (ABC). ABC determines and allocates cost by activities a company executes. This generally happens in four steps: identify each activity and its associated costs, both total and indirect; estimated cost driver and quantity; allocation computation; and cost allocation to the respective activity. ABC refines the way indirect costs are allocated to production and focuses on the costs of each individual activity. Costs are also further assigned to each product within the activities and each activity has its own cost driver. Because of the specificity, active based costing provides a
Managing Capital & Financial Assets
04/12/2014
WGU JET2 Financial Analysis
Task 4 - PASSED To: Vice President
The following is a summary report to recommend whether Competition Bikes should change its traditional costing method to activity based costing, and an analysis of the breakeven point with regards to sales units and dollars for both CarbonLite and Titanium bikes. It also discusses the impacts to the breakeven point. The cost-volume-profit evaluation and the traditional vs activity based costing method overhead analysis were used for the review and analysis.
Traditional Based Costing vs Activity Based Costing
Traditional Based Costing Method (TBC). TBC uses one rate, the overall cost of production, to estimate costs based on the revenue production created. Unlike ABC, manufacturing costs in TBC are only assigned to sold merchandises and do not account for nonmanufacturing costs such as administrative costs. This method is general not as accurate as ABC as it does not account for costs specifics to the level of products. For Competition Bikes, the company can see its manufacturing overhead is $239,020 for the Titanium bikes, and $232,380 for the CarbonLite bikes for a total of $471,400 in overhead costs. This means the unit cost for each is $713 for Titanium bikes, and $1359 for the CarbonLite bikes.
Activity Based Costing Method (ABC). ABC determines and allocates cost by activities a company executes. This generally happens in four steps: identify each activity and its associated costs, both total and indirect; estimated cost driver and quantity; allocation computation; and cost allocation to the respective activity. ABC refines the way indirect costs are allocated to production and focuses on the costs of each individual activity. Costs are also further assigned to each product within the activities and each activity has its own cost driver. Because of the specificity, active based costing provides a