WGU – JET2 Finical Analysis Task 4
To: Vice President
This report has been prepared to argue the case that the company’s current costing method should be changed to the activity based costing method. This report will review; the difference between traditional based costing and activity based costing; traditional split and allocations with activity based costing; and discusses the breakeven point for Competition bikes Inc. with regards to sales units and sales dollars for both CarbonLite and Titanium bikes.
The first item at hand is what kind of detail does activity based costing provide that is different than traditional costing?
The main difference between activity based costing and the traditional system is that activity based costing requires four steps to build its cost point. Traditional costing uses one rate where first, activity based costing must identify each activity and estimate its total and indirect cost. Second for activity based costing is that the cost driver for each activity must be estimated along with the total quantity of each driver’s allocation base. Third the cost allocation for each activity must be computed. Fourth costs to cost object are allocated. Activity-based costing focuses on activities. The costs of those activities become the building blocks for measuring (allocating) the costs of products and services. (Horngren, Harrison, Jr & Oliver, 2008) This method of costing does require more time to compute the cost to the activity yet it earns that money back plus dividends by having a more accurate forecast of the true costs that are associated with each activity.
The second item is understanding how to define the difference between the traditional split and the allocations with activity cost pools.
In traditional costing there was a wide acceptance that the much of the overhead cost had come from direct labor costs. This assumption was satisfactory when
References: Hilton, R.W. (2009). Managerial Accounting: Creating Value in a Dynamic Business Environment. Retrieved January 1, 2013, from http://online.vitialsource.com/#/books/0077771540/pages/53094067. Horngren, C. T., Harrison, W. T., Jr, W. T., & Oliver, M. S. (2008). Accounting 8th edition. Prentice Hall. Retrieved from http://wpscms.pearsoncmg.com/wps/media/objects/6716/6877765/hha08_flash_main.html?chapter=null&page=901&anchory=null&pstart=null&pend=null