Financial Analysis Task 4
A1. Costing Method
In order for a company to succeed and be successful, it is very important for the company to understand the difference between profit and cost of goods. There are costing tools that can help a business figure out what the cost of product is during the manufacturing process. These tools are beneficial for a company to figure out how much profit can be made. These tools take the cost of manufacturing the unit and subtract it from the sale price of the product. Having this information, the profit per unit, is very beneficial for a company to know which products they should produce more heavily, or which ones to eliminate. I want to discuss two costing methods that are beneficial to a company.
The first costing method is called traditional costing. Traditional costing is the process of coming up with unit cost by dividing total cost to make the product by the direct labor used to make the product. This process will assume that the direct labor is the major driving cost. Overhead costs, and indirect costs are combined then are given out based on their rational split. In the spreadsheet it shows Competition Bikes Inc., has a total overhead of $471,000. They have allocated $232,280 for CarbonLite, and $239,020 for titanium. By adding the overhead costs to the direct costs, we get $679,380 for CarbonLite, and $641,320 for titanium. Now if you divide the total cost of the product by the number of units, you will get $1,359 for CarbonLite, and $713 for titanium. You can now be able to determine the profit for each of the splits by subtracting the unit cost from the sales price. For traditional costing, you will get a profit per unit of $136 for CarbonLite, and $187 for titanium. Traditional costing is very versatile and easy to use. It is also very good for companies to use when they only have one line of product, or a larger ratio of direct cost and overhead.
The next costing method is activity-based costing....
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