The activity-based costing
The activity-based costing, commonly known as (ABC) refers to the technique of assigning manufacturing overhead costs logically compared to the traditional based method. The traditional established method of allocating costs is mostly based on machine hours. It is the technique which firs assign the cost to the activities, which are the actual cause of overhead. It then assigns the cost of those other activities only to products which are demanding activities (Averkamp, n.d.). One of the aspects which make ABC a unique process is that it involves tracing the resource consumption and the costing of final outputs. In any production, the resources available are assigned to activities while activities are attached to the cost of objects. It is through the cost of objects that the consumption of resources is approximated. However, after all, s costs are incurred, the output level determines whether that cost will be covered.
ABC is a broadly used technique of comprehending the product and customer cost concerning the profitability of the activities (Averkamp, n.d.). Furthermore, profitability plays a significant role in either supporting or declining business decisions. In the situation of two or more productions of different outputs, the ABC concept is perfect for reaching a wise decision. In that situation where there are multiple productions of the products, a lot of activities are involved, which means that extensive costs are incurred. Also, various productions can never be ideal due to various external factors. The ideal in this context means that those outputs are equal, and their prices and demand are similar. Therefore, ABC is highly influenced by the production, and in a way, it determines decisions of pricing, outsourcing, and also the establishment of the improvement initiatives.
Relating the case of “Jeemp Farms” with the ABC, there some aspects which need to be considered before coming up with the suggested decision by the owner. From the case study, it is seen that owner of the farm known as Leighton Beridon is involved in the production of two outputs. The two outputs are pecan trees and Sod, which have different demands and fetches different prices in the market. Mr. Beridon decides to do away with Sod and concentrate on pecan trees, which are fetching high prices. As an entrepreneur, the choice is right since one of the objectives is maximizing the profit as possible. However, apart from making a profit, there is another factor to consider before doing away with Sod. It is said that the two outputs have made profits over the years though for three recent past years, the profit has decreased. Mr. Beridown must hold on the decision of cutting off Sod due to the issue of the cost of activities
It is a fact that despite sow not making large profits, it does not record loss. It is an opinion which makes it a viable project as long as there is profit. The action which needs to be taken by Mr. Beridon is to try and evaluate those overhead costs of valuable project (pecan trees) and minimize the unnecessary ones. Through reducing those costs and maintaining the level of output will guarantee more profits. Cutting of the project of Sod and increase production of pecan trees will only raise the overhead costs, which can affect the profits. The activities of producing Sod will not be as much as that of pecan trees due to its low profits. However, that small profits can be used to cater for other costs which might arise while producing the valuable product (pecan trees)