Activity-based costing

Activity-based costing

Both small and large businesses have difficulties in pricing products and services across the world. In most cases, these businesses try to price or charge high to its customers in pursuance of decent profits forgetting that the market environment is competitive and end up losing customers. It is precisely what Mr. Beridon expects to do by charging more on pecan trees and dismantling his sod plantation. In this regard, when and if Mr. Beridon employs Activity-based costing, then he will accurately price all his products without dismantling the sod portion of his land. The reason behind this analogy is that Activity-based costing is a method that accounts for the total cost of activities that makes a product, both overhead and direct costs.

According to the analysis, Mr. Beridon should wait on the sod business and not dismantle it in the sense that these products require different direct and indirect expenses. And with the Activity-based costing, Mr. Beridon will have the ability to establish which overhead cost he is likely to cut to avoid losses and expenses or inject the cost to his sod plantation. For example, the pecan trees plantation uses fifty thousand dollars on resources per year, and two thousand five hundred labor hours are directed towards the resources, also known as the cost driver. The cost driver rate, in this case, is dividing the yearly amount of resources by the number of labor hours that year. This narrative brings us to a twenty dollar-cost driver rate. On the other hand, the product produced uses the company’s water for ten hours, meaning the overhead cost product is ten times the cost driver; hence, the overhead cost of the product comes at two hundred dollars.

One of the significant importance of using an Activity-based cost driver is because it helps assembles the overhead cost. And in this case, the analogy described is that Mr. Beridon does not have to dismantle his pod plantation. Since after establishing the overhead cost of the pecan tree plantation then he is obliged to cut down his losses and inject some of his expenses to the sod plantation. Therefore, Mr. Beridon needs to generate cost initiative programs than direct volume measures that would involve more direct labor costs when he decides to increase the volume and price of pecan plantations.

Some of the benefits that Mr. Beridon would gain from using the Activity-based costing (ABC) involve an increase in small business profit margins through set prices on products, altering the nature of many overhead costs. And assigning an indirect cost to activities that generate costs, creating new bases. The prospect of changing the numerous overhead cost involves tracing indirect expenses such as salaries and utilities and directing them towards low volume products to establish a unit cost. Additionally, in the Jeemp farm, the ABC creates benefits in the sense that each product line for tree and Sodom portion will be broken down through the use of Activity-based costing. Both direct and indirect costs will be attached to the product produced in each line. The narrative will establish a product that provides profits or losses in the Jeemp farm. Therefore, variable and fixed costs of products in both product lines will be determined, and direct costs will not be included to reduce the losses experienced in the cost products.

There are five steps in including data in a company’s general ledger concerning ABC systems. These steps include identifying the activities, assigning an overhead cost to activities, calculating the activities rates, assigning indirect costs to cost objects, and preparing a report. Identifying activities, in this case, involves activity measures and cost pool measures in the sense that one can efficiently allocate and identify the cost of each product in the Jeemp farm. Assigning overhead costs to activities loads up primary and secondary cost pools for each product line. In this regard, aspects such as distributing channels, administrative salaries, advertising, and procurement are involved in each product line hence ensuring efficient assigning cost in the general ledger.

Calculating the activity rate influences the measure of active drivers in the ledger. In this case, data applied in the ledger shows cost objects. Using activity driver information is the best way to implement data by calculating the activity rate. Additionally, assign indirect costs to cost objects. In this prospect, one uses the activity measures and activity rates while applying data to the company’s ledger. In other words, it is charging costs to cost objects in a manner likely to suggest that one employs the total cost in each pool and divides it by the overall sum activity in the activity driver, thus creating cost per unit. Finally, the formulation of reports incorporates the conversion of the results acquired concerning the ABC system to consumption management reports by the company.

The questions considered in this case is whether the goods delivered met the standards of the customers as per the terms of the detailed in the contract. Although there might complain from the customers, the absence of grade specification in the line product of product produced is not a guarantee that there should complain within the farm, thus making the ABC system beneficial to the business. Another question involved is the terms and conditions for sale and purchase of the product, both the pecan tee and the sod. The narrative is to ensure constant agreement and acceptance of the product line produced by the farm. Also, one should determine the question on the timeliness of the delivery to customers involved in purchasing the product hence enabling the overhead cost of the product up to delivery.

The information to gather in this case is based on the product that makes more profits in the Jeemp farm. In this regard, there are three pieces of information to be gathered, namely, the cost of the product line, cost of Activity involved, and the cost of resources consumed. The analogy in this is that the cost of the product line and the cost of Activity involved will enable us to determine the demand of products included in the farm and the use of cost drivers that determines the demand of each product line. On the other hand, the information gathered on the cost of resources consumed will ensure that there are proper assigning costs to activities in pursuance of determining important and non-important activities in the Jeemp farm.

The additional information will help the analysis in the sense that it will be beneficial to Mr. Beridon to help establish which Activity is essential in the farm through the use of the ABC system and depicting each lucrative portion in the business. Also, the additional information helps Mr. Beridon to be able to cut losses and expenses of activities that do not add value or make profits in the business. Activity-based costing, therefore, offers a way to manage finances in the farm and enable efficient day to day activities hence the realization of profit margins in the business.

The final recommendation in this context describes the idea of whether Mr. Beridon should dismantle the sod plantation. This narrative will entirely be based on every portion’s acquired cost and how it affects the overall profits of the business. Moreover, the recommendation of the ABC system will only be applicable upon the realization of the reliability of cost products facilitated by cost drivers after the evaluation of other costing systems used by Mr. Beridon earlier before involving Activity-based costing. Therefore, the narrative mentioned above describes the recommendation applicable to Mr. Beridon in pursuance of positive results.

In conclusion, it essential to make the best decision based on accurate and reliable information in any situation. And this also goes to Mr. Beridon, who is entitled to wait for the ABC costing system so that he can ascertain whether pecan trees bring more profits than sod portions. This analogy must also be based on the cost gained during the whole process, thus facilitating a lucrative form of business. Also, the narrative will help him to refrain from traditional costing that led losses over the past years.