Organizations use accounting methodologies to estimate the value of their products and services in order to eliminate the low-priced and unprofitable products (Kaplan, 2007). These methods also help organizations to identify those products that are overpriced. Activity Based Costing (ABC) is such a framework that enables an organization to identify all activities within it and assigns costs to products and services according to their consumption of the activity resources.
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The Wood Yard company is an organization that deals with the production of Executive office tables and king-sized beds. The application of Activity Based Costing requires one to come up with the following activities; each product goes through a Unit-level activity. The cost driver employed here is the Volume based driver because the number of units for sale is equivalent to the amount of activity. The activities involved here include assembling the various pieces of timber, screwing them together and finishing them off with a coating.
In Batch-level activity, the cost drivers involved include order processing and inspections among others (Kimmel, 2008). Inspecting the orders, as well as processing will have a fixed fee regardless of their number. The facility-level activity in general supports the operations of the business. It involves the factory buildings, their heating, safety, security, loans, reports to shareholders among others. The company hopes to direct $300,000 by the end of the year to the assembling and building security departments.
The executive office tables ordered are in small quantities and are the low-volume products because they require specific additional features and a lot of setting up. The beds, on the other hand do not need a lot of attention and their production is steady. The Wood Yard company calculates the cost of activities used in the manufacture of each product and assigns the cost of the activity only to the product that required the activity.
The production cost and number of hours spent on these products enables the organization to coming up with the cost of each of the item. A single executive office desk takes one week to produce, and the cost of production is $5000 per item. The king sized beds take one day to produce, and are sold at $1000 per bed. This cost in detail includes the labor, cost of the inputs, the time spent and overhead charges. The selling price of each item reflects all the costs.
Activity Based Costing results in the knowledge of the true contributor to the company's performance as well as the detractor (Baker, 2007). It helps to predict the exact cost that of the company's products and identifies the cause of financial performance of the company. The acquired information from this cost accounting helps the managers of Wood Yard Company to track the work process and move towards improvement. ABC also results in the company offering its clients better bargains.
This implies that the company's competitiveness improves. There is the integration of the cost of production of every product, and cost drivers such as machine hours, labor hours and other incurred costs during the production of each product.
In conclusion, the selling cost of the executive office tables covers the cost of production of the same. The low volumes sold are able to achieve the desired targets though the costs are high. The beds, on the other hand do not make large sums of profits though their high production rates enable their sales to meet their targets.
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