JET2 Financial Analysis Task 4
Jet2 Task 4
Competition Bikes management decide to retool and now manufacturing both Titanium and CarbonLite Frames bikes. Competition Bikes was using the Traditional based Costing (TBC) method, however the Activity Based Costing (ABC) may give more insight to management and helpful in analyzing the per unit costing of the different types of frames and pinpoint the area of improvement. Also the management wants to know the Breakeven point caused by the potential increase of fixed cost by $5,000 and increase in direct cost by 10%.
A1: Costing Method
Traditional Based Costing Method (TBC)- The allocation of manufacturing overhead (indirect manufacturing costs) to products on the basis of a volume metric such as direct labor hours or production machine hours. As manufacturing becomes more sophisticated the manufacturing overhead costs usually increase while the direct labor hours or production machine hours decrease. Hence, the direct labor or machine hours are unlikely to be the root cause of the manufacturing overhead. (Accounting Coach 2014)
The basis of traditional costing system is to calculate the overhead rate and apply that predetermined overhead rate to various products. Traditional costing system is more desirable when the indirect cost is more and the direct cost is less. Traditional costing systems are simpler and easier to implement than ABC systems. However, traditional costing systems are not as accurate as ABC systems. Traditional costing systems can also result in significant under-costing and over-costing.
The main steps of the Traditional costing process are-
1. Calculate the total indirect cost and determine a indirect cost for the appropriate period.
2. Choose a cost driver like labor hours, machine hours used for the purpose of allocation
3. Determine the total units of cost driver like total machine hours.
4. Calculate the overhead rate per unit of driver eg $xx per machine hour
5. Apply the calculated overhead rate to the products.
Competition Bikes management decide to retool and now manufacturing both Titanium and CarbonLite Frames bikes. Competition Bikes was using the Traditional based Costing (TBC) method, however the Activity Based Costing (ABC) may give more insight to management and helpful in analyzing the per unit costing of the different types of frames and pinpoint the area of improvement. Also the management wants to know the Breakeven point caused by the potential increase of fixed cost by $5,000 and increase in direct cost by 10%.
A1: Costing Method
Traditional Based Costing Method (TBC)- The allocation of manufacturing overhead (indirect manufacturing costs) to products on the basis of a volume metric such as direct labor hours or production machine hours. As manufacturing becomes more sophisticated the manufacturing overhead costs usually increase while the direct labor hours or production machine hours decrease. Hence, the direct labor or machine hours are unlikely to be the root cause of the manufacturing overhead. (Accounting Coach 2014)
The basis of traditional costing system is to calculate the overhead rate and apply that predetermined overhead rate to various products. Traditional costing system is more desirable when the indirect cost is more and the direct cost is less. Traditional costing systems are simpler and easier to implement than ABC systems. However, traditional costing systems are not as accurate as ABC systems. Traditional costing systems can also result in significant under-costing and over-costing.
The main steps of the Traditional costing process are-
1. Calculate the total indirect cost and determine a indirect cost for the appropriate period.
2. Choose a cost driver like labor hours, machine hours used for the purpose of allocation
3. Determine the total units of cost driver like total machine hours.
4. Calculate the overhead rate per unit of driver eg $xx per machine hour
5. Apply the calculated overhead rate to the products.
References: (Accounting Coach 2014) – Definitions Accounting coach retrieved on September 19, 2014 from http://www.accountingcoach.com/terms/T/traditional-costing Investopedia 2014 – Definition retrieved on September 19, 2014 from http://www.investopedia.com/terms/c/cost-volume-profit-analysis.asp Strategiccfo.com 2014- Activity based costing and Traditional costing steps retrieved on September 19, 2014 from http://strategiccfo.com/wikicfo/activity-based-costing-abc-vs-traditional-costing/