Activity based costing system:the case of Tetra Pak Co - Essay Example

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This report aims to introduce a new costing system and analyze it in the light of two of the company’s products. The report aims at introducing Activity Based costing system and defines its relative merits and demerits…
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Activity based costing system:the case of Tetra Pak Co
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"Activity based costing system:the case of Tetra Pak Co"

Download file to see previous pages This report aims to introduce a new costing system and analyze it in the light of two of the company’s products. The report aims at introducing Activity Based costing system and defines its relative merits and demerits.This report aims to introduce a new costing system and analyze it in the light of two of the company’s products. The report aims at introducing Activity Based costing system and defines its relative merits and demerits. The stages involved in the calculation of profits and costs are implemented on two products of Tetra Pak as an example. The report clearly illustrates how this new costing system will affect the decisions of the management regarding continuity of producing some products and decisions based on the profitability of the products it produces.Tetra Pak is one of the world's leading food processing and packaging solutions company. What makes Tetra Pak one of the leading companies is supported & enforced by many theories and systems but one of them is usage of Activity Based Costing System. Activity Based Costing brings a lot of advantages to company for example it provides an accurate costing system which in return helps in identifying real profitable and loss making divisions or products which after then would be given respective response that is improving the decision making process. Activity Based Costing which is also known as ABC costing system is the process of apportioning and allocating indirect costs to the products according to the level of activities being consumed. It is contrary to the traditional costing system where the unit cost is apportioned on the basis of volume. The assumption underlying the traditional costing system was that overhead expenditure is related to direct labor hours or machine hours in production departments. However, this is impracticable for vast number of companies in this modern age where the number of activities is high. Activity based costing provides more fair allocation of cost where numerous activities are involved in the production process, which helps in improving decision making process (Diamond 2006). The Case of Tetra Pak Company Tetra Pak is a huge company having so many products but for now let’s take two products that is packets of milk and juice beverages represented by M1 and J2. Both M1 and J2 are manufactured in batches. The batches differ more or less in that different designs and packaging of M1 and J2. 40000 and 20000 packages are made and sold at $1/packet in the year of 2011 for M1 and J2 respectively. The cost to make total packaging of 60000 comprises direct cost of $20,000 ($0.3/packaging) and overheads of $20,000. Overheads are to apportioned and allocated according to the steps of Activity Based Costing System: STEP 1: Identify the activities which give rise to the overheads. There are two activities that is machine set – ups and order dispatching. Totally 25 machine set ups and 60 dispatch orders are made in year 2011. STEP 2: Determine Cost Driver Cost Driver means the activity which drives the cost or in simple words would increase cost if one more activity is done like here is number of machine set – ...Download file to see next pagesRead More
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