Cost Accounting and Management Decisions - Essay Example

Company Description Alcoa is an American manufacturing organisation which deals in producing primary aluminium and fabricated aluminium. Furthermore, the organisation is also known as one of the biggest drillers of bauxite and refiner of alumina in an international context. The primary products of Alcoa are divided into two major categories which are aluminium products and non-aluminium products. Aluminium products of Alcoa comprise alumina, primary metals, flat-rolled products and engineered products and solutions.

On the other hand, non-aluminium products of Alcoa include industrial fastenings, precision casting and aerospace products (Alcoa Inc, 2013). Impact of Changes in the Variable Cost / Fixed Cost Structure of Alcoa on Cost- Volume Profit Analysis Decisions by Managers Cost-Volume-Profit (CVP) analysis is often argued to assist in taking decisions about business operations for any manufacturing organisation. It is applied as a method of inspecting the link between fixed and variable expenses with respect to number of manufacturing units and related profits.

In order to use the CVP analysis, there is need for analysing the business operations obtaining an unambiguous understanding of fixed expenses incurred by the business in comparison to variable expenses. Therefore, any kind of changes in the fixed expense and variable expenses can impact on CVP analysis and product manufacturing decisions of a particular business like Alcoa. For instance, through CVP analysis, Alcoa can determine the cost of its products more accurately than the traditional method.

As a CVP analysis develops a clear understanding of the fixed and variable costs incurred by a manufacturing firm, accountants and managers are likely to gain better control on the total costs of any product comprising certain fixed and variable components. With a better control on the total cost, these components can be used in order to clarify variations in product price as well as variations in expenses. As the number of quantity produced increases, per unit variable and fixed expenses are quite likely to decrease to a certain extent.

Hence, per unit expenses will also reduce with respect to a decline in fixed and variable expenses rewarding the company with greater opportunity to serve its customers either with increased supply quantity or at a competitive price maintaining its profitability. Stating precisely, by understanding the fixed and variable expenses structure of Alcoa, the managers of the organisation can determine the level to which minimisation of prices of products would not compromise the profit gain per unit (Wiley, 2004).

Analysis of the Current Cost System of Alcoa There are two major types of costing system which can be used by an organisation namely traditional costing system and Activity Based Costing (ABC) system. In this context, it has been observed that Alcoa uses the ABC costing system in its business operations for determining the cost of products as well as for framing its budgeting strategies (Krishnan, 2006). ABC system divides every manufacturing activity explicitly and determines the portion of overhead expenses which are used for manufacturing one unit of a product.

Contextually, the ABC system makes possible for Alcoa to establish more comprehensive factory management structures. With an apparent view of cost of products grounded on ABC system, the managers of Alcoa are