Cost Ascertainment Is an Important Aspect of Business - Report Example

Table of Contents Introduction 2 Change in Costing Method 2 Break Even Analysis 5 Change in Break Even Points when cost increases 6 Conclusion 7 References 9 Introduction Cost ascertainment is an important aspect for business as the pricing decisions are based on it. The ascertainment of the cost helps to determine the resources which will be used and helps to develop strategies keeping the competitors in mind. Selection of correct costing techniques helps the business to ascertain the cost correctly and provides an opportunity through which business is able to maximize the effectiveness of decision making. This report looks to evaluate the manner in which using traditional and activity based costing has an impact on the business performance. This will help to determine whether Competition Bikes should look at adopting activity based costing techniques or not. The report then evaluates the break even analysis through the process of traditional costing where the break even analysis is identified for both the products. Finally the report concentrates on the manner in which changes in cost have an impact on the break even analysis and determines the manner in which business needs to develop their strategies. The report thereby will clearly highlight the policies with regard to costing and highlight the different areas which need to be focussed by Competition Bikes Inc. Change in Costing Method Competition Bikes Inc can look towards using the activity based costing method as it will help to ensure that better pricing can be developed for both the products. Using the activity costing method has helped Competition Bikes Inc to identify six cost centres through which cost are apportioned. The six cost centres which have been identified are factory setup, quality control, engineering services, product movements, utilities and depreciation. This has ensured that the costs are allocated for both the products based on the time for which a particular cost centre is used. This ensures that cost are correctly estimated and helps to ensure that the cost are identified based on different cost centres. It is seen that using the traditional and activity costing method the direct cost like direct materials, direct labour and are allocated directly. The direct material cost accounts to 272700 and direct labour amounts to 129600 in both the method. The direct cost associated with the product is thereby allocated directly. With regard to the indirect cost it is seen that manufacturing overhead is distributed based on different cost centres through the process of activity based costing. This shows a difference in the actual cost as traditional method amounts to 239020 for Titanium and 232380 for Carbonlite making the total indirect cost to be 471400. Using the activity cost method where cost are allocated based on different cost centres shows that the manufacturing overhead cost for Titanium is 188415 and Carbonlite is 282985. This makes the total cost for the product to differ as well as traditional costing method makes the total cost for Titanium to be 641320 and Carbonlite to be679380. The activity costing method makes the total cost for Titanium to be 590715 and Carbonlite to be 729985. This has resulted the per unit cost of Titanium to be 713 according to traditional method and 656 according to activity based costing. In a similar manner the per unit cost of Carbonlite to be 1359 according to traditional method and 1460 according to activity based costing. Using the activity costing method thereby helps to ensure that the costs are correctly estimated and will thereby ensure that the business is able to charge the correct price to the competitors. This will help Competition Bikes to ensure that they are able to charge the correct price and the pricing technique is appropriate. Further Competition Bikes Inc should look to adopt the process of activity based costing because of the following reasons Firstly, Competition Bikes will be able to allocate and identify the cost correctly as the process looks towards cause and effect linkage which will thereby help to ensure correct cost of the product (ABC, 2013). This will thereby ensure that the price that will be charged to the customers can be correctly estimated and will help the business to ensure better pricing techniques. Secondly, fixing selling price for the product becomes accurate as using the different cost drivers ensures better fixation of price (Rojas, 2013). This will thereby help Competition Bikes to understand the manner in which different products are contributing towards their profit and will multiply the overall effectiveness through which pricing decisions are made. Thirdly, it will help Competition Bikes to control the overhead cost through the process of fixed and variable costing process (ABC, 2013). This will help the business to control the cost and will provide the directives through which the business will be able to control cost and maximize their revenues. Fourthly, it will provide information to Competition Bikes regarding the actual profits which the different product line is providing and will thereby provide an opportunity through which business decisions regarding different product line can be taken (ABC, 2013). Fifthly, it will help to ensure that a process is developed through which better benchmarking will be developed and will help to provide a framework through which costing process will be better established (Rojas, 2013). This will thereby help to control cost and will maximize the opportunity through which business decisions will improve. Competition Bikes Inc thereby needs to look at ensuring that steps are taken through which the business is able to estimate the cost correctly. Using the process of activity based costing will help Competition Bikes as it will help them to estimate the different cost correctly and will thereby maximize the revenues and ensure that the costing method which is used by the business will maximize their effectiveness. This will facilitate the process of decision making and ensure better decisions are taken by the business. Break Even Analysis Breakeven analysis helps the business to identify the point at which the business will be able to cover its fixed cost. This point helps the business to take decisions through which long term strategies are made. Competition Bikes have also looked at ensuring that they are able to identify the breakeven point so that business decisions are taken accordingly. The process of breakeven point can also be analyzed from the perspective of Cost Volume Profit Analysis. Cost Volume Profit Analysis will highlight the breakeven point for cost and volume and will determine the manner in which zero profits can be ensured within the organization so that the business is able to cover its fixed cost. The Cost Volume Profit Analysis breaks down the total cost into fixed and variable cost where variable cost remains the same per unit, the total fixed cost remains the same and the selling price is constant. This is aided by the fact that sales mix are constant and equal units are sold which are produced. This thereby ensures that Total Cost = Total Fixed Cost + (Variable Cost per unit X No of units produced) Total Revenues = No of units sold X Selling price of each unit The point where the business is able to cover its fixed cost will highlight the point at which the business is able to determine the breakeven point. Looking at product Titanium it is seen that the sales price is 900 per unit whereas the variable cost per unit is 679 ensuring that the contribution margin per unit is 221. The sales mix in units is 9 making the sales mix to be a total of 1989 (221 * 9). Further, the business has a fixed cost of 400000 for both the products. The cost volume profit analysis shows that total fixed cost is 400000 whereas the contribution margin is 221. The break even unit for product sales mix is 2201. On estimation its is seen that the business will require to sale 1415 model of Titanium so that the business is able to cover its fixed cost and will be able to reach the breakeven point. This is the minimum amount of product which Competition Bikes Inc has to sell so that they are able to cover the fixed cost associated with the production of Titanium. This thereby highlights that breakeven dollar by sales unit is 900 whereas the break even quantity is 1809.95 Looking at product Carbonlite it is seen that the sales price is 1495 per unit whereas the variable cost per unit is 1384 ensuring that the contribution margin per unit is 111. The sales mix in units is 5 making the sales mix to be a total of 555. Further, the business has a fixed cost of 400000 for both the products and will be require to sell 679 units so that the fixed cost is covered. The break even unit for product sales mix is 2201. Cost Volume Profit Analysis thereby provides a computation of the targeted sales in units and dollars for a computed fixed cost and variable cost so that no losses are incurred. This thereby helps to frame a chart through which business decisions will improve and the short term decision making will improve. It helps to understand the mechanism where total cost consist of variable and fixed cost and analysis the breakeven point through it. Breakeven point thereby helps Competition Bikes Inc to ensure that they are able to identify the minimum production and selling price which will help the business to cover the cost associated with the product. This will ensure that the decisions which the business takes will improve and will ensure that the chances of making a loss can be reduced. Change in Break Even Points when cost increases Competition Bikes has further looked at determining the manner in which breakeven point for Titanium and Carbonlite changes when the cost of production. It is seen that the variable cost increases by 10% which will have an impact on the prices as the cost increases and to reach the breakeven point more and more units will have to be sold. This is matched by the fact that fixed cost is also increasing and has grown by $50000 which will impact the break even units and dollars as to ensure a breakeven point the business will have to sell products which covers its fixed cost. The process of breakeven point can also be analyzed from the perspective of Cost Volume Profit Analysis. Cost Volume Profit Analysis will highlight the breakeven point for cost and volume and will determine the manner in which zero profits can be ensured within the organization. The Cost Volume Profit Analysis breaks down the total cost into fixed and variable cost where variable cost remains the same per unit, the total fixed cost remains the same and the selling price is constant. This is aided by the fact that sales mix are constant and equal units are sold which are produced. Since, there has been a change in fixed cost and variable cost so the total cost per unit will change which will be seen through the Cost Volume Profit Analysis. This will also result in a change in selling price thereby making the overall sales prices in dollars and units to change as shown below. This thereby ensures that Total Cost = Total Fixed Cost + (Variable Cost per unit X No of units produced) Total Revenues = No of units sold X Selling price of each unit The point where the total revenues equal total cost is the breakeven point which is provided through the cost volume analysis. Looking at product Titanium it is seen that the sales price is 900 per unit whereas the variable cost per unit is 709 as the price increases by 10% ensuring that the contribution margin per unit is 191. The sales mix in units is 7 making the sales mix to be a total of 1719 (191 * 7). Further, the business has a fixed cost of 450000 and on estimation its is seen that the business will require to sale 2089 model of Titanium at a price of 900 so that the total fixed cost associated with the production of Titanium can be covered. The break even product sale mix is 3249. This is the minimum amount of product which Competition Bikes Inc has to sell so that they are able to cover the fixed cost associated with the production of Titanium. Looking at product Carbonlite it is seen that the sales price is 1495 per unit whereas the variable cost per unit is 1451 as the cost increases by 10% ensuring that the contribution margin per unit is 44. The sales mix in units is 5 making the sales mix to be a total of 220 (44 * 5). Further, the business has a fixed cost of 450000 and on estimation its is seen that the business will require to sale 1160 model of Carbonlite at a price of 1495 so that the total fixed cost associated with the production of Carbonlite can be covered. The break even product sale mix is 3249. This is the minimum amount of product which Competition Bikes Inc has to sell so that they are able to cover the fixed cost associated with the production of Carbonlite. Breakeven point has been identified both the units sold and the revenues after considering all the cost and maximum revenues which the goods can fetch with the price change. The key components which have been considered is the cost structure, input cost, selling price, demand for products, competition and other economic and environmental factors. This has thereby helped to frame a model which has helped to identify the minimum products which need to be sold at the calculated price so that all the cost are covered. This helps to understand the minimum units which need to be sold so that the business is able to ensure that they don’t lose money and incur losses. Competition Bikes Inc thereby witnesses changes which will have to be accounted for when the fixed cost increases by 50000 and the direct cost of material increases by 10%. This will help the business to ensure strategies through which the business will be able to ensure that they don’t incur losses. Conclusion The paper thereby highlights the different advantages which Competition Bikes will be able to achieve when they adopt the activity based costing method and moves away from the traditional method of cost estimation. The paper also highlight the manner in which the business will be able to bring changes in the process price is estimated and will be able to find out the minimum production level at a designated price so that the breakeven is achieved. This will help Competition Bikes to be able to develop their long term strategies and will be able to develop long term business strategies. References ABC. (2013). Activity Based Costing. Retrieved on January 25, 2013 from http://www.valuecreationgroup.com/activity_based_costing_advantage_disadvantage.htm Rojas, E. (2013). The disadvantages and advantages of activity based costing. Retrieved on January 25, 2013 from http://smallbusiness.chron.com/disadvantages-advantages-activitybased-costing-45096.html Read More