New Unit Product of PCB Circuit Using ABC Costing System - Essay Example

TO: FROM: DATE: SUBJECT: CASE ANALYSIS REPORT ON PRINTED CIRCIT BOARDS (PCB) Table of Contents Abstract 3 1.0 Introduction 3 1.1 Scope 4 2.0. Current unit product cost for PCB 4 4.0 Reasons why advanced circuitry is doing badly in the market 6 4.1 Outdated 6 4.2 Lack of extensive technological growth 6 4.3 Intense competition 6 5.0 Activity based costing system over the current based volume system. 7 6.0 ABC limitations 8 7.0 Recommendations 8 8.0 Conclusion 9 Appendix A 9 Abstract The main aim of this report is to analyze the operational cost of the three circuit board produced by the company. This report entails gathering all the information required by the manager of the printed circuits boards produced, their costing from the income statement produced from last month’s sale. Their computed cost using the current volume base costing system and their new product costs using the new activity based costing system. The volume based uses three overheads the machine related overhead, the labour related overhead and variable overhead. While the abc integrates the cost of all activities into individual product costs rather than overheads. Based on the February data produced Antony from the assembly department by the report also shows the comparison between the two costing and show which is the best and yields accurate information for cost management and price decision. 1.0 Introduction This report is presented to Mr. frank Chan the manager pcb department of lifesung corporation, explaining on the product cost of our circuit boards ,the implementation of ABC Activity based c costing rather than the volume based costing on our products. The report also entails the cost analysis of the three circuit boards the advanced circuitry, boosted circuitry and customized circuitry. Their current unit product cost using the traditional costing system and the new unit product cost using ABC costing. The report also states clear assumption why the advanced circuitry is doing badly in the market unlike the other two circuit boards. 1.1 Scope The main area of this report is PCB department of electronic divisions which produces circuit boards mainly for alarm uses .the PCB department produces three types of circuit boards :the advanced circuitry ( AC)board ,which has been the mainstay of the department and very competitive, the boosted circuitry a new board introduced in 2012 its medium based circuit board and has slightly more advance feature than AC the last is the customized circuitry that is most advantaged to the rest because it allows full configuration of the alarm system by customers. 2.0. Current unit product cost for PCB The requirement for the three circuit board is as listed with the current volume based costing system,thus the machine related overhead, labour related overhead and variable overhead. Advanced boostedcustomized Direct materials (grams) 50 75 100 Direct labour( hours) 2 1 0.5 Machine time 1 2 4 Labour related overhead applied $435000 Machine related overhead $560000 Variable overhead applied $180000 Average cost of direct material $600 per kg Wage rate $80per hour With the income statement given to me by the manager I noted that it only referred to the three main circuit boards that is the AC,BC,and CC.and their February sells of their units are as shown below: AC BC CC Total units 3000 1000 500 Selling prices $ 432 450 620 Their current unit product cost as computed using the volume based costing system are as follow, calculation is show in the appendix. Advanced Boosted Customized Labour related cost $ 248,571 $ 124,286 $621,000 Material cost $ 40,000 $60,000 $80,000 Machine time cost $ 80,000 $ 160,000 $320,000 Current unit product cost $122.86 $ 344.29 $924.29 4.0 Reasons why advanced circuitry is doing badly in the market For over the period AC has been the mainstream of the department, the market for advanced circuitry is very competitive and price sentitive.however the sales people noted that advanced circuitry has not been selling as it should, their prices are high contrary to boosted and customized whose sales are very high. I found out that ac is affected by various issues sidelining its markets potentials: 4.1 Outdated Advanced circuiting technology is outdated, its technology is not up to date therefore its been greatly affected by the other circuit boards like customized circuit board which is specially customized for the customers’ needs. This leads to low revenue production in the circuit market because of stiff competitors. 4.2 Lack of extensive technological growth Unlike boosted and customized circuitry advanced circuitry lacks the basic technological growth based on adoption indicators, end-user technology demand .thus making it the least preferred since the consumers want a product that suits their need and is capable of growing in terms of technology. 4.3 Intense competition I noted that most of our competitors are selling advance circuitry thus ac market is higher than its demands. Therefore stiff competition from our rivalry companies is the reason our sales are going down. Ac also faces competition from the other two circuitry boards since they are more advantageous than advanced circuitry.BC has more advanced features than AC and is used in alarm systems which are partly modified to suit the customer preferences, unlike AC, customized circuitry incorporates the latest technology and is a full configuration of the alarm system. 5.0 Activity based costing system over the current based volume system. ABC provides a more accurate measure of cost according to my findings it traces indirect costs more closely with respect to the activitiestypes consumed.With extensiveknowledge of what activities are consumed by individualproducts and the resource cost of thevery activities involved, one can compute for a diversity cost of products.The traditional accounting method however assigns overhead costs of products by using volume-related bases such as labor hours, direct labor costs, direct material costs, and machine hours. The main advantage of ABC over the volume costing system is that it provides more accurate cost products computation it also aligns the generally acceptable accounting principles, especially in situations in which product diversity is important and in which the indirect costs are not directly traceable to the products, and represent an important proportion of the total costs. ABC also allows a deeper level analysis of product costs by explaining the relationship between products and activities. The improved accuracy of perception of the cost structure of products and the continuous process improvements in the various departments of an enterprise provide the substance of activity-based management. Traditionalcosting ishowever an outdated costing system in most companies for instance LifeSung and PCB uses machines and computers for our production. These machines makethe system outdated because it often uses direct labor hours to measure cost. This cost is appropriately not assigned because direct labor hours are not the best cost driver to use. Another disadvantage of using the traditional costing system solely is it leads to bad management decisions because it excludes othernon-manufacturing costs like packaging, shipping number of orders. 6.0 ABC limitations Implementation of ABC system requires Substantive resources thus is of a great disadvantage with companies with limited funds. It’s also prone to easily misinterpretation by some users who expects it to make a significant contribution to the market industry. Since it also involves some non-manufacturing variables it may lead to misunderstanding and misinterpretation of the industry cost products. 7.0 Recommendations Adapt ABC over volume based system. Increase production of BC and CC in the market The company should focus more on boosted and customized circuitry sale than the advanced circuitry. 8.0 Conclusion After analyzing the cost of each circuit with accurate and relevant information, I found out that BC and CC yields the greatest sale income and product costs over 50%. This is because of their advanced technology over AC .Therefore, through ABC implementation we can obtain clear and reliable information about the proportions of their activities costs in every single product. Other lifesung managers can also use the information derived from implementing ABC for decisions on pricing, product analysis on its products. Our comparison of ABC with the traditional costing method shows that ABC method is practical and appropriate for application to the printed circuit boards’ management. Appendix A Cost in direct material AC, BC and CC Total grams 50+75+100=225grms Convert to kgs 0.225kgs 0.23kgs Total direct labour hours 2+1+0.5 = 3.5hrs Total Machine hours 1+2+4 7hrs AC cost in direct materials =0.05/0.0225*180,000 =40,000 AC direct labour=2/3.50*435000 =248,571.43 AC machine labour =1/7*560,000 =80,000 Total 368571.43 No of units 3000 Current unit cost of AC 368571.43/3000 = $122.86 BOOSTED CIRCUITRY Direct material 0.075/0.225*180,000 =60,000 Direct labour 1/3.5*435000 =124285.71 Machine hours 2/7*560000 = 160000 Total =344285.71 No of units 1000 Current unit cost of BC 344285.71/1000 =$344.29 Customized circuitry Direct material 0.1/0.225*180000 =80,000 Direct labour 0.5/3.5*435000 =62142.86 Machine labour hours 4/7*560000 =320,000 Total =462142.86 No of units 500 Current unit cost of CC 462142.86/500 Read More