Quantitative Analysis for Managers - Essay Example

This essay describes an allocation of manufacturing overheads and explaines it using an examples. This essay responses to the request for the analyses of the allocation of manufacturing overheads related to two our products. A comprehensive report detailing the allocation basis and possibilities of our two products Rona Loa coffee and Colombian coffee along with their related implications and recommendations are provided for your study. Using activity based costing as the basis for assigning manufacturing overhead cost to products, the researcher established the total amount of manufacturing overhead cost assigned to the Rona Loa coffee and to the Colombian coffee for the year amounts to £32,900 AND £7,300 respectively.

The amount of manufacturing overhead cost per kilo of the Rona Loa coffee and the Colombian coffee amounts to £0.33 £3.65 respectively. The unit product cost of one kilo of the Rona Loa coffee and one kilo of the Colombian coffee amounts to £4.83 £7.15 respectively. The researcher also calculated costing as the basis for assigning manufacturing overhead cost to products, the total amount of manufacturing overhead cost assigned to the Rona Loa coffee and to the Colombian coffee for the year amounts to £32,900 AND £7,300 respectively.

For detailed working regarding the calculation of these amounts please refer Appendix A and B. It also provides the reader with the detailed statistics tables and results.. Traditional costing systems therefore can result in significant under-costing and over-costing. However, traditional costing systems are simpler and easier to implement than ABC systems. The use of such a rate enables us to determine the approximate total cost of each job when completed. In recent years increased automation in manufacturing operations has resulted in a trend towards machine hours as the activity base in the calculation.

It is believed fluctuations in product costs serve no useful purpose. To avoid such fluctuations, actual overhead rates could be computed on an annual or less-frequent basis. However, if the overhead rate is computed annually based on the actual costs and activity for the year, the manufacturing overhead assigned to any particular job would not be known until the end of the year. Simplistic overhead allocations using a declining labour base cannot be justified, particularly when information processing cost are no longer a barrier to introducing more sophisticated cost systems (Drury 2004).

ABC provides a way to allocate costs more accurately when overhead costs are not incurred at the same rate as direct labor hours. Using ABC means that all the individual activities that are part of a process can be accurately costed. For example in case of our entity it will be possible to accurately determine the cost of each activity involved in processing a coffee from input to final packaging. In this way it will be easy to identify the most and least expensive parts of the process. Process improvement activity could then focus on the most expensive parts of the process.

A model could then be constructed showing a comparison between the existing process costs and the redesigned process and its associated costs.