Problem Statement

·      To analyse the product costing system and its effectiveness

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Quantitative Analysis

·      From the Exhibit 1 we can see that overhead cost of indirect labour and computer has been divided into two activities performed. This gives a more clear division cost then bundling these items in one category. In the allocation of cost fringe benefits has not been included, 40% premium was included on labour cost which indirectly reduced many of cost items and would have given a better understanding of cost drivers to the company

·      Exhibit 2 provides the information regarding cost per unit for various cost drivers.

·      From Exhibit 3 we can get the information of unit product cost used by ABC costing for every product category. This method is very effective as it charges actual indirect cost which is more effective.

·      In the Exhibit 4 we have made a new income statement based on new ABC overhead allocation. Contradicting to the earlier income statement which was made by Ms. Dempsey’s where purple and RED pens were actually did not generate any operating income and was operating loss 

·      In the Exhibit 5 revenue from each product is shown. PURPLE and RED consume the most amount of resources to produce but have the lowest revenue share in the overall share. The total revenue from both of them is only 10%

 

Qualitative Analysis

·      The product development decision made by the company are based on not so accurate information

·      Price of the pen are based on the fixed premium which was driven by the market, increasing the price of PURPLE and RED pens was not a feasible option,

·      The overall revenue was 150k which makes it impossible to have a sales manager, a controller, a manufacturing manager, manufacturing and maintenance staff on the payroll.

·      If the goal of an organisation is to maximise its profit then focusing on price is not a good effective sales strategy.

40% of indirect labour accounted to physical changeovers, Diversification of colours would be a costly option when the volumes are low

 

Recommendation

·      To assess the profitability of more products effectively, they should adopt ABC costing.

·      They should discontinue the orders for RED and PURPLE pens and once all the orders are complete, than they should stop the production for the same

·      They should increase the production of BLACK and BLUE pen as this would help in to reduce the change overs and would reduce the over head cost related to it