Financial Analysis



Financial Analysis: Task # 4

Recommendation to Competition Bikes - Activity Based Costing

Activity Based Costing allocates the manufacturing overhead to the products in much proficient way compared to the traditional costing method. This method particularly distributes the right weight-age or percentage to the products. Activity costing is much rational method for monitoring and allocating the costs to product compared to the traditional costing. The overhead cost in case of tradition costing is allocated entirely on machine hour basis. With ABC, it recognizes various activities for cost, considering the recourses the company might consume. After that, ABC computes those activities that have produced the product. This is important as certain products need few activities while, some products needs various activities.

As we know that the major difference between the Activities Based Costing and Traditional Costing is the allocation of overheads which makes the entire costing of the product in line with the total production cost (Cokins, 2011).

Looking at the case of Competition Bikes, Inc which has been using Traditional costing, the total cost of Titanium and Carbon-Lite line units was$239,020 and $239,280 respectively, while with traditional costing the total unit for these two items were $188,415 and $282,985 respectively. Comparing the Unit cost consumption, Titanium traditional units cost is $713 while through ABC it is $656, whereas, Carbon-Lite line is concern, Traditional units are $1359 while through ABC it is $1,460 to produce a product. Hence, ABC has accurately allocated the product cost for both the items; Titanium per unit cost has been reduced by $57, while Carbon-Lite line per unit cost has been increased by $101. To sum up, the recommendation for replacing the traditional costing method of for Competition Bikes with the ABC is due to the utilization of the percentage of the total production while ABC consider the accurate activt9ies requires for particular products.

The company product line composed of two items that is Titanium line with 64% or 900 of the total product sales while Carbon-Lite line is 36% or 500 of the total product sales. The percentage of the manufacturing overhead of titanium line is 50.7% while Carbon-Lite line is 49.3%. From traditional costing, Titanium is 48.5% while Carbon-Lite line is 51.4% of the total cost of production. Considering the ABC method, 44.7% is of Titanium while 55.3% is of Carbon-Lite line. Hence, from this it is clear that the ABC method is much defined. Carbon-Lite line is 36% of the total sales but at the same time it is 55% of the total expenses.

Chang in costing method provide Competition Bikes to consider the precise activities for production costs. Titanium line is using only $2,104 while Carbon-Lite line is using $116,896 for quality control. As far as, engineering services is concern, Competition Bikes is spending only $12,500 for Titanium while $62,500 for Carbon-Lite line. In order to obtain accurate breakeven point and accurate price of the particular product, correct production cost of Competition Bikes is important (Cokins, 2011).

Cost-Volume-Profit

Breakeven Point for Competition Bikes ...