Task 4- Managing Cost

Task 4- Managing Cost

Articulation of Response

Competition Inc. deals in manufacturing bicycles for professional riders. More than 60 percent of professional riders are able to win the races using bicycles of Competition Inc. The firm is using these success rates in their advertising in order to increase their sales and have competitive advantage over their rivals. The firm is able to run its operations successfully by using the budgeting tools and the organization uses methods that should provide high quality products to its customers. The company in recent times has been facing lot of internal control problems because the company has not conducted an annual audit even after listing on the Philadelphia Stock Exchange.

Competition Inc. makes bicycles from two materials that are carbon lite and Titanium. The company has conducted a cost analysis of carbon lite and Titanium bicycles in order to find out that either the variable costing or activity costing method is suitable for the firm or they should adopt a new method that is activity based costing. The following report will help the management and the decision makers to take decision to use the activity based costing method and find out the impact of breakeven point on the sales and revenue determination of the firm.

A1. Costing Method

There are two costing methods that are used by organizations: traditional costing method and activity based costing method.

The quantitative data shows that per unit cost of titanium is $ 713 and carbon lite is $ 1359 according to the traditional method used. On the contrary, per unit cost of titanium is $ 656 and for carbon lite is $ 1460.The per unit cost stated above shows that carbon lite is expensive to manufacture if the activity based costing method is used. It is the responsibility of the management that they should conduct an investigation related to the overhead cost that is allocated in the carbon lite model so that per unit cost can reduce. It was examined that overhead cost as it appears in setting up a factory is $ 30,642, the cost incurred for quality control is $ 116,896 and the engineering service cost is $ 62,500, which consumes a significant portion. Therefore, in order to reduce per unit cost of carbon lite management the above stated cost should be reduced.

The quantitative data shows difference between the cost calculated by traditional and activity based costing method. The direct material and direct labor cost calculated under both the methods is similar whereas the differences arises while calculating the activity based costing for both Titanium and Carbon DL. The manufacturing overhead cost is much more under the activity based costing method; however it is low under the traditional costing method.

Activity based costing involves all the cost associated with different activities performed by an organization while developing a product. On the other hand traditional costing method involves cost of only producing the products as a whole and does not take into consideration cost of every single activity ...