Strategic Accounting Assignment Example | Topics and Well Written Essays - 2500 words

Strategic Accounting - Assignment Example Widgets Gadgets Helios Total MH = MH per unit* number of units 100,000 200,000 120,000 Total DLH = DLH per unit* number of units 350,000 120,000 60,000 Number of set-ups 120 200 200 Customer orders 8,000 8,000 16,000 Supplier orders 3,000 4,000 4,200 Assigning overhead to the product lines: Activity center Widgets Gadgets Helios Total Machining Services 100,000 MH x 0.85 per MH 85,000 200,000 MH x 0.85 per MH 170,000 120,000 MH x 0.85 per MH 102,000 357,000 Assembly Services 350,000 DLH x 0.60 per DLH 210,000 120,000 DLH x 0.60 per DLH 72,000 60,000 DLH x 0.60 per DLH 36,000 318,000 Set-Up Costs 120 set-ups x 50 per set-up 6,000 200 set-ups x 50 per set-up 10,000 200 set-ups x 50 per set-up 10,000 26,000 Order Processing 8,000 orders x 4.875 per order 39,000 8,000 orders x 4.875 per order 39,000 16,000 orders x 4.875 per order 78,000 156,000 Purchasing 3,000 orders x 7.50 per order 22,500 4,000 orders x 7.50 per order 30,000 4,200 orders x 7.50 per order 31,500 84,000 Total Costs Assigned 362,500 321,000 257,500 941,000 Profitability by product using Activity-based cost system is the following: Widgets Gadgets Helios Total Units 50,000 40,000 30,000 120,000 Selling price 45 /unit 95 /unit 73 /unit Sales Revenues 2,250,000 3,800,000 2,190,000 8,240,000 Direct labour and material costs 1,600,000 3,360,000 1,950,000 6,910,000 Overhead 362,500 321,000 257,500 941,000 GROSS MARGIN 287,500 119,000 -17,500 389,000 GM, % 12.8% 3.1% -0.8% Under Activity-based costing, Widgets and Gadgets exhibit positive GM rates of 12.8% and 3.1% correspondingly, while the new product Helios has a negative GM rate of -0.8% and decreases the division's overall profitability. Noteworthy, Widgets... Application of the traditional methods of overhead allocation to products based on any single activity measure can produce distorted product costs. In brief, the traditional volume-based approach led to an overestimation of the unit costs for Widgets and Gadgets products for 2.30% and .49% correspondingly and underestimation - for Helios by 2.99%. Although the difference percentage is comparatively not high - sometimes the distortion can reach the level of 300% (Emblemsvag, 2003, p.124) - it leads to false conclusions about the performance on the product level. It is obvious that the Helios product should be reassessed and the decision regarding its future should be taken by the management as the product currently makes a negative contribution to the overall result. Yoram Eden and Boaz Ronen (2002) note that "In general, it may be claimed that the greater the complexity of manufacturing a given product the greater the degree to which traditional costing underestimates the cost to be attributed to that product" (p.55). Bingley Products division's case proves this general rule. Helios requires high number of set-ups, as well as quantity of customer and supplier order processing activity. Traditional costing widely used because of its simplified nature and m