Managerial Accounting and Cost Control

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MANAGERIAL ACCOUNTING AND COST CONTROL

Assignment-1

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Written analysis for Rubrics Corporation                         and Midwest Office Products

Submitted to:

Prof. Kannadas S

Submitted on: 31-10-2018

Submitted by:

Darshan M Urs

PGDM No. - 18181

Section - C

Rubrics Corporation

1. Assuming ABC allocated overhead more accurately, which products were incorrectly priced using the traditional costing method? What difficulties might result from incorrectly budgeted products?

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From the above table we can get to know that:

• The product widget’s per unit cost according to ABC costing method is $590 but the rubrics corporation was selling the widget for $ 400. Similarly, the product smadget’s per unit cost according to ABC costing method is $1250 but they were selling it for $850. So, both widget and smadgets were sold at a loss of $190 and $400. As there was no proper allocation of budget for the products which made the products under-priced and the company may have huge loss in the future.
• The Product smidget’s per unit cost according to ABC costing method is $760 but the company was selling the product for $1350 which in turn the company was making a profit of $590 which is beneficial for the company so, the company should sell the product with same price or with little discounts. Also, because of high prices the customers may buy the same product from different company which may lead the company to loss in the future.

1. What actions might be explored to deal with the mispriced products?

• Adopting ABC costing method will help in proper budget allocation for each product.
• Giving offers during certain events on over-priced products(smidgets) results in the high sales which in turn will earn profit for the company.
• Reducing the production process will help the company to plan and allocate the resources in a more effective and efficient way for the Under-priced products (widget and smadget).
• Stopping the under-priced product for a specific period for the additional development and re-launching it with different price.

1. Compare assigned costs per product under both methods. Why had activity-based costing changed the total costs assigned to each product?

• The traditional costing method was improper as the overhead rate was calculated based on historical overhead expenses on the manufacturing of units.
• The traditional costing method had only one overhead that is on direct labour which is 200% which resulted in mispricing of each product.

Whereas,

• ABC costing method uses proper allocation of resources like raw material, labour and price on which the overhead cost will be calculated.
• This type of overhead calculations helps in knowing the accurate total cost and differences in per unit overhead expenses.

1. What are the two circumstances where traditional costing and ABC method yield the similar or equal overhead costs?

• When there is proper allocation of each resources in the manufacturing process with accurate overhead cost.
• When the overhead rate on direct cost of the manufacturing companies is proper which would give equal overhead cost.

Midwest Office Products

1. Using the cost driver information compare the cost and profitability with the existing costing system?

• In the existing system all the order which involved was costing $500 to acquire the products from the manufacturers.
• There was a mark-up $100 which is 22% on the cost of $500 when the orders from the manufacturers was sold to the customers.
• An additional mark-up of $32.5(4.5% on current mark-up) when the customers required for direct delivery.

1. Explain the difference in profitability of the five orders calculated by ABC cost system?

• The ABC cost concept helped the Midwest company to find the profitability on each order.
• ABC concept helped in calculating proper delivery rate for each item, which would help in knowing the exact cost.
• It also helped in calculating proper interest for the credit sales, which helped the company to know about proper profits.

1. Based on your analysis what action should John Malone should take to improve the profitability?

• John Malone should first implement the ABC costing method to know the accurate profitability of the company.
• He should then think about the improvement of orders like Oder no.2 which had a huge loss of 39.94% which is more than the profit which the company was gaining.
• The introduction of delivery system may have reduced the other costs, but he should think about the delivery which would give less profit in this system.
• John should also come up with different prices for freight and truck delivery system, where previously both had similar cost.

1. What issues, barriers arise in the organization for building ABC model?

• Identifying the activities and processes in the ABC model is very difficult because it takes lot of effort to check each individual resource in the process.
• Implementation of this model requires a separate member to do all the calculation which would cost more when compared to traditional method.
• The top-level management resisted from implementing the ABC model as they had lack of interest.