Managerial Vs. Financial Accounting Essay

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Allocations

What drives consumption of costs?

In Activity-Based Costing (ABC), consumption of costs is driven by a company's activities (Investopedia, LLC, n.d.), such as production, administration and sales (Cokins, 2010, p. 9). The company's product consumes activities, whether main or supporting activities, and those activities consume company resources (Cokins, 2010, pp. 9, 11). In that context, a cost driver is something that drives the cost of a company's activity (Investopedia, LLC, n.d.); it is a "factor which generates occurrence of resource (capacity) expenses" (Cokins, 2010, p. 8). For example, a manufacturing business may have an activity of running machinery, which will have cost drivers such as machinery operating hours, labor, maintenance and power consumption (Investopedia, LLC, n.d.). That same manufacturing company may also have the activity of release into production, which will have cost drivers such as the number of products (Cokins, 2010, p. 13). Cost drivers are chosen according to two major criteria: optional (chosen) and specifying (determined) (Cokins, 2010, p. 9); and they are chosen according to: the degree of complexity, diversity and variation a company's product; the accuracy of calculations, leading to a reasonable number of cost drivers; and the usefulness of information, which is detailed and accurate enough for rational cost drivers (Cokins, 2010, p. 10).

Cost drivers help the allocation process on three basic levels: allocating resources to activities, whether those activities are main activities or support activities, using resource drivers (Mursau, 2014); after reconcentrating support activities into main activities, costs of main activities are assigned and traced to cost objects by using activity drivers (MBAbullshitDotCom, 2010); and finally cost object drivers are assigned and traced to other cost objects and ultimately sum into final cost objects, such as consumers, using final cost object drivers (Cokins, 2010, p. 11).

Works Cited

Cokins, G. (2010). Cost drivers. Evolution and benefits. Theoretical and Applied Economics, XVII, 8(549), 7-16.

Investopedia, LLC. (n.d.). Activity cost drivers. Retrieved February 28, 2015 from www.investopedia.com Web site: http://www.investopedia.com/terms/a/activity-cost-driver.asp

MBAbullshitDotCom. (2010, July 28). Activity-based costing example in 6 easy steps - Managerial accounting with ABC costing. Retrieved February 28, 2015 from www.youtube.com Web site: https://www.youtube.com/watch?v=PcjxRe4EsuY

Mursau, A. (2014, January 4). Activity-based costing (cost hierarchy categories, cost allocation bases, ABC system setup, etc.). Retrieved February 28, 2015 from www.youtube.com Web site: https://www.youtube.com/watch?v=mRt5YMVGOxg

2. Case Assignment: Relevant Cost Case -- Behemoth Motors Corp.

Using the typical accounting steps to advise Wally Wizard:

a. Clearly define the decision to be made (MBAbullshitDotCom, 2010)

Should Behemoth Motors Corp. (BMC) manufacture its own 8,000 GPSNs per month or should it contract with Far East Enterprises, Ltd. (FEE) for the manufacture and delivery of 8,000 GPSNs? Immediately, the decision to be made cannot be clearly defined: the problem states that FEE promises to deliver 8,000 GPSNs on January 1, 2013 and wants a 2-year contract but the problem does not state that FEE promises to deliver the required 8,000 GPSNs every month during the contract period. If BMC is not guaranteed 8,000 GPSNs every month from FEE, then Wally Wizard should immediately know that the FEE contract is inadvisable.

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For purposes of running through all the steps of this case assignment, it will be assumed that Wally checked back with FEE and they guarantee delivery of 8,000 GPSNs every month for the contract period.

b. Identify all costs related to any of the options, including past, future and opportunity costs (MBAbullshitDotCom, 2010)

Option 1 -- BMC manufactures 8,000 GPSNs per month for 2 years

Cost per unit

Option 2 -- BMC contracts with FEE for 8,000 GPSNs per month for 2 years

Cost per unit

Direct Materials (purchased locally)

$165

Direct materials

0

Direct Labor (6 hours @ $28/hour

0

Penalty for layoffs

0

$66,000/year penalty for 4 years due to layoffs/unit/month

1.38

Factory floor space charges (16,000 sq. ft. @ $2.50/sq. ft. per month allocated over 8,000 units/month)

5

Factory floor space charges with no alternative use

5

Savings on rental space

0

Savings on rental space/month/unit

-0.63

Supervisory labor (monthly cost of $56,000 allocated over 8,000 units/month

7

Supervisory labor

0

General company overhead $640,000/month assigned to GPSN allocated over 8,000 units/month

80

General company overhead reallocated to other departments

80

Outsourced manufacturing cost/unit

0

Outsourced manufacturing cost/unit $Total Unit Cost

$425

Total Unit Cost

$485.75

In determining all costs: option 1 requires $165 in direct materials while option 2 requires $0; Option 1 requires $168/unit in labor costs while option 2 requires $0; option 1 requires no penalty payment while option 2 requires layoff penalty payments totaling $66,000/year for 4 years, totaling $264,000 allocated to the 2 years of the contract, totaling $11,000/month and divided by 8,000 monthly units, for a cost of $1.38/unit; factory space has no alternative use and the costs are based on overall use, so there will be no difference between the $5 cost under options 1 & 2; option 1 results in no savings of rental space while option 2 creates a savings of $0.68/unit in savings on rental space; option 1 costs supervisory labor of $7/unit/month while option 2 costs $0; general supervisory labor costs $640,000 whether under option 1 or 2; option 1 has no costs for outsourced manufacturing while option 2 costs $400/unit. Including all the above costs, option 1 costs $425/unit while option 2 costs $485.75 per unit.

c. Determine which costs do not differ between options and eliminate them (MBAbullshitDotCom, 2010)

General company overhead sis $640,000 whether Wally uses option 1, in which BMC manufactures its own GPSNs, or option 2, in which Wally contracts with FEE for manufacture of the GPSN units. Consequently, that cost should be eliminated from the decision. Eliminating the cost of general company overhead, option 1 costs $345/unit while option 2 costs $405.75/unit.

d. Analyze the remaining costs, as they are relevant to the decision (MBAbullshitDotCom, 2010)

With option 1 costing $345/unit and option 2 costing $405.75/unit, it appears that BMC should not contract with FEE; rather, BMC should manufacture its own GPSNs.

e. Consider any qualitative factors that relate to the decision and modify the.....

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