Competition Bikes Inc: Costing Method Recommendation (Case Study Sample)

Competition Bikes Inc
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Competition Bikes Inc
Costing Method Recommendation
The report entails analysis on the current costing method at Competition Bikes, Inc. (CBI) and provides an appropriate recommendation for improvement. The paper also provides details on cost-volume-profit evaluation in regards to break-even analysis for sales units as well as sales dollars for carbon lite and titanium bikes. Currently, the company is using traditional based costing method. For effectiveness, it is important to examine the difference between traditional based costing as well as activity based costing. Traditional costing method includes direct and indirect component. In most cases, indirect costs(overhead) are grouped as one. Additionally, this method operates only with one cost driver like direct labor hours to determine costs (Dunne, et al., 2011). On the other hand, activity-based costing divides the indirect costs into activity cost pools. It is undeniable that this method requires more time in computing, however, it is profitable and effective since it provides an accurate calculation of every activity. Therefore, activity based costing promises long-term financial improvement and stability.
It is advisable for the managing and financial department to counter-check every product and determine precise costs. As a result, the company shall be in a position calculate the exact cost incurred in manufacturing each item (Gulati, Mayo & Nohria, 2014). It is worth noting that the organization is in a unique financial state if the management department has clear and better comprehension on activity costs. This is to say, competition Bikes Inc is assured of funding future projects, which shall increase its market competitiveness. This objective can be attained through implementation of activity-based costing. This costing method requires a substantial commitment of employees, which may be difficult to achieve immediately. Traditional costing is easily computed making it easy for managers to perform their duties. Nonetheless, it is associated with inefficiencies and ineffectiveness since its computation is done generally. Consequently, prices may be overpriced or underpriced leading to unfavorable outcomes to the organization’s bottom line.
Therefore, it is of great necessity for competition Bikes Inc to adopt and implement activity-based cost system. Through this costing system, the company can determine its pricing limit and competitiveness among its business rivals. Furthermore, by adopting activity-based costing(ABC) system, the firm increases competitive advantage through in-depth knowledge of financial management, which promotes organizational savings. With respect to overhead evaluation, it is true and evident that Competition Bike Ince (CBI) should change its costing system to Activity-based cost method. In way of example, assuming that the total units produced by titanium line are 900 while overall units for the carbon lite line is 500. The company shall be operating at a profit level using ABC method instead of traditional costing method. Traditional costing system
Titanium line production indirect cost: $478,040
Carbonlite line production indirect cost: $464,760
Total traditional produation indirect cost: $942,800
Activity-Based Costing system
Titanium line production indirect cost: $376,830
Carbonlite line production indirect cost: $565,970
Total traditional production indirect cost: $942,800
Notably, the totals production overhead is constant in both the systems. Therefore, it is significant to state that the type of costing method is more important compared to the difference in indirect costs. In this case, application of activity based costing method is more cost-effective and preferable than traditional method
Cost-volume-profit and break-even point evaluation
Cost-volume-profit (CVP) analysis is mostly used by managerial and financial departments to estimate future levels of operational activity (Garrison, 2012). CVP analysis is a tool that enables an organization to avoid financial losses, break even and gain profit. Cost-Volume-profit analysis plays a key role in determining future revenues. It is a tool significant in financial stability and planning. This analysis is also utilized in estimating production levels needed to generate revenues equal or above to capital investments such as expansion in business operations. CVP tool eanalyzes arising changes in profits with respect to changes in sales volumes, costs and prices.
CVP formularCVP= Total Sales- Variables Costs in this case, Sales per unit for Titanium component $900.The variable cost per unit for the Titanium component $679 Contribution margin = $221
Sales per unit for carbon lite $1,495 variable costs for carbon lite $1,384contribution Margin $111
The carbon lite product attracts higher sales revenue and lower contribution margins compared to titanium. This is as a result of specialized items and maximized labor necessary for manufacturing the product. Meaning, Carbonlite product is not profitable since it attracts lower contribution margin.
Break-even analysis
Break-even sales units can be determined using weighted average contribution margin (WACM) and Total Contribution Margin Dollars.
Break-even point in units of sales mix = Total fixed cost WACM per unit
$400,000 $181.71 = 2201
After obtaining the break even it is essential to calculate the number of units of Titanium and Carbonlite units at the break-even point. Number of units at break-even point = Sales mix ratio (total break even units) Titanium: 0.643 (2201) = 1415
Carbonlite: 0.357 (2201) = 786 The last step entails calculation of the break-even point in dollars. Break-even point in dollars = Product units at break-even ...