Every concern is involved in production where some costs are incurred. In order for a concern to apportion its merchandising monetary value to its merchandises. bing analysis is required. Costing which is a method of accounting used by fiscal direction is a really indispensable procedure. It gives a full description refering all costs incurred in the concern either variable or fixed. It gives the concluding production cost which in bend is used in finding the merchandising monetary value of the trade goods. the units to be produced which is tantamount to its market portion. Competition Bikes needs to set in topographic point a costing system that is indispensable and economical to its production procedures. Recently it’s utilizing conventional based attack which involves delegating costs harmonizing to the volume of goods produced. This makes merchandises to be the chief determiner of costs. Competition Bikes are in a quandary whether to go on with conventional attack or switch to activity method of bing.

Activity system of bing divides the costs into a figure of activities used in the production procedure. It takes an premise that costs in an organisation have multiple determiners different from its production. In order for the Competition Bikes to make up one’s mind whether to switch or non. an rating is needed where some advantages of activity costing system are considered over conventional volume method of bing. One of the benefits of following activity based system of costing is that it gives an accurate calculation. This is as a consequence of taking histories for costs incurred in each degree of production compared to when taken at the terminal of the production based on the volume produced.

Cost drivers are really indispensable tools when transporting out bing. The activity system of cost accounting gives a clear designation of the particular and precise drivers used in finding the costs. This is really of import to any organisation as incase of bing jobs. it enables the cost comptrollers to follow them which doing it easy to come up with the best mechanism of commanding cost. Through such analysis. it’s beneficial for the Competition Bikes to switch from conventional to activity method of bing which is a better system.

The other country that the study takes in to consideration is the breakeven point. This is of import as the company is involved with two productions i. e. Titanium Bikes and C lite which is done utilizing the construct of cost-volume-profits. This analysis brings the relationship between the net incomes. volume of goods produced. and the organisations costs. The benefit of an analysis based on breakeven point is to enable the house to do proper determinations refering monetary values of goods produced. The analysis shows that CVP is non an effectual attack. This is because it takes an premise that the organisation trades with a individual merchandise which is non true to many organisations. Due to this premise. an constitution of gross revenues mix must be put into topographic point. In every production there are two cardinal types of costs incurred i. e. fixed and variable costs. The study examines the impact of altering them. of which it has shown that it will hold a important consequence on the costs.

Costing method

This refers to the method of coverage and fiscal recording. It involves the procedure of taking calculations of the costs incurred in the procedure of bring forthing goods ( Chang. Pelliser. 1996 ) . This costing is done by a finance director who takes into consideration different types of cost information and uses them in the calculations. This includes costs of company operating expenses. labour hours and the units of production. This is a tool used by analysts to place cost drivers and in bend use them in calculating costs. Competition Bikes needs to set up an efficient method of bing which is economical and provides accurate information. In order to come up with such a method. it has to analyze whether to take volume based or activity based costing.

Volume based costing

It’s a traditional method of costing of which competition motorcycles is presently utilizing in its calculations. This type of attack allocates costs utilizing the volume of goods produced. It’s different from activity based method as it uses a individual cost driver which is the entire volume of goods produced. This attack becomes really ambitious to the organisation when apportioning costs utilizing attack. The ground is that in costing. both variable costs and overhead costs are of import. but this attack ignores overhead costs which are assigned to merchandises on the footing of their use of direct labour. It assumes any activity without direct impact on the volume of goods produced. as it considers the chief drivers to be the merchandise. It gives inaccurate studies as it’s a traditional attack used in the yesteryear where operating expense costs were ignored. This was as a consequence of these costs taking an highly little portion on the overall costs of the organisation. which is different presents as they are significantly high and the company can non afford to disregard them.

It’s besides a construction oriented attack. this implies that it’s more concerned with the chart of the organisation instead than existent engagement in the production. It makes the procedure of production to be really shallow as it gives information refering entire sum of money used. without giving clear inside informations of why it was spent. This brings a challenge incase the company wants to present steps of salvaging costs as no clear information given.

Activity based cost accounting

It’s a costing method which identifies all the activities involved in the organisation refering the production of goods. It assigns every activity the cost incurred in it before giving the full cost of production. It’s different from volume based which assumes merchandises to be the chief cost drivers unlike activities which are the chief cost drivers. Activity based puts into consideration the overhead costs of the company heightening their control through demoing the relationship between activities in the organisation and the costs incurred. It’s an efficient method as it enables analysts to hold a clear cost links between the direction duties. merchandises. organisational procedures. clients and other cost drivers. Unlike volume based. this attack provides accurate calculations as all cost drivers are examined establishing them on the cost of running the company.

Another benefit of this attack is that it provides the organisation with clear ways which can be used when implementing steps of cost economy ( Chang. Pelliser. 1996 ) . It’s a procedure oriented attack as it gathers information about the costs of the house through organisational procedure rating. Costss jobs are good addressed as it provides luxuriant information which is used in set uping efficient mechanisms and luxuriant information associating to resources used in each activity.

Organizational cost degrees

Unit degree ; it’s a degree where cost is incurred in bring forthing one unit of a merchandise such as cost of cost of direct labour and stuffs.

Batch degree ; it’s a degree where cost is realized after bring forthing a batch of goods such as cost incurred in planning.

Product degree ; it’s a degree where cost of every merchandise is computed without sing how many units have been produced such as cost of planing the merchandise.

Facility degree ; these are indirect costs which can non be linked to any individual merchandise such as office disbursals and indirect labour.

Activity system of bing shows all the activities that leads to overheads costs of the organisation. Due to this system heightening allotment of activity cost pools. it enables calculation of the fixed costs in the organisation which differentiates period costs from merchandises costs.

Recommendation

Through the analysis of the two methods of bing. Competition Bikes needs to alter from its bing method and follow activity-based system of bing. The ground buttocks is that Competition Bikes have a really big part of its entire cost being the fixed cost of over $ 500000 dollars. Activity based system will assist in placing the different drivers of this cost hence enabling the company to set up steps of salvaging costs. This attack comprises of six activities viz. ; mill apparatuss. technology services. quality controls. merchandises motions. depreciation and public-service corporations. It besides identifies cost drivers based on each activity such as apparatuss. technology. reviews on quality controls and by merchandises used by the mill. which is different from volume based attack which makes it difficult for the organisation to implement schemes of cost economy.

This system is really of import as it will enable the company to hold accurate costs appraisals. This will supply different figures associating to fixed costs as opposed to volume based method. The system will heighten accurate calculations by Competition Bikes and them to calculate all costs happening at each degree that is variable costs at the unit degree. cost of control at the batch degree. cost of merchandise motion at the merchandise degree and depreciation cost at the installation degree.

2. A breakeven point.

It’s a state of affairs attained when the entire cost of production of a peculiar merchandise becomes tantamount to the cost of bring forthing it. Its analysis is a really critical tool used in determination devising by the concern. It helps the concern in finding the sum of merchandise to be produced in order to do this merchandise profitable through production programs. This enables the organisation to do better determinations refering monetary values of the goods from the unit degree.

Breakeven units

It refers to the entire figure of units an organisation is expected to bring forth in order to do the entire cost equivalent to grosss obtained from this merchandise. Titanium breakeven units is 1514. connoting that Competition Bikes must sell such units of Ti for the organisation to get down recognizing net incomes. The 1 for C lite is 915 while for the mix is 2429. This shows that the company needs to bring forth 2429 units of both merchandises for the concern to get down doing net incomes.

They are calculated by spliting the organization’s fixed cost with the part border. The part border refers to the fluctuation between monetary values of one unit of a merchandise and the unit cost of the same merchandise. It gives a contemplation of sum of money that a specific sale contributes in relation to covering the fixed costs of a house. The part border fortitanium is $ 230 since the unit monetary value for Ti is $ 1500 and its variable cost is $ 1270.

Its gross revenues mix is 550 units for Ti and 350 units for C lite. This shows that for every sale of 900 units made by the company. 550 are made up of Ti and the remainder 350 are gross revenues of carbonlite. This gross revenues mix for both merchandises is multiplied by their entire part border giving 234. 500. It’s so divided by 900 so as to achieve leaden norm that gives a part border of a individual unit of the mix giving us 260. 56. The part border was obtained by spliting $ 500. 000 by the common weight of the part border giving us ;

Titanium = 550/900 * 2478 =1514

Carbonlite = 350/900*2478 = 964

Breakeven points in footings of dollars

It gives an indicant of the sums of gross revenues that have to be achieved so to enable the house to cover its full production cost. In footings of dollars. it’s obtained by multiplying units’ monetary value of the merchandise and its breakeven units.

Titanium = 1514 units * $ 850= 1. 286. 900

Carbonlite= 964 units *1500= 1. 446. 000

The analysis above indicates that Competition Bikes has to do a sale 1. 286. 900 of Ti and 1. 446. 000 of carbonlite for the concern to get down recognizing net incomes.

B. Change in Breakeven analysis

Any alteration made in the fixed costs of the organisation brings an impact that is important to the breakeven analysis. Breakeven point brings the relationship in the organisation between its monetary value. fixed costs. variable costs and the volume of gross revenues. If the company decides to increase its fixed cost by $ 20. 000 it gives a new value of $ 520. 000. This indicates that the company needs to sell extra units so as to cover that addition. Any alteration in the concern direct stuffs will besides do important impact on the breakeven point. If the company increases the cost of direct stuffs with 20 % of the cost. variable cost of both merchandises will increase by the same border.

If part border alterations. it consequences to alterations in the part border of the leaden norm. Since gross revenues mix of carbonlite is 350. its part border and gross revenues mix becomes 15400. While that of Ti is 550. its part border and gross revenues mix becomes 104885 giving a sum of 120. 285.

Average weight of the part border

120. 285/900= 133. 65

Breakeven point for the mix

520. 000/ 133. 65 = 3900

Breakeven points utilizing gross revenues mix of each merchandise

Titanium = 550/ 900 * 3900= 2200

Carbonlite = 350/ 900 * 3900= 1517

Breakeven value alteration in footings of dollars

Titanium = 2200 units * $ 850 = $ 1. 870. 000

Carbonlite = 1517 units * $ 1500 = $ 2. 275. 500

Decision

Every concern should follow a costing system which helps in calculating costs incurred in the concern. This information is really of import in doing determinations refering the monetary values of the merchandises. Within the two systems of apportioning costs. that is volume based and activity based systems of bing. Volume based is non an efficient method as it assumes that merchandise is the chief cost driver. Through the above analysis. it’s clear that Competition Bikes should follow activity based system as it provides accurate information. luxuriant information that can be used in supplying cost salvaging mechanism. It has besides considered the breakeven analysis which is an of import tool in make up one’s minding the monetary values of trade goods. Last. the study has shown that if there is a alteration in either the fixed or variable costs. it brings a important consequence on the costs.

Mentions

Brimson. J. A. ( 1991 ) . Activity accounting: an activity-based costing attack. J. Wiley.

Cao. P. . Toyabe. S. I. . & A ; Akazawa. K. ( 2006 ) . Development of a practical costing method for infirmaries. The Tohoku diary of experimental medical specialty. 208 ( 3 ) . 213-224.

Park. S. E. . & A ; Lee. Y. K. ( 2006 ) . Efficient command pricing based on bing methods for Internet command systems. In Web Information Systems–WISE 2006 ( pp. 289-299 ) . Springer Berlin Heidelberg

Beginning papers