Acct 6130 Group 3 Project Presentation

7/30/2019 Acct 6130 Group 3 Project Presentation

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I. IntroII. ABC Theory

III. Pros & ConsIV. Case Study: Alpine Inc.V. Recommendations & Conclusion


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Alpine Inc., a manufacturer of winter sportinggoods,

Management has questioned spiking costsduring off-season months.

Alpine needs a better way of determining thetrue costs of producing its products.


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Takes total cost and separates it by eachcomponent of the process

Does not separate cost by function or allocation Three steps

Accrue costs within a production or non productionsector

Allocate non-production costs to productiondepartments

Assign resulting production costs to various products,services, or customers


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Identify significant activities Assign costs of activities to cost pools

Identify cost drivers for each cost pool Use cost drivers to relate costs to products.


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Fixed costs buy a certain amount of productioncapacity.

Allocation rates should be based on amount of

practical capacity consumed by the itemproduced.

This effectively variabilizes some fixed costs,with the remainder going against an unusedcapacity account, not a particular product line.

This shows management what they are payingfor, but not using.


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ABC measures product and service costsmore accurately to understand product

profitability. ABC provides detailed information through

many cost drivers from many activities thathelp managers to better plan and controlcosts.

ABC helps management to analyze customerprofitability.


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Expense of developing and maintaining anABC system

Doesnt measure incremental costs.


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Manufacturer of snow sporting goods, with twoproduct lines: skis and snowboards.

Fixed costs consist of:

$200,000 depreciation on machinery $100,000 rent & utilities $500,000 administrative overhead

Seasonal production schedule, ramps up during

the winter seasons. For the coming season, Alpine plans onproducing an equal number of snowboards andpairs of skis.


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Allocate fixed costs on an allocation basis.Alpine currently uses units of production.

Since an equal amount of both product linesare produced, fixed costs are allocatedevenly, causing both lines to appear equallyprofitable.

When looking at the total cost of each unitproduced, the costs spike during the off-season.


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0

2,000

4,000

6,000

8,000

10,000

12,000

Jan Feb Mar Apr May J une July Aug S ept Oct Nov Dec

Production

$0

$50

$100

$150

$200

$250

$300

Jan Feb Mar Apr May June July Aug S ept Oct Nov Dec

Cost/Unit


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In order to determine the true profitability ofeach product, Alpine can switch to an ABC

system.Cost Pool Driver Skis Snowboards

Machine Depreciation Machine Hrs. 66% 33%

Rent & Utilities Floor space 50% 50%

Administrative Overhead Units of Production 50% 50%


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$0.00

$50.00

$100.00

$150.00

$200.00

$250.00

$300.00

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec

Cost/Unit

Snowboards Skis


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That doesnt tell management the wholestory.

Alpine has purchased 60 machines, which canbe run 20 hours a day, 30 days a month. This gives Alpine a cutting capacity of 36,000

hours a month.


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Shift to a capacity-based ABC system.

Allows management to understand the drivers of

fixed costs. Draws attention to unused capacity within the

system

Does not burden product lines with fixed costs for

which they are not responsible.


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Alpine Inc has $1,000,000 of unused capacityacquired for peak production which remains

idle during the off-season. Management should consider harnessing

unused capacity to produce a new water skiproduct line.

Acct 6130 Group 3 Project Presentation

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