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Cost Management Systems Assignment

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Added on  2020-03-16

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Cost management is one of the most important phenomena in the product life cycle that determines the profitability of every product. In order for the product to yield profit, the product cost should be accurately estimated based on specific cost estimation method. Two most common costing estimation methods are traditional costing method and Activity Based Costing (ABC) method.

Cost Management Systems Assignment

   Added on 2020-03-16

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Running head: COST MANAGEMENT SYSTEMS 1Cost Management SystemsStudent NameInstitution
Cost Management Systems Assignment_1
COST MANAGEMENT SYSTEMS 2Executive summaryCost management is one of the most important phenomena in the product life cycle thatdetermines the profitability of every product. In order for the product to yield profit, the productcost should be accurately estimated based on specific cost estimation method. Two mostcommon costing estimation methods are traditional costing method and Activity Based Costing(ABC) method. For a proper understanding of the two costing methods a model company is usedand this is Adairs Company. Adairs Company is a retail store that is a major trader of homewaresand furniture. Adairs Company has a headquarters is in Scoresby, Victoria from where it has alsospread to various parts of Australia. Currently, the company has its branches in Victoria,Northern Territory, New South Wales, Queensland, Western Australia and South Australia. Theproduct category includes bed ware, bathroom ware, giftware and the recently incorporatedfurniture. The organization has many operational processes that form better part of the valuechain for the company's products. These operational activities can be used to calculate the cost ofa single item using activity-based cost method of cost estimation. The activities within thisproduct value chain are divided into stages categorized as activity cost pools. Digging deeperinto each activity cost pool there are drivers for the cost that are also used in allocating cost toproducts. These activities give the elements of price calculation that is used in calculating bothdirect and indirect cost that are part of the product cost (Cooper, 1990). Activity-based costing(ABC) can also show both benefits and disadvantages when used in calculating the cost ofproducts sold at Adairs Company.
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COST MANAGEMENT SYSTEMS 3Table of ContentsExecutive summary.....................................................................................................................................2Introduction.................................................................................................................................................3Part 1 – Business Processes.........................................................................................................................3Value chain analysis................................................................................................................................31.Characteristic of Adairs Company...............................................................................................42.Sources of the products sold at Adairs Company.........................................................................43.Operations....................................................................................................................................54.Marketing and sales.....................................................................................................................5Part 2 – Costing System..............................................................................................................................6Activity Based Costing............................................................................................................................61.Activity-based costing and traditional costing method................................................................62.Benefits of using Activity Based Costing in Adairs Company.....................................................73.Presentation of product costing system........................................................................................8Part 3 – Product Costing............................................................................................................................11Example 1: Mattress topper activity unit pools and cost drivers............................................................12Example 2: Spot Flannelette activity units pools and cost drivers.........................................................13Calculating profitability.........................................................................................................................15Conclusion.................................................................................................................................................15Reference...................................................................................................................................................16
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COST MANAGEMENT SYSTEMS 4IntroductionUnderstanding of cost management system of an organization is important for estimationof the internal management cost for an organization such as Adairs Company. There are variousfactors that are used in cost estimation and this mostly considers organization characteristics andvalue chain. Another factor that also plays a critical role in price estimation is the operationalprocesses that add the overhead cost to each product. With this respect, there are two commonlyused costing methods and these are traditional and activity-based costing. Traditional costingmethod involves estimation of overhead cost based on the volume of product produced. Activity-based costing takes into account all the activities that attribute the cost of products whenestimating indirect cost on the product. Well, these two cost calculation methods have bothbenefits to the business and disadvantages (Hansen & Mowen, 2006). The main focus of thisreport is exploring the cost management system as applied in calculating the cost of productionof Adairs Company.Part 1 – Business ProcessesValue chain analysisWhen looking at the company's value chain it is important to explore the various aspectsof the company starting from the product acquisition to the sales. This, of course, takes intoaccount the characteristics of the company and other operational processes leading to theavailability of the product. 1.Characteristic of Adairs CompanyAdairs Company is an independent retail store that deals in homeware and homefurnishings. The company has both online and in-house stores where it sells its many products.
Cost Management Systems Assignment_4

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