COST DISTRIBUTION

a)     The recalculated cost of the five orders using activity based costing is as under:

*The above figures are in (,000 Euros)

The recalculated costs of each of the order is shown above is based on the percentage of activity being utilized by each order. The difference in cost of order 28 and order 32 is because there both the order is having different usage of the overheads. The machinery labor hours for order 28 is much less than that of order 32 thus that component is higher whereas for the other heads order 28 has higher share. Overall order 32 is having higher cost.

The costs that have been derived are more accurate as the costs associated with one order is not transferred onto the another order. (Siegel,2009)As it can be seen that the warehouse cost of order 27 is less than order 36 as order 36 has higher share in the usage. In the traditional costing the cost would have been equally divided resulting in higher cost for order 27 and in a way the cot of order 36 or any other order would have been transferred onto order 27. This is not the case in activity based costing.

b)     It can be seen from the given activity based costing that most of the cost is associated with machinery whereas the warehousing has the minimum cost. The per unit cost for each cost head is shown below. As shown assembly line and the machinery has the lowest per unit cost whereas oven has the highest. Thus it can be said that the company is having the competitive advantage in the assembly line and the machinery. The purchase of Oven or kiln may not considered prudent as it is having the highest per unit cost but this purchase has actually resulted in the reduced cost of other costs head (Jiambalvo,   2009). Thus the purchase of oven is fine but it has to be utilized for the orders that have less proportion of the utilization of oven. Thus arrangements may be made for the oven activities of staircases.

*The above figures are in (,000 Euros)

c)     The sale, costs and the profit from each of the order is shown below:

*The above figures are in (,000 Euros)

The staircase may not be considered as the product that is meeting the basic condition. As per the activity based costing the order 28 is not resulting even in break-even point and thus is resulting in the loss for the company. Thus in the circumstances where the oven is operating at only 25% of its capacity, other factors being neglected the operation activities for oven should not be applied to order 28 and may be utilized by other orders like order 32 which has more per unit profit than others. Final decision has to be made after accessing the market conditions also. Thus it can be said that although order 32 has the highest allocated cost but the sales have resulted in the profit for that order. Secondly allocation of the cost clearly shows that the constraint of the oven is not there with order 32 which is generating maximum profit. It contributes to less than 25% of the oven requirement. Thus the constraint of oven can be very well managed. This is the most important advantage of activity based costing (Jiambalvo,   2009)as it assist in identifying the dependency of the objects and to estimate which product can be produced with the given resources so as to benefit the company the most.

d)     Selling of the additional twelve staircase will be a huge boost the revenue of the company as the revenue of the order will be increase by three times. Thus it can be beneficial for the company to estimate the effect of each of the cost order so that the maximum advantage can be taken (Horngren, Datar & Foster, 2007). The main consideration has to be given to the cost of warehouse and oven. The staircases have maximum cost associated for warehouse and oven. Societe Bonlieu can work on to reduce the cost associated with warehousing and utilize this in meeting the demand. In this way the cost of warehouse for staircases will be reduced. This will also result in overall reduction of the cost as staircases have the maximum share in warehouse costs.

The company will have to consider the costing for the oven. This is for two reasons. Firstly the capacity on which the oven will work is not certain. Secondly the oven at the current level may not be able to fulfill the complete demand including the demand for the other products also. (Kieso,2009)Thus Societe Bonlieu  may go in for outsourcing of the work in progress of activity of oven. This may be resulting in lower costs and thus be beneficial for the company.

Staircases involve very less drafting thus this will not be a problem for the company to accommodate. Machinery and assembly also are in the range of 25% and 20% respectively and thus the costs associated for these activities will be less as compared to the other orders. Thus these costs may not impact much the other operations of the other products.

Thus Societe Bonlieu need to provide a little consideration to the costs associated with oven as this is contributing the most and has the major effect on the order of staircases.

References:

Jae K. Shim, Joel G. Siegel (2009,2000). Modern Cost Management and Analysis 3rd Ed. Barron’s Education Series, Inc

Charles T. Horngren, Srikant M. Datar, George Foster (2007). Cost Accounting: A Managerial Emphasis. Prentice Hall.

Donald E. Kieso , Jerry J. Weygandt , Terry D. Warfield (2007). Intermediate Accounting

Reginald Tomas Yu-Lee (2001), Explicit Cost Dynamics: An Alternative to Activity-Based Costing, Wiley

James Jiambalvo  (2009), Managerial Accounting

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