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Paper Topic:

Product Costing - Traditional Methods and Activity Based Costing

Question 1

The proposed solution will be useful to agricultural enterprises because it will enhance the level of efficiency in cost control . The organization presented in the case study produces two commodities : corn and soybeans . Additionally , the equipment used is shared between two parties . Complicating the situation further is that the ownership of the farm is distributed among several parties . Therefore the establishment of cost and profit centers is a must for correctly assessing the level of costs and earnings . Currently the management focus is on production However the management intent

is to shift greater focus to implementing a managerial accounting system that will correctly allocate costs and assign the level of profits proportionally . In this respect implementation of activity based costing is the best solution inasmuch as it facilitates the identification of allocation criteria based upon which costs and profits can be assigned

The advantage of using the managerial accounting system mentioned above is that the management can exercise its own discretion about how to allocate costs between different processes and commodities . Unlike the financial statements prepared under the strict scrutiny of the GAAP internal reports generated by the managerial accounting system mentioned above do not have to follow any hard and fast rules . As a result the management can customize the system to the specific characteristics of its own business . This customizability is one of the most important features in favor of implementing an activity based costing system . The customizability enables the management not only to assign costs to different processes and commodities based upon resources consumed but also to enhance the level of process efficiency . For example , the proposed solution for the organization in the case study enables John and Mary Farmer to allocate costs to the equipment based upon their level of usage in producing different commodities . As a result , the cost driver is this case is identified as the two commodities . The cost of production for each of the commodities is calculated accordingly . The advantage from using this system is that the overhead is allocated in proportion to the level of resources expended in producing each commodity . This strengthens the quality of the cost structure . The result is that the management is in a much better position to measure performance and formulate strategies accordingly

As illustrated in the case , John and Mary Farmer are going to have to collect a considerable level of information in to implement an activity based costing system . Therefore in conducting a cost benefit analysis of implementing the managerial accounting system , the cost of collecting the information will have to be taken into account Additional costs will be incurred by the maintenance of the information system which will have to be supported by expensive hardware and software requirements . These are some of the drawbacks that agricultural enterprises can run up against when implementing the proposed solution However these drawbacks must be the weighed against the benefits of more cost-efficient strategy formulation

Question 2

If the Farm Council Case did not...

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