case 5

Case Study

Name

Course

University

Tutor

Date

Activity based costing

It is a departure from the traditional costing methods . Activity based costing starts by allocating overheads to categories called cost pools Then the activity cost drives (activities that cause the overheads in the cost pools ) are identified

The overheads in the cost pools are then allocated to the activity cost drivers to get the unit cost (Accounting Coach , 2008

Steinway and Sons

Steinway 's operations involve a lot of operations that require specialized attention and

therefore the need of cost effective production system is important

The making of the pianos involves a lot of activities from the making of the first component to the final assembly and testing

These operations form the overheads and therefore it is prudent that the overheads are allocated to the activities that actually cause these costs in the first place

The from the Steinway 's factory tour indicates that the making of the pianos is a specialized process . Highly specialized processes usually may lead to increased costs and therefore determining the most accurate cost is necessary because it will help in the pricing strategy to be adopted . It is because it will help in the pricing to be adopted . It is also important to note that wrong cost calculations can lead to wrong product price , which may mean loss of both customers and profits

The typical activity cost pools at Steinway 's include the following

Inspection- since the piano production is specialized quality standards must be met throughout the production process and therefore the need of regular inspections to ensure set standards are met . The activity cost driver in the inspection process is the number of inspection done during the production process

Testing- the factory tour provides information that indicates that a lot of testing is needed in the making of the piano and therefore this should form part of the cost pools . The number of tests carried out is the cost driver

Machine set up-apart from the manual processes performed at Steinway 's factory , there are numerous others that require machine use . Machine usage requires setting up . The cost activity driver for the machines set up is the number of set ups performed in the production process

Specialized engineering-a substantial part of activities undertaken in the piano making process require specialized attention by experts . This thus could form large part of the overheads incurred in the production process . The number of specialized engineering done is the activity cost driver for this cost pool

Purchasing department- the materials used in making the pianos are obviously bought and therefore the need for the purchasing department of the company to be designated as a cost pool . The cost driver for the purchasing department is the number purchase made

Activity based costing helps Steinway and Sons to trail the costs incurred by the activities and production processes and therefore enabling fast and informed decision-making . As seen from the factory tour , without a sound cost management strategy , Steinway...