As a management accountant different, more accurate costing systems can be implemented to suit the company and its products. In regards to Suaveness three products Gammy, Twiggy and Whinny the implementation of a new costing system BBC will show how misleading the conventional costing system can be. Before implementing the BBC costing system we will analyses product performance based on its profit in the conventional system.
The annual profits based on the units sold for the three products found that product G is the least profitable for Jayvee. When comparing product G to W and T the annual profit for product G was $528,000 compared to the profit for product W and T which were $1 and respectively. (Appendix 17) All products were found to be profitable under the conventional costing system implemented at Jayvee. Management accountants are able to dissemble costs and allocate them to where they are absorbed most.
Under a costing system such as activity based costing, it may be able to show products running at a deficit whereas invitational systems may not be able to discover. Suaveness competitors may have a diverse reaction in regards to the firms pricing strategy. His pricing strategy would have his competitors confused to as why he hasn’t utilized his monopolistic position in regards to Whinny even though he is the only supplier in the market for this product. This is as Whinny is still not giving him a profit or sales that would be expected for a monopolistic product.
As a competitor it would be seen that Jayvee does not have a good pricing strategy as he is not utilizing the amount of profit he can make per unit. In regards to Gammy and Twiggy, Gammy sells very close to its cost price which suggests to competitors that he’s of no threat to the sale of their products and Twiggy seems to be safe as it sells at its budgeted price and is the largest seller for Jayvee so as a competitor to go into a market for this product would be tough.
Nan O’ Second the financial controller for Jayvee recently attended a conference to gain more knowledge on different types of costing systems and in particular activity based costing systems. Upon her return to Jayvee she highly recommended the implementation of an activity based costing system in order to better understand and allocate costs accordingly. After managements approval an activity based costing system was designed for Suaveness three products.
After cost pools and activity drivers were identified and formed the percentage of each activity driver that was consumed by Suaveness products are as follows: Activity cost pool I Product w TTY driver Machinery I Machine hours | 24% Product G Product T | 126% I Machine set up I Number of set pups 22% 130% 1 48% Inspection I Number of inspections | 16% 144% 1 40% Material handling I Raw material costs | 25% 169% 1 6% Engineering I Number of change orders | 35% | 10% | 55% | Nan O’ Second was able to determine the percentages easily as a management accountant.
Using raw materials as an example she would have to multiply the cost of raw materials for the unit by the number of units produced per product which was then divided by the total of the raw materials used overall and multiplied by one hundred. (Appendix 18) Using a simple activity based costing system new costs can easily be developed for Suaveness three products. These product costs will be more thorough and accurate to scored costs and set prices. Based on the activity cost pool and drivers the cost per unit for the products the costs for each of the products have drastically changed.
Gammy and Twiggy have decreased by around 20% while Whinny has increased a drastic 200%. The new budgeted prices were calculated based on Suaveness pricing formula of product cost multiplied by one hundred and fifty percent. The budgeted price for Gammy and Twiggy are now very similar to their current selling prices, whereas Whinny has increased to have a budgeted price $384 higher than its actual current selling price. As according to Suaveness new product costs the budgeted price shows that product W is now running on a loss compared to its original profit whereas product G and T will be considered more profitable now.
Due to the new activity based costing system being implemented several faults in Suaveness operation has been discovered. I am recommending communication to the company managing director to report Suaveness situation in regards to the market for his products and its competitors. Such communication could be addressed to their attention in the way of a memo. I would suggest something along the lines as: To The Managing Director, I am writing to you as the financial controller of Jayvee Ltd.
After implementing a BBC costing system for three of your products it has come to my attention several faults in your company. The main issue I discovered was one of your products running at a severe loss. I am referring to your product Whinny which took me by surprise as this was a monopolistic product for you which should have allowed you to have full advantage over the market. In regards to your other products in a more it has come to our attention that competitors are able to provide the product at a cheaper cost.
BBC costing has reduced your cost of Gammy which provides you with a way to reduce your price hence he is able to relieve competitive and market pressure. Many strategic options are available to you in regards to all of your products. Whinny has a history of price increases with no loss of sales. You could increase the selling price to above cost to make pronto and increase the number to units. It is a monopolistic product, there is no competition. Gammy prices have been urged to be reduced repeatedly, now we have an accurate cost price for it in order for us to do this and be a more competitive entity in the market.
Sincerely Nan Second To The Managing Director, increase the selling price to above cost to make profit and increase the number of Based on the comparison of the two costing systems it is easy to see how distorted and misleading the conventional costing system can be. Not only is activity based costing more accurate in regards to its products costs technically advanced in regards to how costs are allocated and driven. The BBC system can provide more reliable information for the managers to better understand possible opportunities and avenues for decision making.