Competition Bikes Cost Analysis Essay

E rattling descent is involved in toil where some impairments be incurred. In order for a business to allocate its selling equipment casualty to its reapings, constitute abbreviation is required.Costing which is a mode of accounting economic consumptiond by fiscal management is a very necessity process. It gives a proficient description concerning all tolls incurred in the business either uncertain or fixed. It gives the final performance bell which in turn is used in determining the selling price of the commodities, the social units to be stupefyd which is equivalent to its market share. tilt Bikes needs to put in place a constitute arrangement that is essential and economical to its mathematical produce processes. Recently its exploitation effected establish shape up which involves appointment cost according to the saturation of goods produced. This gathers products to be the chief(prenominal) determinant of cost. opposition Bikes are in a dilemma whether to continue with conventional progress or trip to activity manner of be.Activity system of costing divides the be into a number of activities used in the employment process. It takes an supposal that cost in an arrangement retain multiple determinants antithetic from its merchandise. In order for the disceptation Bikes to decide whether to shift or non, an evaluation is unavoidable where some advantages of activity costing system are considered over conventional strength method of costing. One of the benefits of admiting activity ground system of costing is that it gives an accurate computation. This is as a result of taking accounts for cost incurred in each level of production compared to when taken at the end of the production based on the volume produced.Cost drivers are very essential shafts when carrying out costing. The activity system of cost accounting gives a suck in identification of the specific and precise drivers used in determining the costs . This is very beta to whatever government as incase of costing problems, it enables the cost accountants to trace them which making it easy to come up with the best apparatus of controlling cost. through with(predicate) such analysis, its beneficial for the ambition Bikes to shift from conventional to activity method of costing which is a damp system.The opposite area that the report takes in to consideration is the breakeven point. This is important as the come with is involved with ii productions i.e. Titanium Bikes and carbon lite which is desex exploitation the concept of cost-volume-profits. This analysis brings the relationship between the profits, volume of goods produced, and the disposals costs. The benefit of an analysis based on breakeven point is to enable the hearty to make suitable decisions concerning prices of goods produced. The analysis shows that CVP is not an effective approach. This is be bowel movement it takes an assumption that the organizat ion deals with a exclusive product which is not true to many organizations. Due to this assumption, an establishment of barters mix must be put into place. In every production there are two key types of costs incurred i.e. fixed and inconstant costs. The report examines the impact of changing them, of which it has shown that it allow have a substantial effect on the costs.Costing methodThis refers to the method of reporting and financial recording. It involves the process of taking computations of the costs incurred in the process of producing goods (Chang, Pelliser, 1996 ). This costing is d nonpareil by a finance manager who takes into consideration different types of cost information and uses them in the computations. This includes costs of company overheads, labor hours and the units of production. This is a whoreson used by analysts to identify cost drivers and in turn use them in computing costs. Competition Bikes needs to establish an cost-effective method of costing which is economical and provides accurate information. In order to come up with such a method, it has to examine whether to take volume based or activity based costing.Volume based costingIts a traditional method of costing of which competition bikes is currently using in its computations. This type of approach allocates costs using the volume of goods produced. Its different from activity based method as it uses a single cost driver which is the natural volume of goods produced. This approach becomes very challenging to the organization when allocating costs using approach. The reason is that in costing, both variable star costs and overhead costs are important, but this approach ignores overhead costs which are assigned to products on the basis of their usage of direct labor. It assumes any activity without direct impact on the volume of goods produced, as it considers the main(prenominal) drivers to be the product. It gives inaccurate reports as its a traditional approach used in the past where overhead costs were ignored. This was as a result of these costs taking an extremely small part on the overall costs of the organization, which is different nowadays as they are substantively high and the company cannot afford to ignore them.Its also a structure oriented approach, this implies that its more concerned with the chart of the organization rather than actual involvement in the production. It makes the process of production to be very shallow as it gives information concerning total amount of capital used, without grown bear details of why it was spent. This brings a challenge incase the company wants to introduce measures of saving costs as no decease information given.Activity based cost accountingIts a costing method which identifies all the activities involved in the organization concerning the production of goods. It assigns every activity the cost incurred in it before giving the full cost of production. Its different from volume based which assumes products to be the main cost drivers unlike activities which are the main cost drivers. Activity based puts into consideration the overhead costs of the company enhancing their control through showing the relationship between activities in the organization and the costs incurred. Its an efficient method as it enables analysts to have a clear cost link up between the management responsibilities, products, organizational processes, customers and other cost drivers. Unlike volume based, this approach provides accurate computations as all cost drivers are examined basing them on the cost of running the company.Another benefit of this approach is that it provides the organization with clear ways which can be used when implementing measures of cost saving (Chang, Pelliser, 1996). Its a process oriented approach as it gathers information close the costs of the firm through organizational process evaluation. Costs problems are well addressed as it provides elaborate information w hich is used in establishing efficient mechanisms and elaborate information relating to resources used in each activity.organisational cost levelsUnit level its a level where cost is incurred in producing one unit of a product such as cost of cost of direct labor and materials.Batch level its a level where cost is realized after producing a stilt of goods such as cost incurred in planning.Product level its a level where cost of every product is computed without considering how many units have been produced such as cost of designing the product.Facility level these are indirect costs which cannot be linked to any single product such as office expenses and indirect labor.Activity system of costing shows all the activities that leads to overheads costs of the organization. Due to this system enhancing allocation of activity cost pools, it enables computation of the fixed costs in the organization which differentiates period costs from products costs.RecommendationThrough the analysis of the two methods of costing, Competition Bikes needs to convince from its costing method and adopt activity-based system of costing. The reason behind is that Competition Bikes have a very large portion of its total cost being the fixed cost of over $500000 dollars. Activity based system will help in identifying the different drivers of this cost hence enabling the company to establish measures of saving costs. This approach comprises of six activities namely grind setups, engineering services, quality controls, products movements, depreciation and utilities. It also identifies cost drivers based on each activity such as setups, engineering, inspections on quality controls and by products used by the factory, which is different from volume based approach which makes it gravid for the organization to implement strategies of cost saving.This system is very important as it will enable the company to have accurate costs estimations. This will provide different figures relating to fixed costs as opposed to volume based method. The system will enhance accurate computations by Competition Bikes and them to compute all costs occurring at each level that is variable costs at the unit level, cost of control at the visual sense level, cost of product movement at the product level and depreciation cost at the facility level.2. A breakeven point.Its a position attained when the total cost of production of a particular product becomes equivalent to the cost of producing it. Its analysis is a very vital tool used in decision making by the business. It helps the business in determining the amount of product to be produced in order to make this product profitable through production plans. This enables the organization to make better decisions concerning prices of the goods from the unit level.Breakeven unitsIt refers to the total number of units an organization is expected to produce in order to make the total cost equivalent to revenues obtained from this product. Tita nium breakeven units is 1514, implying that Competition Bikes must sell such units of si for the organization to start realizing profits. The one for carbon lite is 915 while for the mix is 2429. This shows that the company needs to produce 2429 units of both products for the business to start making profits.They are calculated by dividing the organizations fixed cost with the contribution shore. The contribution margin refers to the variation between prices of one unit of a product and the unit cost of the resembling product. It gives a reflection of amount of money that a specific sale contributes in relation to covering the fixed costs of a firm. The contribution margin fortitanium is $230 since the unit price for titanium is $1500 and its variable cost is $1270.Its sales mix is 550 units for titanium and 350 units for carbon lite. This shows that for every sale of 900 units made by the company, 550 are made up of titanium and the heartsease 350 are sales of carbonlite. This sales mix for both products is multiplied by their total contribution margin giving 234,500. Its then potpourri integrity by 900 so as to attain cloged average that gives a contribution margin of a single unit of the mix giving us 260.56. The contribution margin was obtained by dividing $500,000 by the common weight of the contribution margin giving usTitanium = 550/900 * 2478 =1514Carbonlite = 350/900*2478 = 964Breakeven points in terms of dollarsIt gives an indication of the amounts of sales that have to be achieved so to enable the firm to cover its entire production cost. In terms of dollars, its obtained by multiplying units price of the product and its breakeven units.Titanium = 1514 units *$ 850= 1,286,900Carbonlite= 964 units *1500= 1,446,000The analysis above indicates that Competition Bikes has to make a sale 1,286,900 of titanium and 1,446,000 of carbonlite for the business to start realizing profits.b. Change in Breakeven analysisevery adjustment made in the fixed c osts of the organization brings an impact that is significant to the breakeven analysis. Breakeven point brings the relationship in the organization between its price, fixed costs, variable costs and the volume of sales. If the company decides to cast up its fixed cost by $20,000 it gives a new value of $ 520,000. This indicates that the company needs to sell additional units so as to cover that increase. Any change in the business direct materials will also cause significant impact on the breakeven point. If the company increases the cost of direct materials with 20% of the cost, variable cost of both products will increase by the same margin.If contribution margin changes, it results to changes in the contribution margin of the weighted average. Since sales mix of carbonlite is 350, its contribution margin and sales mix becomes 15400. While that of titanium is 550, its contribution margin and sales mix becomes 104885 giving a total of 120,285.Average weight of the contribution ma rgin120,285/900= 133.65Breakeven point for the mix520,000/ 133.65 = 3900Breakeven points using sales mix of each productTitanium = 550/ 900 * 3900= 2200Carbonlite = 350/ 900 * 3900= 1517Breakeven value change in terms of dollarsTitanium = 2200 units *$850 = $1,870,000Carbonlite = 1517 units *$1500 = $2,275,500ConclusionEvery business should adopt a costing system which helps in computing costs incurred in the business. This information is very important in making decisions concerning the prices of the products. Within the two systems of allocating costs, that is volume based and activity based systems of costing. Volume based is not an efficient method as it assumes that product is the main cost driver. Through the above analysis, its clear that Competition Bikes should adopt activity based system as it provides accurate information, elaborate information that can be used in providing cost saving mechanism. It has also considered the breakeven analysis which is an important tool in deciding the prices of commodities. Lastly, the report has shown that if there is a change in either the fixed or variable costs, it brings a significant effect on the costs.ReferencesBrimson, J. A. (1991). Activity accounting an activity-based costing approach. J. Wiley.Cao, P., Toyabe, S. I., &Akazawa, K. (2006).Development of a hard-nosed costing method for hospitals.The Tohoku journal of experimental medicine, 208(3), 213-224.Park, S. E., & Lee, Y. K. (2006). Efficient bid determine based on costing methods for Internet bid systems. In meshing Information SystemsWISE 2006 (pp. 289-299). Springer Berlin HeidelbergSource document