Case Study Assignment - Sadie Inc.

Case Study Assignment - Sadie Inc.

Memorandum

November 21, 2013

TO: Chief Financial Officer ABC

From:New Managerial Accountant XYZ

Subject:Recommended alternative for tracking cost of Dog Food Products

The cost accounting is an integral concept in the field of accounting. The process of costing is comprised of accumulation, analysis, summarization and assessment of various possible ways to record and track the related transactions. The main agenda of this memorandum is to provide the higher officials including CFO a short report pertaining to the most effective method of recording and tracking cost of our main product that is dog's food. This approach certainly helps management in making most appropriate action in order to maximize the cost effectiveness and efficiency within the organization (Vanderbeck, 2012).

This information shall be helpful for management to control the existing set of operations and make future based plans accordingly. The literature of cost accounting field has revealed and researched regarding various methods of cost accounting systems. As a result of flailing the given task, I would like to shed light on the analysis being done for tracking the cost of main product by using plant wide rate, and activity based accenting.

The data used to evaluate the total cost per using different costing methods is showed below in tabular form:

Overhead Costs:

Setup Costs

$42,000

Mixing Costs

470,000

Inspection Costs

200,000

Packaging Costs

350,000

Total Overhead Costs

$1,062,000

Basic Dog Food

Premium Dog Food

Bags of Dog Food Produced per Year

15,000

20,000

Prime Costs

$84,000

$136,000

Direct Labor Hours

80,000

120,000

Machine Hours

12,000

23,000

Production Runs

12

30

Mixing Hours

16,000

24,000

Inspection Hours

1,500

2,500

Packaging Hours

7,000

13,000

The cost of product can be calculated by sing a plant wide rate on the basis of direct labor hours is as follow:

Part 1: Calculation of Plant wide rate

A plant wide rate used in this case represents pre determined overhead rate that remains same while calculation with respect to all departments of the business. It is used when the product is homogenous/ It is calculated by using the following formula:

Predetermined Overhead Rate - Basic=

Budgeted Yearly Total Factory Overhead CostsBudgeted Yearly Activity (direct labor-hours, etc.)

=1062000 /(80000 + 20000)

=5.31

The total cost for each product per unit is calculated as below:

Items

Basic

Premium

Direct Labor

1.05

1.13

Direct Material

7.00

5.91

Overheads

67.13

281.96

Total Unit Cost

75.18

289.01

The activity-based costing system (ABC) is based on activities consumption of resources and products consume activities, which is to show enterprise to provide a certain quantity of products or services that consume human, material, technology of such natural resources as activities (Kim 2009). This is the link resource cost to products. According to this, it can set up the cost pools, then as the quantity of activities to sum up the total cost of activities, calculate the product total and per-unit.

The total cost per unit for basic and premium product using activity based costing system is as follow:

Cost Items

Basic

Premium

Direct Labor

15750.00

22666.67

Direct Machine

105000.00

118260.87

Overheads

Production Setup

12000.00

30000.00

Mixing Ciost

188000.00

282000.00

Inspection Cost

75000.00

125000.00

Packaging Cost

122500.00

227500.00

Total cost for overheads

397500.00

664500.00

Total units produced

15000.00

20000.00

Total Cost per unit

26.50

33.23

(Hansen, et al, 2009)

In the activity-based costing, the short-term variable costs ...