American Red Cross
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A lot of businesses use various but relatively standard accounting procedures to calculate the worth of the products and services they offer (Kaplan, 2007). They also use the same methodologies to remove low-value products and ones that are not profitable. Accounting practices also pinpoint products that are overpriced or over-valued. One popular methodology used for monitoring business activities is ABC (Activity Based Costing) and this American Red Cross essay looks at how this method works. Essentially, the system enables an organization to price its products and services based on their usage.
One company involved in the production of king-size beds and executive-style tables for office use is the Wood Yard. Applying ABC involves each individual product-undergoing unit, batch and facility-level activity assessment. Volume is the factor that drives cost at unit level where the level of activity equals the number (or volume) of units available for selling. The process involves assembling the different pieces of wood, fitting them together and applying a coating to finish them off.
Two of the factors, among others, that drive cost in batch-level activity are the processing of and inspection of orders (Kimmel, 2008). The fee for both these activities - processing and inspecting - will be fixed, irrespective of numbers (or volume). Facility-level activity is used to support business operations. This includes, among other things, the actual factory premises, security, safety maintenance, heating, loan repayments and stakeholder reports. The business will have an amount it hopes to allocate by the year-end for activities such as, say, building or putting together a better security department.
In this particular company, the quantities of desks sold are small and this product is treated as low-volume because each unit requires additional and particular features and requires a lot of effort to set up. In contrast, production of the king-size beds is steady and these do not require much effort. The next sections of this free American Red Cross essay show how the company estimates and allocates the cost of each activity in the manufacturing process to the units where that activity applies.
The cost of making the units and the number of man-hours devoted to the process allows the company to devise a price for each product. A single office table takes a week to make and costs $5,000 to produce. The beds take a day to make and have a selling price of $1,000 each. The total cost for each unit covers labor, inputs, overheads and time spent. All these factors are reflected in the sale price.
The ABC method allows the company to identify the factors that contribute and/or detract from its performance (Baker, 2007). It enables the precise cost of each product to be predicted and identifies key factors in the company’s financial performance. The information collected from this accounting procedure allows management at Wood Yard to monitor work processes and plan improvements. The ABC method also allows the company to offer its customers bargains or better deals.
This American Red Cross essay suggests this means improved competitiveness for the company. It facilitates the integration of production costs and it allows cost factors such as labor man-hours, machine usage hours and other costs involved in the production of individual units to be itemized.
To conclude, the price the office desks are sold at covers their production cost. Despite their high selling price, the small quantities sold manage to meet required targets. Additionally, while the king-size beds do not achieve large profits, the high volumes produced and sold enable targets to be met.