Prepare financial analysis of a company, Finance Basics

Using the data provided in Appendix 1 prepare an analysis for the attention of the directors of Meridian Ltd. The analysis should highlight the strategic differences between the conventional and activity based costing. Your analysis must also include a critical review of the theory and a summary table of the key values.

Appendix 1 

1214_financial_analysis.png

 

 

Solution:

 

Analysis of Conventional and ABC Costing -

ABC Costing is a more accurate way of determining overhead costs per unit than the conventional costing system. The conventional costing system uses a single driver for cost i.e. labour cost per unit or direct labour hours etc. However, in case of ABC Costing system the overhead costs are allocated to the units produced based on the actual cost driver for each cost i.e. canteen expenses can be allocated on the basis of employees, quality control costs can be allocated on the basis of production runs etc.

For the purpose of analysing the differences between conventional and ABC Costing systems, we have considered the following drivers for the purpose of allocating overhead costs under each method as below -

Conventional System - The overhead costs are allocated on the basis of direct labour cost only.

ABC Costing System - The overhead costs are allocated on the basis of following cost drivers -

Machine Department Costs - on the basis of machine hours per unit

Set Up Costs - on the basis of budgeted production batch units

Canteen expenses - on the basis of number of employees

Quality Control - on the basis of production runs

Ordering Costs - on the basis of budgeted sales batch units

Summary table of overhead cost per unit -

Overhead Cost per unit

Conventional £

ABC £

Alpha

14.50

17.06

Beta

15.71

12.78

Gamma

9.67

13.32

Delta

13.29

10.76

 

The summary table above highlights the overhead cost per unit for the products Alpha, Beta, Gamma and Delta. The overhead costs per unit as per ABC Costing system are accurate than the conventional costing system and only these costs should be considered for the purpose of preparation of financial statements of the business. 

Posted Date: 7/21/2012 6:41:55 AM | Location : United States







Related Discussions:- Prepare financial analysis of a company, Assignment Help, Ask Question on Prepare financial analysis of a company, Get Answer, Expert's Help, Prepare financial analysis of a company Discussions

Write discussion on Prepare financial analysis of a company
Your posts are moderated
Related Questions
Compute the future value of $2,500 compounded annually for 10 years at 6%

Partnership Deeds This is an important document which governs the members in partnership firm. It covers among other things the following points:      i. The name, location,

For the set of activities shown in the table below, draw the total expenses vs. time curve using the following data: The labor rates are as follows: Labor # 1 (L1) rate = 30

Calculate total number of ordinary shares Example Company XYZ Ltd has sold 10,000 ordinary shares of Shs.30 as partly called up plus 20,000 Shs.45 preference shares, tha

Risk-Return Trade-Off Most financial decisions comprise alternative courses of action. The choices have different returns and risk.  As like example, must we buy a replacement

Ask question #MinimQuestion You are the financial accountant of Donald Bhd, a manufacturer and wholesaler of soft drinks. Donald Bhd is in direct competition with Fizz Bhd and Po

Define Meaning of Investment Meaning of Investment: Investment involves making of a sacrifice in the present with hope of deriving future advantages. Investment has many


(i) Find out operating leverage from the following data: Sales                             Rs.50000 Variable Cost               60% Fixed Cost                   Rs.12000