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
Significance of Cost of Finance The cost of capital is Significance since of its application in the following areas as: i) Long-term investment decisions - In capital b


Disadvantages of Floatation of New Shares 1. The cost of getting a quotation is high, mainly when a new issue of shares is completed and the company is small. It means that su

Why are financial institutions heavily regulated, with specific focus on their ability to increase or reduce the money supply?

Paper on Estate Planning (3–5 pages) Evaluate the tools commonly used in estate planning, including trusts, life insurance, and annuities. Compare the tools as to how they would a

Lock-Box System In a lock-box system, the customer sent the payments to a post office box. The post office box is emptied with the firm's bank at minimum once or twice all bus

Risk Adjusted Discounting Rate - Methods of Computing Cost of Capital This method is used to establish the discounting rate to be used for a provided project. The cost of capi

ascascasc

Assume the managers of Fort Winston Hospital are setting the price on a new outpatient service. Here are the relevant data estimates. Variable costs $ 5.00 Annual fixed c

what are the qualitative factors to be considered when deciding on product mix