The paper "Budgeted Profit Statements " is a great example of a finance and accounting assignment. Most importantly, one of the main signs that are evident from the results is the fact that the addition of the activity-based costing data is manifested differently in the three products’ operating profits. For example, ABW results show that it incurred a setback since its operating profits goes from £ 46,528 to -£ 17,500; this may be due to some factors such as customer orders, supplier orders, and setups. While relating the ABW results to the other figures, they show that when the ABW had the lowest production volumes, it required the joint highest number of supplier and customer orders and setups.
Consequently, even though ABW required a lower number of production hours, its higher order volumes, and set up means that, under the activity-based costing, it reports a negative operating profit. Primarily, the ABW’ s supplier and customer processing costs are double that of the other two products, meaning that it accounts for more than half the difference between the activity-based and traditional absorption costing figure (BRADTKE 2007, p.
6-8). After a full analysis of the ABW results in its overheads and all production costs, it may seem that the company would do better if they eliminated or reduced its production since it does not produce any operating profit for the company (BROADBENT, & CULLEN 2003, p. 204). Nevertheless, this will depend on a specific context, for example, if the company has a 420,000-machine hour factory regardless of the production volumes, then the machine costs will remain high even though the ABW product is eliminated. Therefore, holding back or eliminating the production of ABW is not necessarily attractive; this is because it can reduce the overhead by an amount that would be comparable to the company reducing the revenues and gross profit generated through holding the production of ABW (COKINS 2001, p.
14-17). However, this can be resolved through an alternative method, which is using the activity-based costing data so they improve the efficiency of ABW in relation to the other product to ensure that is making a positive contribution. Particularly, the use of activity-based costing has highlighted the additional purchasing and order processing overheads incurred by the ABW relative to the other products (DYSON, 2010).
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