Costing Responsibility Centres and Products Case Study: Wilkerson Company Lessons learned from this topic and case study: 1. Managers need to be able to estimate the costs of different responsibility centres and products to assist with monitoring the performance of different departments and also to assist with decision making about product pricing, profitability of individual products, assist with decisions when making changes to product lines and various other managerial requirements such as controlling costs and valuing inventory for financial statements. 2.
Dividing the business into cost objects such as departments or products can assist with creating greater accuracy when allocating costs to each ‘cost object’. 3. The more we break down the business into activities and cost objects, the greater the accuracy of allocating costs to each object. 4. Costs can be allocated as direct or indirect costs related to each cost object. Indirect costs must be estimated for each cost object and it is important to assess how much of the costs allocated to each object are indirect as the greater the proportion of indirect costs allocated, the greater the margin for error in these estimations. . Managers need to be careful of overpricing or under-pricing goods due to allocation of costs to each product. As was shown with the Wilkerson case on further analysis of costs using the activity based costing method the company had been under-pricing some goods while over pricing others. This was affecting their profits and their ability to make sound business decisions on the pricing of products to meet market demands. 6.
Activity based costing is more complex to use however used correctly should improve the accuracy of allocating indirect costs to cost objects. This in turn produces more accurate allocation of costs and assists to make more informed management decisions. 7. Managers should weigh up the costs and benefits of using activity based costing rather than using a single business wide overhead rate as although more accurate it is also more complex and more expensive.
Each organisation is different and as managers we will need to ensure that the benefits of using it will outweigh the costs of obtaining it. Application within my organisation: I work for a not for profit organisation providing employment services to people with a disability or disadvantage within the Fleurieu and Kangaroo Island region. We are a service industry and our client numbers and funding levels are set by contracts won from DEEWR.
As a service industry and particularly one where our main income is determined externally by government contracts which provide a set rate per job seeker we assist and outcomes we achieve it is difficult to determine how activity based costing can benefit our organisation. As a not for profit service organisation we do not sell our services, have no inventory and also have a high level of indirect costs which are hard to assign, these include our management staff, administration and IT support costs.
Using the ABC method may prove too costly and time consuming to be beneficial as a standard practice. However it could be used on occasions to assist with future planning for the organisation by providing a one off analysis of costs for each regional outlet and profitability of each service provided within the outlets. For example for each outlet I could break down the services provided into the following activities: * Job Services Australia contract servicing * Job Services Australia outcomes * Disability Employment Services servicing Disability Employment Services outcomes * Career Development Services I would then need to identify the cost drivers and work out the cost per unit (client) of delivering each hour of service in each outlet. These unit costs would then be used to identify the costs of providing each service according to the number of clients per outlet, the minimum number of clients required per outlet to achieve profitability and set targets for outcomes required to achieve required profit margins for the business.
Being a not for profit organisation does not mean we do not need to make a profit. By breaking down the outlet and activity costs for the business in the above way using activity based costing methods I would be able to more accurately determine for the company: * Which outlets were the most and the least profitable – this in turn could then identify areas which could be improved and assist with strategic decisions about the future of outlets and tendering for future contracts. Which contracts were the most profitable and where it would be best to allocate more resources to ensure they remained so. While use of this system in our organization might not be warranted on an ongoing basis, used occasionally for decision making purposes and future planning it could prove a useful tool. Lisa Smart