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Intermediate Financial Accounting

Table of Contents

Background.

Problem...

Theoretical analysis.

Quantitative analysis.

Recommendations.

References.

Background of CEB Corporation Analysis

CEB Corporation is an Australian manufacturing firm that produces various types of printed circuit boards. Out of all, two boards, namely, TV circuit board and PC circuit board account for the large proportion of sales. It serves the customers present in USA, Australia, Europe and Asia. CEB Corporation is now experiencing high performance pressure from the investors as the cash flows and the profit margins are monitored and evaluated by them. From the last 3 years, the profits of the corporation are declining due to which there is negative influence on the share price of the company. Moreover, the COVID – 19 crisis have also posed a serious threat to the profitability of the company. Due to lockdown, the sales of the Televisions are rising that is leading to the high demand for TV boards. However, the company is facing reduction in the demand and sales for its PC boards. The company is currently applying standard costing mechanism in assigning the overhead cost to the products on the basis of labour hours. Direct labour is mainly used in manufacturing process as functions are performed manually. The organization requires a better costing system in order to determine the cost of its products accurately.

Problem

CEB Corporation is recently a problem with regard to the costing of the products. Incorrect costing of products will produce various issues in the future period. The major problems are concerned with the allocation of overhead costs on the basis of direct labour hours and the cost subsidisation of products. The system of standard costing is considered effective in those cases only where cost of overheads can be allocated to the different products on equivalent basis. However, these two products that are being offered by CEB Corporation are using large amount of indirect resources. This system is leading to the inaccurate costing of products. Cross subsidisation of products is also rising using this method of costing. This may lead to the over costing or sometimes under costing of the company’s products.

Theoretical Analysis

Consumption of indirect resources by some products produced by CEB Corporation is leading to the inaccurate costing of products. There is no impact on the overhead cost that is being allocated to each product as per the labour hours because of the functioning of batch level activities as the corporation is currently applying standard costing system. The margin or profit will not be so high as expected by the company to grab from the sale of its products by using such method od costing the products. The operations of the corporation might get affected if the selling price is just set less high above the cost price. Due to this, the company might face difficulty in covering its selling, marketing and administrative expenditures. Also, if the selling price is set at a higher rate after allocating large amount of overhead cost, then there might be a decline in sales revenue because of the high selling price for the products. It has been estimated that the overhead charges were allocated largely to the PC Board. Instead of standard costing method, the corporation must go for Activity based costing method to allocate the cost of overhead to the products on the basis of activities performed to manufacture them. This method of costing will help in obtaining clear understanding of the major activities and the cost drivers (Foroughi et al., 2017). Also, this provides the insights with regard to the non value added operations so that the management must be able to undertake suitable measures to reduce or remove the performance of such activities (Altawati et al., 2018). Thus, it is claimed that ABC method of costing helps the company in assigning correct cost to the products that further helps in establishing effective pricing structure.

Quantitative Analysis

Under quantitative analysis, the cost of the TV Board and PC board have been estimated using both types of costing method. The selling price of TV board is et as $200 per unit and that for PC board as $350 per board. The manufacturing overhead were allocated on the basis of labour hours under the standard costing method. The cost of the products is significantly different using these methods. The cost of TV board has been estimated as $154.90 and for PC board as $290.20 under standard costing system. This led to the contribution margin on TV board as $45.10 and on PC board as $59.80. On the other hand, using ABC costing system, the cost of TV board has been computed as $134.80 and for PC board as $234.80 that led to the higher contribution margin on both products.

Calculation of contribution margin (Standard costing system)

Model

TV board

PC board

Budgeted sales

80000

130000

Selling price

$200

$350

Direct materials

 $ 100.00

 $ 160.00

Direct labour

 $ 27.20

 $ 67.20

Manufacturing overhead

 $ 27.70

 $ 63.00

Total cost (standard costing system)

 $ 154.90

 $ 290.20

Contribution margin per unit

 $ 45.10

 $ 59.80

Total contribution margin

 $ 36,08,000.00

 $ 77,74,000.00

 

Calculation of contribution margin (ABC costing system)

Model

TV board

PC board

Budgeted sales

80000

130000

Selling price

$200

 $350

Direct materials

 $ 100.00

 $ 160.00

Direct labour

 $ 27.20

 $ 67.20

Manufacturing overhead

 $ 7.60

 $ 7.60

Total cost (ABC costing system)

 $ 134.80

 $ 234.80

Contribution margin per unit

 $ 65.20

 $ 115.20

Total contribution margin

 $ 52,16,000.00

 $ 1,49,76,000.00

Thus, it can be claimed that the organization should go for ABC method of costing as this will help in raising large contribution margin in the products.

Recommendations on CEB Corporation Analysis

After assessing both the systems of costing for CEB Corporation, it can be concluded that the company must start applying ABC method of costing instead of standard costing system to estimate the cost of its products. This will help in resolving the issue of over allocation of overhead cost to the PC board. This method will fetch better understanding regarding the contribution margin on each product. In order to achieve better functioning of this system, the organization can arrange for an effective training workshop for the employees to increase their knowledge regarding cost drivers and the identification of major activities.

References for CEB Corporation Analysis

Foroughi, A., Kocakulah, M., Stott, A., & Manyoky, L. (2017). Activity-based costing: Helping small and medium-sized firms achieve a competitive edge in the global marketplace. Research in Economics and Management2(5), 150-171.

Altawati, N. O. M. T., Kim-Soon, N., Ahmad, A. R., & Elmabrok, A. A. (2018). A Review of Traditional Cost System versus Activity Based Costing Approaches. Advanced science letters24(6), 4688-4694.

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