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Intermediate Management Accounting

Table of Contents

Background.

Problem..

Theoretical analysis.

Quantitative analysis.

Recommendations.

References.

Background of CEB Corporation Analysis

CEB Corporation is a manufacturing company that manufactures different types of printed circuit boards, namely, TV circuit board and PC circuit board and provides them to the customers existing in USA, Europe, Australia and Asia. CEB is now under high performance pressure from its investors as they monitor the company’s cash flows and profit margins. The profits for the company are declining from the last 3 years. This is leading to the fall in the share price of the company. Its circuit boards are sold in large quantities, however, PC circuit board that was recently bought into production is not being sold very well. It is currently using standard costing system to allocate projected overhead costs on the basis of labour hours. The company uses high amount of direct labour in its process of manufacturing as lot of activities are manually performed. This raises the requirement for the corporation to allocate cost of manufacturing overhead in an accurate manner to its products.

Problem

The major problem faced by CEB Corporation is that it is current costing its products in a wrong way that may led to the rise of number of issues. The issues that may contribute to this major problem are:

  • Using an overhead rate on the basis of labour hours
  • Product cost subsidisation

Standard costing systems that involves an overhead rate are efficient to apply in circumstances where overhead cost can be evenly allocated amongst products. They are easy to apply and provide accurate results. However, some products offered by CEB are consuming considerable higher amount of indirect resources than others. This is the issue that may led to the inaccurate costing of products. Using standard costing system, it has also raised cross subsidisation that may contribute to under costing and over costing of items.

Theoretical Analysis

The major reason behind incorrect costing of products by CEB Corporation is that some of the products are consuming considerable amount of resources in an indirect way through batch level activities. As the company is recently using standard costing system, the performance of batch level activities are not influencing the overhead cost allocated to every product which is being allocated on the basis of labour hours. By using standard costing system, the margin of CEB would not be high as the company is expecting from its two products. If selling price is set just above the cost price, this may affect the corporation by not being able to cover various marketing, selling and administrative expenses. Moreover, if the products are priced at a high rate after allocating too much overhead cost, a corporation might lose sales owing to high selling price. It has been identified that the corporation has over allocated overhead cost to PC board which is being mentioned in detail under section quantitative analysis. Activity based cost method helps in allocating the overhead cost to the particular products on the basis of activities (Almeida & Cunha, 2017). It raises the understanding with regard to overhead and cost drivers and highlights non value adding and costly activities and enables the managers to eliminate or reduce them. It tells about the cost behaviour and fetches relevant costs for carrying out production of various products (Cuguero-Escofet & Fito, 2016). Therefore, this system helps in establishing correct price for the product.

Quantitative Analysis

The simplest way to identify whether the company is allocating the overheads in correct way or not is by undertaking an analysis of standard costing system and then perform comparison with the activity based costing system. Under standard based costing system, overheads are allocated on the basis of labour hours. However, by using activity based costing system to evaluate the cost of the two boards, the total cost for the two differs substantially. The total cost of both type of board is less under ABC costing system, due to which contribution margin per product is also high.

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

After evaluating the outcomes, it can be claimed that there was cross subsidisation under the standard costing technique. A part of overhead that must be allocated to TV board has been added as the overhead cost under PC board. ABC costing technique will be considered as the better and accurate method to allocate overhead cost to both boards.

Recommendations on CEB Corporation Analysis

It is highly recommended to CEB corporation to undertake ABC costing technique for accurately pricing the products. This will help in eradicating the issue of cross subsidisation and provides the company with the better idea with regard to the contribution made by different products. The corporation must plan and implement a training program for its accountants in order this costing method in a more effective and efficient manner. It raises the understanding with regard to overhead and cost drivers and highlights non value adding and costly activities and enables the managers to eliminate or reduce them. This system will help CEB in establishing correct selling prices for its products. 

References for CEB Corporation Analysis

Almeida, A., & Cunha, J. (2017). The implementation of an Activity-Based Costing (ABC) system in a manufacturing company. Procedia manufacturing13, 932-939.

Cugueró-Escofet, N., & Fito, M. (2016). The impact of ABC costing systems to solve managerial cost problems: a real improvement, a fad or a fashion?. European Accounting and Management Review3(1), 4-23.

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