Star Brewery: Activity Accounting
Question Two
Competitor Brewing Industry existed as the traditional EXTREME DARK beer and DARK beer low-cost producers. Profit margins remained to be above 20% of total sales. Five years later, the CREAM ALE brand was introduced, which needed the same basics of production technology and could be traded at a premium of 3%. Previously, the LITE beer brand was introduced to the company because it commanded a premium of 10% in the marketing price. This overhead weight rate was 300% cost of direct labor. Most individuals in the firm evoked that it is just previous years ago that the overhead rate stood to be only 250%. The staff members of the plant identified six classes of support expenditures that were presently being assigned to the production of beer.
The manager of the Competitor Brewing next tuned his devotion to the expenses of $50,000 to control the computer system of the company. He also interviewed the directors of the Management Info System department and Data Centre. He realized that most computer time (software expenses) was used in scheduling production turns in the company and to pay the materials needed in every production run. In total, around 80% of the computer resources were included in the activity of the production run. Practically, the (20%) of all the remaining computer expenses were utilized in keeping records on the four products, including the production process and associated engineering change notice information. The other three classes of overhead expenses, machine depreciation, the energy to control the machines, and machine maintenance were experienced in the supply of machine volume to yield the beers. The machines required had applied the ability of 16,000 productive time hours that can be provided to beer production. To remedy these excess production expenses, the marketing and sales manager must take into consideration the real opportunities to develop the industry by ranging the product lines into fresh products that offer premium-selling charges over CREAM ALE beers. The firm has to maximize the allocated time on scheduling and purchasing activities and keep pathways of where the company stands on backlogged, existing, and future orders.
Question Three
It is therefore recommended that adopting Activity-based Costing or Activity-based Management in STAR Brewery would be worthwhile. According to the analysis, Activity-based Costing offers a more precise method of service /product costing, resulting in more precise pricing decisions. It increases the comprehending of cost drivers and overheads; and makes non-value adding and costly activities more visible, letting managers eliminate or reduce them. STAR Brewery will not be of restricted profit if the costs of overhead are mainly volume connected or if the associated overhead is a slight proportion of the general cost. It is possible to assign all costs of overhead to specific tasks.
The selection of both cost drivers and activities might be appropriate. Activity-Based Costing helps to reduce costs by providing meaningful information on the opportunities available for reducing costs. Activity-Based Costing involves working first on the tasks. Hence, the executive can make the worth decision by understanding the nature of all activities. The activities might be categorized into two that is, non-value-adding and value addition activities. This Activity Based Costing will help the executive on concentrating the forces on value addition activities and eliminating non-value addition activities. Various costs are characterized as non-manufacturing expenses, for instance, advertisement. The non-manufacturing costs are easily distributed as the association between costs, and the situational sources can be accurately understood through Activity-based Costing. For future growth and success in the market, STAR Brewery firm must realize that other competing brewers must prosper. Consequently, instead of seeing fellow competitors of breweries as a threat, they must understand other products as the main rival. This idea will encourage an affirmative attitude in the sector.