ABC and TBC coffee bean finance comparison

Table of Content

This study analyses the costs associated with two of Coffee Beans Inc. merchandises, Moana Loa and Malaysian blends based on two different bing methodological analysiss, viz. the traditional occupation bing system that the company uses so far and the Activity Based Costing ( ABC ) .

ABC provides us with a more elaborate and accurate appraisal of the existent cost of the merchandises and it can function as the footing for suited strategic determinations, refering merchandises mix, pricing, providers and market placement.A major issue that have to be concerned is the discontinuance or non of Malayan blend. Appropriate recommendations and alternate solutions are being provided in order to ease the strategic determination procedure and assist the Board of Directors to travel to the right way that will optimise our merchandise mix, beef up our place in the market and hike our operating net income.Traditionally, companies used bing based entirely on direct labour or machine hours in order to apportion indirect costs to merchandises.

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A more recent attack is the Activity Based Costing ( ABC ) that first accumulates overhead costs for each of the activities of an organisation, and so assigns the costs of activities to the merchandises, services, or other cost objects that caused that activity.The present study will look into the costs construction of two merchandises of Coffee Bean Inc. , Moana Loa and Malaysian. Initially, the so far applied traditional method will be presented.

Then, the refined costing system of Activity Based Costing will be examined. Following there will be a comparing of the two methods with an attempt to turn up points that will uncover incompatibilities in costing and subsequent pricing of the merchandises. The purpose is Coffee Bean Inc. to place exactly which drivers dominate the cost of each blend and actively set its merchandise mix, pricing, buying and selling scheme.

Decisions and recommendations on possible paths of jobs, solutions or schemes to follow will be exhaustively discussed and a crystal clear image of the “ cause-effect ” relationship of all phases and factors in each blend will be drawn.The first method of bing used to measure the Coffee Bean merchandises ‘ costs and profitableness is the traditional costing method. This provides an initial base for comparing in order to measure the Malayan and Moana Loa java blends against each other.The traditional costing method classifies all fabrication costs of merchandises into three large classs, these being direct stuffs, direct labour and fabrication operating expense.

Direct stuffs and labour are straightforward in the instance of Coffee Bean Inc. Company data provided breakdown these costs for both java blends in inquiry. On the other manus, the 3rd class of fabricating operating expense may non ever be every bit accurate as it is applied based on a leaden norm for the merchandises. The computation of all three classs is discussed in the undermentioned paragraphs.

Data is provided for the direct cost of Moana Loa and Malayan javas every bit good as the direct labour costs ( Table 1 ) . In add-on, a anticipation of production in lbs for each merchandise is 100.000 and 2.000 severally.

Given the above inputs, the undermentioned direct costs are extracted:Moan Loa Direct Material CostMoan Loa Direct Labor CostMalayan Direct Material CostMalayan Direct Labor CostThe fabricating overhead budget provides us with a agenda of costs for java bean merchandises including all other costs other than direct labour and stuffs. In order to find the indirect fabrication costs, the overhead rate used to bear down all the indirect fabrication costs is determined. The merchandise of the overhead rate along with the direct cost allocated to each java trade name provide a figure of the indirect fabrication operating expense which can be allocated to each blend.Having all three classs of conventional costing and the measure of each blend required for production, a budgeted cost and monetary value of each blend can be acquired ( Table 2 ) .

It is apparent that the budgeted cost and monetary value of Moana Loa blend is higher than that of Malaysian, making values of $ 6.00 and $ 5.00 severally. Given that the direct stuff cost is the lone different driver in value, and all other costs are found as a merchandise of common rates with measure, this consequence is expected.

Higher direct stuff cost of Moana Loa, leads to higher monetary value.This consequence is seen with incredulity since the informations provided for the different activities does differ with blend pick, and to delegate fabrication costs based on leaden norms of production is a simplistic manner to travel. The consequence the different activity costs provided per blend have on their budgeted costs is investigated in the undermentioned subdivisions.The 2nd method of bing used to measure the java bean merchandises ‘ costs and profitableness is the Activity Based Costing ( ABC ) method.

This method will uncover the nexus between executing peculiar activities like buying, stuffs managing, quality control, processing beans which consist our indirect costs, and the demands those activities make on the organisation ‘s resources.In contrast with traditional method, in ABC the disbursals incurred to bring forth single units of peculiar merchandises ( Malayan and Moana Loa java blends ) are separated from the disbursals needed to bring forth these different merchandises.Refering the activities of roasting, blending and packaging, they have the same overhead cost per hr. Hence, they all can be included in a pool of processing costs since they are homogenous with a cost allotment base or hours of processing.

( Table 4 ) .;In add-on to the cost allotment rate, the rate per unit of each cost allotment base used to apportion indirect costs ( activities ) to the merchandises is required. Activities are bonded with activity drivers. Therefore, activities like buying, stuffs managing and quality control are linked with cost drivers known as dealing drivers where the figure of times an activity occurs affairs.

On the other manus, processing activities are associated with continuance cost drivers where the clip needed for the completion of each activity is of importance. Each activity uses a specific cost allotment base. Recovering informations from Table 5 of the appendix, the sum allocated to the cost base used is found.;It is deduced that budgeted cost and monetary value of Moan Loa blend is lower that of Malayan holding values $ 4.

82 and $ 6.27 severally contrary to the values of $ 7.54 and $ 9.80 of Malayan blend.

The figure of the end products affects the budgeted costs and monetary values of the blends. Economies of graduated table are introduced in the production of Moana Loa contrary to Malayan java. In the first blend the outlook of 100.000 lbs gross revenues allows bigger distribution of cost per lb.

At the same clip forecasted gross revenues of 2.000 lbs for Malayan java do non allow the merchandise to profit through this method as the cost and the monetary value is higher.The contradicting consequences originating from the application of the two bing methods ( traditional and ABC ) are farther analyzed.Comparison Between the Results of Traditional Costing and Activity Based Costing for Coffee Bean Inc.

The first evident difference which arises from the application of the two aforementioned bing methods is the important spread between the concluding cost figure of each method ( and accordingly the large difference in the monetary value of each blend ) . With traditional bing the cost of Moana Loa is 25 % higher than in the instance of ABC ( $ 6.00 Traditional, $ 4.82 ABC ) while for Malayan blend the cost when calculated with the traditional method is about 51 % lower than what in the ABC instance ( $ 5.

00 Traditional, $ 7.54 ABC ) . The ground for this cost ( and accordingly monetary value ) difference is the cardinal difference between the two bing systems which is the premise in traditional costing that cost objects consume resources whereas in ABC it is assumed that cost objects consume activities.Another thing that becomes clear with the usage of ABC but could non be observed with the usage of the traditional costing method is the fact that the point with the lower stuff cost is really the 1 with the higher monetary value ( the cost of the natural stuff for the Malayan blend is 24 % lower than the cost of natural stuff for the Moana Loa blend while the monetary value of the Malayan blend is 56 % higher than the monetary value of the Moana Loa blend ) .

The above observation can be explained by the fact that in the instance of the Moana Loa blend we have economic systems of graduated table, so the entire cost per lb is lower than the entire cost per lb of the Malayan blend, even thought the cost for the natural stuff is higher for the Moana Loa and lower for the Malayan blend.In general after detecting the consequences of the two methods we may state that in the instance of the traditional costing method the normally lead oning consequences that we obtain do non let us to detect and take actions for instances of mispricing, do non ever do clear the instances of economic systems of graduated table, do non do us inquire about the effectivity of our merchandise blend an so on. It is obvious that without accurate cost figures, direction can non do accurate observations and take actions sing of import issues.;RecommendationsThe above decisions make clear that some disciplinary strategic actions are perfectly necessary in order to re-launch our merchandise mix in a more efficient manner, offer value-for-money to our clients and take our concern frontward.

Based on the cost analysis under ABC system and the decisions that were derived, the undermentioned recommendations are made:We should stop the production and merchandising of Malayan blend since it is presently a beginning of loss for our concern.If there is a particular ground that we do non desire to stop the selling of Malayan java ( antique. to cover the demands of some good and particular clients that want a broad assortment of merchandises ) , there is an alternate solution that can turn Malayan java profitable. The solution is to do an accurate gross revenues projection and unite the gross revenues orders throughout the twelvemonth in merely one order that will cover the demand for the whole twelvemonth.

The proper storing conditions will guarantee the optimum saving of the merchandise. In order to exemplify that statement with Numberss, if the budgeted 4 orders of 500 lbs each were unified in one order of 2000 lbs ( entire one-year estimated gross revenues ) the cost per lb will drop from $ 7.54 to $ 4.63 per lb and there will be a net income.

We can keep the monetary value at $ 6.50 ( in order non to confound the market ) and have a net income of $ 1.87 per unit or diminish the monetary value to $ 6.02 ( 30 % mark-up ) and addition market portion with the competitory lower monetary value of the merchandise.

Possibly, the ground that Malaysian does non sell much and has really low market portion is that it is expensive in relation to its quality.We should analyze the cost of all other 13 merchandises in order to detect other merchandises that may be inexpedient to go on bring forthing.We should carry on a Market Research in order to garner information of the consumer behaviour sing the java ingestion and find their willingness-to-pay for more premium merchandises. That will assist us make up one’s mind if we shall keep the monetary value of Moana Loa at $ 7.

80 and advance it as a premium quality java in order to hold a high mark-up ( 61.8 % ) or lower the monetary value to $ 6.27 % ( 30 % standard mark-up ) , increase gross revenues and addition market portion from rivals.The demand for alteration in our pricing policy will convey about the demand for other strategic alterations every bit good.

We shall be after our tactics towards our scheme taking into history other relevant information. We have to do better gross revenues projections based on historical informations of our gross revenues and on market intelligence. The proper market research will supply us with information about consumer penchants and demands, so we can polish our merchandise mix ‘ quality and monetary value offered to the consumers.We will so continue to a more elaborate cleavage of the market and advance the right merchandise to the right consumer section ( ex.

premium java for willing-to-pay clients and less expensive blends to clients that consider coffee a trade good ) . Besides, information about rivals ‘ moves that can come from our providers and sweeping clients would be highly valuable for the function of the market field.Another facet that we should look into is the beginning of our natural stuffs and the location of our providers. We have 15 different natural stuffs ( java beans ) that come from assorted providers.

If we could group providers together based on their location, we could plan a co-ordinated buying program that would unite the orders and diminish a batch the transit cost. As an immediate consequence, we will hold a higher operating net income per merchandise.Overall, this new costing system will assist us go more efficient, more productive, do better strategic determinations and our merchandises will became more competitory with the new representative pricing that will be based on the existent cost and the existent value they carry to the consumer. That will beef up our place in the market and authorise the company to spread out in other consumer goods market every bit good.

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