Every single organization of the world is now trying to flourish their growth comparatively better than that of their competitors (Bradtke, p.45). The thing that really matters for them to have the same comparative growth potential is the management of operational cost. Operational Cost, though a common thing for an organization, but emerged as a real gangrene if the proportion of the same would be on a higher node (Cokins, p.34).
Cost-Volume Benefits always bring positivity in the functions of the company, as it has the ability to manage the operational cost in such a manner that leads to further strengthen the financial functions of the entity (Cokins, p.56). The essence of costing depends entirely upon two different aspects known as Traditional Full Costing and Activity Based Costing.
Activity Based Costing (ABC) is the type of costing that emerged remarkably well after this current economic crisis created intensifying situation for most of the manufacturing companies of the world (Kaplan and Anderson, p.88). ABC requires the organization to incur the cost according to the activity, and put only specific amount of material and labor in performing the activity (Cokins, p.66). After the severity of the current economic collapse, most of the organizations of the world have changed their cost structure to ABC rather than implying any other form of cost, as it has the ability to manage the cost of the company in a more effective manner for the company (Goektuerk, p.77). There is a clear difference found among the traditional full costing method and Activity Based Costing (ABC) method, and it is equally applicable over the Gateway Plc as well. From the first task of calculation, it is found that Gateway Plc is strategizing to make three products, the Nidd, Ouse and Foss, however they would like to change their current costing style to ABC, and required thorough analysis over the implication of the ABC (Kaplan and Anderson, p.67).
There is a clear difference found among the total labor hours and total machine hours, and it can be found in the below mentioned chart
It is showing that Gateway Plc has to employ 60,000 labor hours for making the aforementioned three products, while the machine will take only 40,000 hours to complete the making of the same three products. Overhead per unit cost in this scenario is higher for the Total Machine hour’s scenario, manifesting a total overhead per unit cost of 70.75, while it is 47.16 for the total labor hours. There will certainly a difference count among the production cost and the profit amount while employing the labor hours and machine hours particularly (Kaplan and Anderson, p.67). The comparative production cost of Nidd, Ouse and Foss in these two scenarios is as follows
In the graph, the blue denoted graphs are showing the total production cost after employing the labor hours, while red denoted graph is showing the total production cost by employing Machine Hours. Comparative analysis is clearly showing the difference in the total production cost while implying labor hours and implying machine hours (Kaplan and Anderson, p.67). It means that labor hours working is providing a sort of cost efficiency to the company as compared to use the machine factor. The comparative profit in these two scenarios is as follows
Now, there is another costing factor that will be applied here for the comparison known as Activity Based Costing (ABC) (Kaplan and Anderson, p.80). After employing the ABC on the scenario of making these three products and comparing its overhead cost with Machine Hours and Labor Hours of the traditional cost, mentioned below result is found
The aforementioned chart is clearly showing that applying the activity based costing will decrease the level of overheads of the company effectively, which will lead to increase the bottom line of Gateway Plc. All of the selected products, Nidd, Ouse and Foss have a relatively lower overhead cost while applying the costing technique of ABC. The graph is showing that the total production cost will be on the highest node after applying the Machine Hours, as it has an average overhead cost of £ 439.91, followed by the average overhead cost of Labor Hours which is £ 438.73. In contrast to these couple of cost scenarios, the average overhead cost incurred by the Gateway Plc while making those three products is £ 249.366, which is nearly 43% lesser than that of the traditional costing methods. This particular graphical representation is in the favor of employing the ABC while making those three products for Gateway Plc. The analysis will get firmer, if the effect of the ABC and other traditional methods will be analyzed on the basis of the profit (Kaplan and Anderson, p.102).
Profit Generation and Maximization is the most important state for the organizations, and it is equally applicable for Gateway Plc as well (Kaplan and Anderson, p.88). Operational cost has a direct linkage with the net profit of the company. The net profit generated through each of the product by employing two different costing techniques is as follows
Profitability is an important element that associated specifically with an organization, in fact without the same intension, no entity can view the things for the future needs (Kaplan and Anderson, p.88). Costing has a direct linkage with the core financial position of an organization, this cost efficiency is essential for the company in their future. As a conclusion of this part, it can be said that profitability depends heavily over the costing techniques, and organizations would choose the technique according to their need and organizational structure (Kaplan and Anderson, p.88). The analysis depends upon the manufacturing of three products which are Nidd, Ouse and Foss. Two traditional methods, one is the traditional method of costing and Activity Based Costing (ABC) have been utilize in this section. Activity Based costing found with greater effectiveness to the company that will provide both economic and strategic benefits to Gateway Plc. The company is also strategizing to have the same costing technique, and the current analysis provided clear evidence regarding the usefulness of this technique in terms of gaining long term financial benefits.
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