Question 1
We applied the ABC costing method (see appendix 1 for details) and compared the calculated unit costs against the formerly used methods. The following table gives an overview of the significant impact on the calculated unit costs :
Mainly for the flow controllers the ABC method allocates a much higher unit costs compared to the revised method. For the valves the unit costs barely changed with the costing method, whereas for pumps the unit costs according to the ABC method is around 20% lower than calculted with the standard method.
Applying the different costing methods impacts the calculated gross margins as depicted in the table above. This means, when taking the ABC method perspective we are of the opinion that the other methods can not have been appropriate in light of the huge differences.
In general, the distribution of gross margin between different products has changed. The pumps are more profitable as opposed to former costing methods, whereas flow controllers appear in a much worse light. They actually destroy value and do not cover their total unit costs.
Question 2
In order to understand the different outcome, the following analysis focuses on the reasons of the above found unit costs.
The subsequent table highlights only the most significant changes in overhead cost allocation. Material and labor cost were not affected by the costing method and have thus been neglected.
Compared to the standard and revised method the difference of the ABC costing method stems mainly from allocating differently the engineering, packaging and shipping costs as well as the receiving and handling costs. This is due to the higher number of transactions necessary to produce the flow controllers. This aspect was comp ...