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BikeWorks Inc., is a small bicycle manufacturing company that produces two types of bicycles: Standard and Mountain . BikeWorks is facing increasing cost pressures in
BikeWorks Inc., is a small bicycle manufacturing company that produces two types of bicycles: "Standard" and "Mountain BikeWorks is facing increasing cost pressures in today's competitive market. In an effort to gain better insights into its cost structure and optimize resource allocation, the company decided to implement ActivityBased Costing ABC accounting. Traditional cost allocation methods did not provide a detailed breakdown of costs, making it difficult to pinpoint areas of inefficiency.
This case study explores how ABC accounting helped BikeWorks Inc. identify cost drivers, improve cost allocation accuracy, and make more informed strategic decisions. The increasing competition is imposing cost reductions while maintaining product quality and customer satisfaction. The company is seeking your assistance as an accountant to provide guidance on how to address companys challenges, and conduct a comprehensive cost analysis to help the company understand its cost structure better based on ABC costing method. Below is information for each product:
Standard bikes Mountain bikes
Units produced and sold
Selling price per unit $ $
Plastic per unit $ $
Metal per unit $ $
Direct labor rate $ per labor hour $ per labor hour
Direct labor hours
Design hours
Machining hours
Plant surface m m m
Number of inspections
Maintenance hours
Production runs
Indirect costs are as follows:
Activity Activity cost in dollars Cost driver
Design costs $ Design hours
Engineering costs Machine hours
Rent costs Plant surface
Inspection costs Inspection hours
Maintenance costs Maintenance hours
Setup costs Production runs
BikeWorks Inc. provided additional details concerning further indirect costs:
Standard bikes Mountain bikes
Selling & advertising costs of sales revenue of sales revenue
Shipment costs $ per unit sold $ per unit sold
Total administrative costs amounted to $ and were allocated based on the plant surface.
Required:
Calculate the total cost per unit for each product based on traditional costing system simple costing assuming that the company was using machining hours as a cost allocation base.
Calculate the operating income per unit for each product as per traditional costing system. Deduce the total operating income of the company.
Describe briefly why Activitybased costing is important for companies.
Calculate the total cost per unit based on activitybased costing system.
Calculate the net income per unit for each product as per activitybased costing system. Deduce the total operating income of the company.
Specify whether total cost of each product is underestimated or overestimated. Explain why the traditional costing and ABC costing systems did not generate the same total costs.
Explain briefly how the company may benefit from using the activitybased costing system, by underscoring the benefits of ABC management.
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