How can activity based costing address the distortions of product costing linked to traditional costing systems? attatched is the costing carried out with traditional costing

Design Product and Production Process to Achieve Target Cost Denise has established a team to manage the product and manufacturing process design. The team consists of person from each of the following areas: marketing, engineering, purchasing, accounting and administration. The team identifies an initial cost for the Mountain Braker. The engineer altered SCB's basic bike design to incorporate the new braking system. The cost estimate of 905 is higher than the target cost of 855, so the team considers ways to reduce the cost. The team assembles information about current costs and necessary cost reductions, assuming sales of 50,000 bikes. They identify areas with the most potential for cost reduction and then establish the following estimates for these reductions. Current Cost Per Bike 50 710 Target Cost Reduction Cost Needed 50 0 680 (20+120+20) 30 730 50 Cost Category New brake development Manufacturing Total manufacturing costs Selling and distribution Warranty and support Administration Total cost 760 55 30 55 905 fixed cost 45 855 Similarly, the total manufacturing/cost amount of the current costs per bike includes following: non-variable costs 50; indirect costs 100; delivery costs 20. In terms o target cost per bike, the total manufacturing costs include the following: non-variable 17. 1. ante con Price 950 Less profit margin 95 Target cost 855 Design Product and Production Process to Achieve Target Cost Denise has established a team to manage the product and manufacturing process design. The team consists of person from each of the following areas: marketing, engineering, purchasing, accounting and administration. The team identifies an initial cost for the Mountain Braker. The engineer altered SCB's basic bike design to incorporate the new braking system. The cost estimate of 1905 is higher than the target cost of 855, so the team considers ways to reduce the cost. The team assembles information about current costs and necessary cost reductions, assuming sales of 50,000 bikes. They identify areas with the most potential for cost reduction and then establish the following estimates for these reductions Current Cost Cost Category Per Bike New brake development 50 Manufacturing 210 Total manufacturing costs 70 760 Selling and distribution Warranty and support 35 Administration 195 17. 55 Total cost 905 Target Cost Reduction Cost Needed 50 680 895.47 30 730 30 50 5 %3A SA 55 30 14.6% 10 45 855 50 Similarly, the total manufacturing cost amount of the current costs per bike includes the following: non-variable costs 50; indirect costs 100; delivery costs 20. In terms of the target cost per bike, the total manufacturing costs include the following: non-variable costs 30; indirect costs 120; delivery costs 20. However, when Denise shared the estimates with his brother, a management accountant, he suggested that a further sub-categorisation of the cost elements and other external information might help the company in its quest for cost reduction and its ambition in securing a 25% market share. Required: (1) With reference to SCB's intent of developing a distinct product, discuss two pricing strategies that may be associated with what SCB is seeking to achieve. Your discussion should include the potential challenges that SCB may face in going for either of the two pricing strategies. Where possible, illustrate your discussion with the data from the case (25 marks) (11) As the estimates stand, to what extent do you agree or disagree with the team in terms of their most potential areas for cost reduction? Discuss and where possible, illustrate your discussion with the data from the case. 249 (25 marks) Part A (maximum 750 words, 50% of the coursework marks) Santa Cruz Bikes (SCB) is a start-up company that manufactures high-quality mountain bikes to compete with products from companies such as Ridgeback and Trek. SCB's high quality bikes have some of their parts acquired from suppliers. Examples are the bike' seats, handlebars, tyres and tyre tubes. The company offers a three-year warranty and support to its customers. One of SCB's emplovees developed a new braking system that allows bikers to descend steep slopes using a consistent braking pattern that pumps both front and back brakes at regular, pre-set intervals depending on the brake setting chosen by the biker. The marketing department surveyed current customers and found they would be willing to pay more for this option. Because SCB's brand is not a well-established one, prices for its bikes need to be kept below those of its major competitors. SCB's owner, Denise Clark, wants the company to launch a line of bikes with the new braking system. Her accountant who has recently joined the company recommended that the company use target costing and/or pricing to develop the new product to ensure that design is a financially viable one. The accountant also highlighted that he was concerned about the company's current reliance on traditional cost allocation system in determining the overhead cost of their product. As such, the accountant recommended that the company could use Activity Based Costing (ABC) as an alternative to the traditional costing system in allocating their overhead costs. After conducting customer surveys and a number of focus groups, SCB's marketing staff identified five features that are highly important to prospective customers: the weight of the bike, the bike's ability to withstand hard riding in difficult terrain for long periods of time, appearance, ease of handling, and riding comfort over rough terrain. Depending on the brand name of the bike and its components, the market price for competing models with these features ranges between 800 and 1,200. The closest relevant model with the market share in that price range is priced at 949. From the survey and focus group information gathered. Denise believes that a bike with the new braking system and the same levels of quality and functionality as the competitor's models should be priced at 950 to achieve a 25% market share. SCB has decided to call the new model the Mountain Braker. Denise sets a minimum profit margin of 10% on new products. Given this information, Denise's accountant sets the new product's target cost