Rollers co. produces two different rollerboards. Basic model is sold to the grocery markets and pro-model to spesific stores. 

Although the company has been successful, its management must continually make decisions regarding, among other things: product range and volume, product pricing, production process and suppliers, and customers.

The founder and largest owner of the company, Jan Mertala, has hired four executives for the departments of administration, sourcing, production and marketing. The cost accounting system records the costs of each section separately, as well as the materials and labor required for skateboards. Jan has estimated that next year 50,000 basic board and 5,000 pro model boards could be produced and sold. The basic model boards can be produced in 10 batches, while the pro model boards must be manufactured individually. 

The competitors have very similar products. Products competing with the basic model are sold for € 15, while pro models are sold for € 25. Jan Mertala estimates the following year's costs to be in accordance with the table below, assuming that 50,000 basic skateboards and 5,000 pro model skateboards will be manufactured and sold.

Estimated costs (€)

Materials 60,000

Labour 300,000

Administration 90,000

Acquisition 50,000

Production 210,000

Marketing 100,000

In total 810,000

Currently, 91% of the boards produced are basic and the remaining 9% are pro. Current prices reflect competitors' prices, but Jan is quite confident that by lowering prices he could sell more boards. Before making a pricing decision, however, Jan needs to know the cost of producing the boards. If the production cost of one board exceeds the price of competitors, this product may need to be dropped from the product range. On the other hand, if the cost of production is below the market price, the price may be reduced. Unfortunately, the current cost accounting system does not provide accurate product cost information. Nor is Jan convinced that his company is operating effectively. Even if prices could be lowered, further efficiency gains could lead to even lower prices. In order to answer these questions, a company must analyze and understand its operations.

Cost accounting

Jan appreciates the immediate materials (including plywood, glue, polyurethane, tires, shafts; in the pro model also the plastic coating) and the immediate work needed to make the boards. After discussing with the suppliers and observing the time spent by the production workers, Jan calculates the direct cost of each type of rollerboard: (Table 2)

A comparison with market prices (€ 15 and € 25) shows that there is no immediate need to change the product mix. However, Jan knows that direct costs are only part of the truth - he still has to estimate indirect costs.

Jan has heard that activity accounting, whereby departments are structured by function and activity costs are allocated to the targets using function cursors, usually leads to accurate product costs and creates decision-making transparency in the organization's cost structure. The following table shows the functions identified by Jan, the function cursors, and their volumes. (Table 1)

Compute   Indirect costs allocated to the basic model and pro-model.

Compute the absorption costs for the basic model and pro-model.

Table 1                                                                                                                                                      

Basic model (Second left column)		Pro-model (Left column)
Functions	Function costs  (€)	Function cursor	Cursos volume	Use of function for basic model		Use of function for pro-model
Administration	90 000	Direct working hours	30 000	25 000		5 000
Acquisition	50 000	Number of orders	100	30		70
Production
storage	18 000	Number of deliveries	150	50		100
cutting	50 000	Machine hours	5 000	4 000		1 000
bonding	10 000	Machine hours	5 000	4 500		500
setting of molds	55 000	Numbers of settings	6 000	5 000		1 000
painting	35 000	Paint litres	1 000	500		500
composition	42 000	composition hours	10 500	8 000		2 500
Marketing	100 000	Number of customer visits	80	40		40
Total	450 000

Table 2:                                                                                                                                              

Basic model						Pro-model
Direct cost	Quantity		Price €		Cost €		Quantity		Price €		Cost €
Plywood	1m 2 /kpl		0,2/m 2		0,2		1m 2 /kpl		0,02/m 2		0,2
Tire-axcel packages	2/kpl		0,44/pkt		0,88		2/kpl		0,44/pkt		0,88
Plastic coating							1/kpl		0,12 kpl		0,12
Direct labour	0,5h/kpl		10/h		5		1,0h/kpl		10/h		10
Total					6,08						11,2