Activity Based Management: Sail Rite (Marine Tools Industry)

1416 Words6 Pages
Activity Based Management –Sail Rite (Marine tools Industry) CPM Assignment 1 8/15/2015 IIM INDORE SOMA BANIK (2014PGP370) Product ABC allocation Burger 1000 x 8/10 = 800 Cola 1000 x 2/10 = 200 Cost Driver Machine runs Burger 800/50 =Rs 16 Cola 200/50 = Rs 4 INTRODUCTION TO ABM Activity based management is a method that analyzes how a company incurs costs from its activities and not from its final products. For this purpose, activity based costing plays a major role in proportionately distributing the manufacturing overhead costs over products in a logical manner. The simplest example to understand this concept of ABC is the burger and cola example. If a small shop sells burger and cola and the total time it takes…show more content…
Identifying the cost object 2. Identifying the direct and overhead costs 3. Selecting the activities and cost allocation base for assigning cost overheads to the cost object 4. Developing the overhead rate per unit for allocating overhead to the cost object ABM ANALYSIS OF SAIL RITE In this report, I will be discussing the ABM model of a company called SailRite. This is owned by Matt and Hallie Grant and a full stock online retailer of fabrics, tools, kits and their flagship product, sewing machines. It started in 1969 and slowly began diversification into not only boats but also home fabrics. Sail Rite believes the cost of its manufacturing equipments are costly and it is essential that they keep a count on which material is used in which activity to produce what product. Hence Sail Rite has recently dived into ABC costing. Sail Rite follows a 5-step approach to ABM. Before ABC, Sail Rite was aware that the total overhead costs in the company were around $8 million. After evaluating the balance sheets and other financial statements, the company accountant came up with the following activity list:- Step 1: Identifying activities contributing to overhead costs 1. Purchasing materials 2. Machine set…show more content…
Recommendation: Economies of scale is not taken into account in ABC method. For such kind of industries where there is a possibility of making more production units by utilizing more resources, a large portion of overhead costs are actually fixed costs which must be spread proportionately among number of units produced. For example, if 2,000 units of deluxe boats were produced instead of 1000, the product unit cost will vary accordingly and the new value, say x will now be divided among 2000 units instead of 1000, thereby reducing the unit production cost. The company then has to dynamically change its pricing policy since the product can now be sold at a cheaper price with similar or more profits. Companies must keep this in mind.

    More about Activity Based Management: Sail Rite (Marine Tools Industry)

      Open Document