Zenon manufacturers deal in two products, Namely CD1, and CD6. Product CD1 has won several awards, and product CD6 is relying on its good reputation to gain market share. Attention has been drawn because; with the adoption of two different accounting methods, namely the Traditional accounting method and Activity based management; there is a switch in profit and loss between the products (Leitner, 2014).
Establish the cause of switch in product’s profit and loss with the adoption of different accounting methods is the reason we are working to establish the cause and offer recommendation. Establish the most suitable accounting method to adopt and rely on for decision making, in particular by the Marketing and production departments to check the basis and suitability for overhead absorption and apportionment basis (Eyring, M., Johnson M.W. and Nair H. 2011).
Mr. Wong, CEO to do a thorough scrutiny of all cost overheads especially those with variable elements and ensures they are controlled and maintained at most possible lowest levels with the aim of increasing overall firm’s profitability (Hildebrand, 2009).The decision to apportion Pool S’s Overheads using Labours hours Base should be reviewed for appropriateness, basing on the fact that S’s overheads relate to all activity support costs. The effort is made to the specific classification of such expenses to ensure no biases or burden among departments during apportionment.
Set up hours efficiency be improved especially in product CD1 based on the fact takes twice as long as setting figured for CD6 to reduce the comparative advantage elements present for product CD6 (Algarín, 2016).
2. Report on the Reasons for Different product’s Profit and Loss Amounts
This report focuses on the causes of different product profitability with an application of various accounting methods, namely, the Traditional two Stage system and the Activity Based system (Ciravegna, 2014).The fact that each set up for product CD1 takes twice as long as configured for product CD6 is a primary cause of the discrepancy. Example, like the case in January 2016, where some setting up was 1000, This simply, while product CD1 was at setup 500 stage, product CD6 was already at 1000.This comparative advantage can be attributed to production economies of scale. Thus less unit costs hence higher profits.
A keen analysis of the methods different Unit costs is, Traditional CD1, CD6 249.38, 220.83 respectively, on the other hand, the Activity based method, unit cost CD1, CD6, 262.32 and 203.57 (Ciravegna,2014).The unit costs are relevant since they determine the level of productivity. These varying levels of unit costs can be attributed to the fact that, unlike traditional method which focuses on the general production process, the activity-based methods revolves around the actual activity overheads involved in producing the unit of product. Like the case of CD1, there might be some elements which are spilled over to the unit costs of CD6 during the second stage overhead absorption and apportionment in the traditional method, unlike the Activity based method where specific costs and overhead activities are curtailed to a particular product.
The different amount is attributed to the fact that, during the second stage in the traditional method where accumulated expenses are apportioned to the products using direct labour hours as the base. The summing up of costs at this stage causes the proportionate cost sharing between the products, this tend to be bias especially on Product CD6 since with adoption of the activity Based method the overhead amounts are lower, since it focuses on specific activities relating to a product, thus product CD1 bearing the overhead burden.
In conclusion, the CEO should identify the main cost drivers in Pool S especially those with variable elements, since the Pool tends to have an overall effect on the firm’s profitability.
3. Production and Marketing managers t can focus on producing most profitable like the case of CD1 (in traditional) and CD6 (in activity based) increased production implies higher profits hence viable (Farkas, 2016). In order to reduce losses/ increase profitability, management needs to focus on cost cutting mechanisms and non-costs strategies aimed at reducing units cost, best method can be tailored. Example, Employers be motivated, thus increases efficiency leading to a drop in set up hours which in turn pushes unit costs downwards (Papadopoulos, 2013). The marketing department efforts are geared towards promoting a more profitable product since profitability relates to the general firm. Basing on the fact that CDI reputation is good and has won awards on the other hand CD6 has gained market share based on CD1.
In such scenario, management is forced to continue product production irrespective of profitability level. On the other hand, Management accounting in relation to increasing profitability enhances controlling which ensures that all plans are implemented as per the objectives thus increased profit since objectives aim at profit maximization (Algarín, 2016). Management accounts helps in Organizing and grouping of activities thus ensuring higher profit levels and economy during production process, for instance the production and marketing department activities be grouped with an aim of smooth work flow.
In conclusion the management of Zenom manafucturers should adopt the most appropriate accounting method which incorporates the current and future organizational requirements.
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