2 paragraphs email to the president of the company. Proposing an activity based costing system and what that might mean for product costs and management decisions. A brief example such as cutting labor and adding machines you feel that is necessary for your explanation to the president.

ANSWER

Activity-Based Costing System

An activity-based costing system entails a method of accounting that can help find the total cost of activities necessary to produce a given product. For this particular company and its products, the ABC system will be of utter importance, since it will assign costs of each activity undertaken by the company, which goes into production.  As a result, it will help determine the costs of goods sold and help determine the costs of creating a product (Childers & Maggard-Gibbons, 2018).  Its primary focus will be the direct costs, without the inclusion of indirect costs such as overhead.  For overhead expenses, it will be essential to allocate them keenly among all the products.

An activity-based costing system will hence be vital to help the firm in effective management, where the leadership will be conversant with the costs that are likely to be used when producing the products. Having an activity-based system will also significantly aid in product pricing by setting prices that produce a healthy small business profit margin (Blakely-Gray, 2018). Knowing the costs that go to the company’s products makes it easy to understand the best ways to enhance profit margins, which is an added advantage to its overall revenue generating strategy.

The ABC system helps make effective management decisions of a company, since it helps assign costs to each production process activity. This aids in allowing the firm to accurately set the prices, which will account for the total costs required to create a product (KENTON, 2020).  As a result, the firm will maintain its top position in the industry and keep up with the competition through the products’ apt pricing.

References

BLAKELY-GRAY, R. (2018). Activity-Based Costing for Small Business. Retrieved from https://www.patriotsoftware.com/blog/accounting/activity-based-costing-small-business/

Childers, C. P., & Maggard-Gibbons, M. (2018). Understanding costs of care in the operating room. . JAMA surgery, 153(4), e176233-e176233.

KENTON, W. (2020). Activity-Based Costing (ABC). Retrieved from https://www.investopedia.com/terms/a/abc.asp#:~:text=Key%20Takeaways,task%20with%20a%20specific%20goal.