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The presentation to defend my thesis in which I examined various cost allocation methods to see if it can be implemented in a medium sized company. Time driven activity based costing was one of them as it turned out that this was the only method the could be implemented at the lowest costs. However, th conclusion was that give the technical requirements and the costs to implement the method the costs do not outweigh the benefits.
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Finding a cost allocation method to
define brand profitability
What to expect from this presentation
Introduction1
The client and the problem2
The Theory – what is a cost allocation method3
Research and findings4
What to expect from this presentation
The methods suggested to the client 5
The choice of the client 6
The findings and recommendations7
End of presentation8
Introduction
The client – key facts Annual turnover about 35 million in EU
markets Employs about 150 people in Europe & US Highly competitive industry with low
margins Distributed in Europe and the US
Introduction
Problem definition The company experienced dropping
revenues and rising overhead costs in the past 3 years
Margins also decreased due to price pressure in the markets
Reorganization – cost cutting and brand oriented strategy
Theory – a cost allocation method
What is it all about? Overhead cost allocation is part of cost
control – profit maximization Get more insight in the overhead cost
structure Derive important information e.g. brand
profitability or whether to keep or eliminate a brand
Theory – a cost allocation method
Cost object = brands
Indirect cost = overhead
Direct or Indirect cost?
Total costs
Indirect costs are usually named as overhead costs
The important question direct or indirect cost?
All costs of a company
How is overhead related to the cost object?
The research
11There are a number of options available
22Cost allocation methods are widely implemented
33Cause-and-Effect relationship determines accuracy of the allocation method
The methods suggested to client company
Traditional costing method•Simplistic•Inexpensive to operate •Does not examine cost causes closely – inaccurate
Based on requirements &
research
Time driven activity based costing•It’s a modification of ABC•An accurate cost allocation model can be built easier and faster.•uses time equations that directly assign costs to activities
The choice of the client company
Cost allocation base = percentage of sales
A sales subsidiary so overhead is driven by sales €
Business processes and activities performed for each brand are the same
Traditional costingTraditional costing but...but...
Traditional costingTraditional costing but...but...
Findings, conclusions and
recommendations
1
Findings•The management never really looked into product and brand profitability •Cost control beyond direct costs was clearly of secondary importance •Not knowing these cost causes forces the management to react rather than act.
32Conclusions•Various options to solve the problem area available but only limited choice when budget is too tight•Arbitrary cost allocation base can be misleading and can disguise the actual brand profitability•Cost allocation goes beyond purely allocation costs – business tool!
Recommendations•Start a project to research the different cost allocation methods in more detail and compare the results•Conduct an analysis on overhead cost causes•Research on new ways of working
