peau Company is noted for an exceptionally impressive line of one-size fits-all men's hats. Chapeau has established the following selling and distribution support activity-cost pools and their corresponding activity drivers for the year 2018: Activity Cost Cost driver Marketing $106,000 $1,540,000 of sales Customer service 70,000 10,000 customer Order execution 2,000 500 orders Warehousing 15,000 152 product lines Required: 1. What kind of a costing system is your company using? Justify your answer. 2. Your management argues that the current costing does not add any benefits to the company. Do you agree or disagree with his statement? Present convincing arguments.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
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