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Strategic Cost Management and New Technologies Case Solution & Answer

Strategic Cost Management and New Technologies

Answer no. 5

Under the following conditions, the one-pool system might allow the company to gain more profits.

  1. If all of the company’s equipment that the company uses for its operations, are running at their full capacity i.e. runs at 100% capacity then it would allow the company to allocate actual costs to its overheads. This way the company would be able to actual representation of the costs and manage the costing process effectively.
  2. Secondly if the company’s labor and equipment’s utilization is proportionally equal i.e. If the company’s operations are 50% labor intensive and 50% capital intensive, than the company is more likely to gain more profit margins by using one-pool costing system.
  3. If the company becomes able to cut several costs using the current costing method.

If the company effectively raises its prices, it would allow the company to increase the revenues and ultimately the profit margin.

Answer no. 6

Evaluation of burden rate

For the calculation of burden rate the company divides its overall overhead costs with its direct labor costs. Under the current one-pool costing system the burden rate of the company is calculated to be around 145. However if the different purposed costings systems are used then the burden rate under different costing systems would be calculated as following:

Answer no. 7

Answer no. 8

The main difference between Crest’s and Posh’s costing system is that Posh’s costings system allocates equipment overhead costs more specifically based on their high-tech and low-tech classifications, Whereas, the Crest’s Costing system does not offer and allocate equipment overhead costs more specifically based on their High-tech and Low-tech classifications.

Answer no. 9

Answer no. 1

For the Investment in the new 3D MRI scanner it is suggested to the company to use a costing system which allocates the costs to different tests based on the run time that the machine required by each type of tests. The depreciation should also be calculated for each test separately.

Answer no. 11

Answer no. 12

Investment in 3D MRI machine is a great opportunity for the company as it would provide a lot of growth benefits to the company.

Pros:

The advantage of using the suggested costing system would be that, it will enable the company to allocate the costs for each type of test that the company perform. By doing so the company would be able to determine how much cost is consumed for each category of the test. In future if the company decides to focus on the test that generate less costs to the company, then by using this costing system the company would be able to conveniently specify the cost per each test.

Cons:

The disadvantage of this costing system would be that the calculations for this costing system would be more complexed as compared to the calculations done by the company in its current costing system.

Answer no. 13

There are different other type of costing that the company could use to treat the new equipment. Two of the other costing systems are recommended below.

Activity Based Costing

This type of costing is used to allocate costs to every activity that is incurred into the production of a product or delivering a service. Since this machine is aimed for service purpose hence costs would be allocated to every activity regarding the machine that happened to deliver a service.

The company could treat the machine by using this costing system and consider the cost driver of the machine to be the working hours of the machine. Hence allocate the costs based on the working hours consumed by the machine.

Job-based costing

The job-based costing system is a system in which costs are allocated based on the jobs done. In this type of costing system, costs are allocated to each type of job done in a process.

The company can use Job-based costing and allocates the cost based on the type of job tests) perform by the machine out of for types of test.

Recommendations and Conclusion

By doing the case analysis and exploring every aspect of the situation at the company we have come up with the following recommendations that the company could implement and to bring significant changes to the company and become more efficient. Based on the analysis, it is recommended to the company to change its existing cost systems and increase its profit margins.
It is also recommended to the company to invest in the new 3D MRI machine and improve the quality of its testing services….

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