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.
1. Finding a cost
allocation method to
define brand
profitability
2. What to expect from this
presentation
1 Introduction
2 The client and the problem
3 The Theory – what is a cost allocation method
4 Research and findings
3. What to expect from this
presentation
The methods 5 suggested to the client
6 The choice of the client
7 The findings and recommendations
8 End of presentation
4. 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
5. 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
6. 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
7. Theory – a cost
allocation method
Cost object = brands
Indirect cost = overhead
How is overhead related to
the cost object?
Indirect costs are usually
named as overhead costs
The important question
direct or indirect cost?
Direct or Indirect cost?
Total costs
All costs of
a company
8. The research
11
There are a number of options
available
22
Cost allocation methods are
widely implemented
33
Cause-and-Effect relationship
determines accuracy of the allocation
method
9. 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
10. The choice of the
client company
Cost allocation base =
percentage of sales
A sales subsidiary so
TTrraaddiittiioonnaall ccoossttiinngg
overhead is driven by sales €
Business processes and activities
performed for each brand are the same
bbuutt......
11. 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.
2 3
Conclusions
•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