Farm Financial Standards Council Model Case
If the Farm Council Case did not use Activity Based Costing, identify several dysfunctional decisions that could be made using traditional cost allocation.
Which solution do you prefer, the initial or alternative solution proposed in the case?
Explain the difference between the suggested solution and alternative solution.
Read this article:Throw Out Fixed and Variable Cost Thinking Bring In Activity-Based Costing for Distribution Decisions, Discuss the assertions this author is making in terms of variable and fixed costing and why ABC may make more sense in these type of settings. Justify your answer with good reasoning. You should attempt to integrate the thoughts of this article and your critique of it with the comments you make above.
Please find the attached solution for better formatting and charts.
A hypothetical sole-proprietor, the Farmer family owns and operates a corn and soybean farm. Searching for a managerial accounting system solution, Mr. Farmer is attempting to build an efficient business structure for himself, that will also stand the test of time for his son. Given two structures in the hypothetical case study, Mr. Farmer should adopt the suggested system (Case Study). It provides the highest fidelity in providing relevant data for decision making. See Figure 1 for a depiction of the accounting organizational scheme:
Figure 1: Primary accounting organization (Case Study, pg. 4)
The engine driving the effectiveness of the suggested, or primary, system is Activity Based Costing (ABC) combined with the complexity of the Farmer's enterprise. A 2000 PricewaterhouseCoopers Endowment for the Business of Government report acknowleged that ABC accounting is "particularly useful for large organizations... that administer multiple programs simultaneously," (Saldarini). Assuming the objective of the accounting exercise is to make purely rational decisions about the application of limited resources, the primary solution provides the most useful data. By breaking the farming enterprise down into its constituent sites, the primary solution ...
Four page, APA style case study illustrating the effectiveness of activity based costing and the potential risks of using more basic alternative of fixed vs. variable costs. References included.