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Explain why Bovis Homes might need activity-based costing

Bovis Homes. See their annual report http://www.edocumentview.co.uk/bovishomes2012/2012/103621/default.htm?voting=false

1. Assess how Activity-Based Costing can contribute to enhancing shareholder wealth.
2. Provide a rationale for why Bovis Homes might need activity-based costing.

- Their products include Houses and Apartments.
- Their services include Surveying, Designing, Building and Selling Homes, Engineering, Acquisition and Residential Development of Land
- They have a huge operating expenses which could be due to the high cost operating model.
- They always aim for high margin by selling at a premium price.

1. Identify key elements that need to be covered in order to answer question 1. Then provide some brief explanations for each element.
2. Explain why Bovis Homes might need activity-based costing.
3. Provide guidance relating to typical activities, examples of cost pools and cost drivers, and the overheads for Housebuilding company like Bovis Homes.

Solution Preview

1. Assess how Activity-Based Costing (ABC) can contribute to enhancing shareholder wealth.

ABC helps improve business returns in a number of ways. The first and usually the most obvious is that managers are now charged "ala carte".? That means that activity is no longer free. If all overhead charges were based on labor, then any other activity was "free". When you switch to ABC, many activities (the significant ones) now cost the overhead manager a price. That is, when you use the forklifts, you get charged. You place an order, you get a charge. You have a shipment inspected & you guessed it: a charge!

Imagine an apartment where the utilities are included in the rent. What temperature will you leave the place in the summer? Now, what if that apartment did not include utilities in the rent? Now what temperature will you keep it? Different, right? Because it isn't included regardless of usage. Under ABC, managers become sensitive to the consumption of resources because they are charged for activities.

Another way that ABC improves shareholder returns is by providing a ...

Solution Summary

Your tutorial is 626 words and gives a link to their annual report. Nine potential cost pools are given with cost drivers for each. The post includes a discussion of the two main ways that ABC improves shareholder returns with examples. Reasons that Bovis is ideal for ABC are given.

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