Activity Based Costing Harvard Case Solution & Analysis

Current approach to allocate the overhead at SailRite Company:

I selected the SailRite Company for analyzing the overhead allocation methodology. SailRite Company is a manufacturing company that started back in 1969 after founders Jim and Connie Grant took an interest in building their own sails.Since then, SailRite has been sewing boat covers and reupholstering pieces of furniture.There are many methods to allocate the cost overhead as it depends on the industry in which the company is operating. It also depends on the manager to decide how to allocate the overhead through the selected method and the desired information of the cost of products. Cost pools are groups of overhead cost. Most of managers think that, as more cost pools are used, more accuracy will occur in the overhead allocation processes.

The overhead of SailRite Company is of two types, one is administrative overhead and other is manufacturing overhead. The costs of administrative overhead are those costs that are not directly involved in the production and development of products or service. For example, sales cost and front office administration cost; all these are not a part of production overhead.

The other type of overhead includes all those costs that are directly involved in the manufacturing processes. It is also called direct cost. The current approach of SailRite Company to allocate the overhead is the plant-wide allocation of cost. The plant-wide allocation method used in order predetermined the overhead rate to applied overhead cost. In this method, the predetermined overhead rate for each cost pool is established by using the formula of predetermined overhead rate.The direct labor and direct material cost are used for the allocation of the overhead cost. The production management estimate the direct labor and direct material cost for the plant-wide allocation. The base of the estimation of direct labor and direct material are based on the overhead cost of the previous year. Then, the past data is adjusted according to the expected increase in the demand of goods in the coming year.

The annual estimated overhead cost; $80,000 is divided by the estimated direct labor hour, which is 25,000 hour for the coming year to get the predetermined overhead rate for direct labor hour, which is $32. After calculating the predetermined overhead rate for direct labor,it is then charged on the each direct labor hour worked. But this cost includes the overall production cost of the different products of the company. This cost reflects the working hours of labor on all the products.

Activity Based Costing Harvard Case Solution & Analysis

Potential for Introducing the Activity based costing at SailRite Company:

Implementing the activity based costing is a difficult task. It requires different advancements through many stages of allocation of the overhead cost. Now a days, thousands of the companies using the activity based costing to make profit and reduce cost. But activity based costing is much more than a superb accounting technique that determines how much value in terms of money a single product islosing or making. Through activity based costing, the company can not only improve the products or services offered but also improve the marketing strategies and production processes..................

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