Cost Accounting for Astel Computers Harvard Case Solution & Analysis

Introduction:

Astel is a leading IT distributor providing IT infrastructural solutions and office automation. It is a UK based company, which was established in 1991. It provides its customers a wide range of services around the world. Astel has teamed up with world renowned manufacturers in order to supply the latest technology in IT infrastructure. The company wants to review its cost accounting method for which the company has decided to opt any one of the two methods, which are target costing and life-cycle pricing.

Products:

Astel offers a wide range of IT equipment such as computers, printers, office automation equipment, networking, physical security equipment and projectors. It also provides all the services starting from procurement to the installation of the equipment to the premises of the customer.

Customers:

The customers of Astel are mostly supermarkets and the retailers. It also provides services to individual companies and customers. Astel also provides after sales services to its customers. It provides insurance to its products in case of any damage of equipment.

Astel provides warranty to its equipment for the satisfaction of the customers in case of any malfunctioning of the equipment. It also provides technical support to its customers as it is difficult to manage the systems for an ordinary person with little knowledge of equipment.

Current method of cost accounting

Absorption costing:

Currently, the company is using absorption cost accounting method to value its inventory. This method means that all the manufacturing cost is absorbed by the units produced. The cost of the inventory as finished goods includes the cost of direct material, direct labor and variable and fixed manufacturing overheads of the factory.Ref: (sabar, n.d.)

Advantages of absorption costing:

The advantage of using absorption costing is that it is easy to understand and implement and does not includes assumptions and predictions. If a company wants to choose variable costing for its costing purposes, then it will have to calculate absorption costing to issue any official reports.

It takes all the costs into account as it adds all the cost to the cost of the units produced by the company. By using absorption costing a company has a full and accurate picture of the cost per unit incurred by the company.

It makes easy for the management of the company to evaluate the profitability and prices of the products. It also helps in calculating the related profits of the products made by the company in the period when the sale is actually made.

Disadvantages of absorption costing:

The disadvantages of absorption costing is that it can manipulate the profits of a company in a given period if all of its stock produced is not sold in the given period as well. This happens because all the fixed cost is not deducted from the revenues produced by the company in a particular period. This act can mislead the investors as the profits of the company will be skewed because of the ending inventory of the company.

 Absorption costing does not provide a fair analysis of cost and volume. It is difficult to determine the variation in cost that occurs at different production levels if the fixed cost is large part of total production costs and makes it difficult for the management to make decisions for operational effectiveness of the production process.

Absorption costing is inefficient as compared to the potential profitability of different product lines. It is easy to compare different products on the basis of variable costs of producing the products directly.

Annual budgets:

Annual budget is any budget prepared for a period of 12 months. It is the predicted amount of incomes and expenditures that are to be received or paid over the next 12 months period for which the budget is being predicted. It can be used by anyone to predict the financial performance of its entity;it can be an individual, a company or a government.Cost Accounting for Astel Computers Case Solution

Advantages of annual budgeting:

The advantages of annual budgeting is that it provides a method of allocating and using resources within the organization which helps in monitoring and controlling the operations, promoting forward thinking, shows employees the direction of the objectives of the organization for the period.

It helps in coordinating the employees and different departments in aligning for the achievement of the objectives of the company and provides a framework for delegation. Budgets also warn about the future situations of the organization and challenges............................

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