Activity Based Costing: Determining Cost Of Production

Overview of Activities

Illustrations for Bill of Activities

As evident from the illustration of the computations that has been performed above an important consideration in this regard is that the overhead cost is quantified. Evidences from the calculations have stated that there are indirect costs that offers their support to the process of producing or alternatively in the procedure of allocation (Renz, 2016). Additionally the indications from the calculations have represented that there are large sum of indirect cost that are considered as the part of the cost however the indirect costs that are occurred have not yet been incorporated. Direct cost are regarded as those costs, which can be assigned to the product cost of the specific goods and services (Zeff, 2016). There are certain costs that are regarded as the part of the direct cost namely the depreciation costs and the administrative expenditure. These costs are regarded as the difficult to distribute and therefore there are considered as the indirect costs.

Direct costs are treated as those costs that primarily originates from the production of goods and services in which the firms is dealing (Clinton & England, 2016). They are regarded as the important element of the production process however there are some are some situations where manufacturing of goods and services cannot be done with incurring any direct cost. In order to arrive at the cost of production of the lamington, it is necessary to take account of the indirect costs and these costs are stated below in the tabular format

1. Costs originating from the freight inward
2. Direct cost associated with labour
3. Direct costs associated with materials  

On viewing the circumstances from the case study, it is understood that the amount of revenue that is derived by the HLW are largely from two different bases. The sales revenue that is generated by HLW is particularly from the yearly subscription of membership and the revenue that is derived from the court fees (Morden, 2017). Accordingly, there are greater than 40% of the total amount of sales revenue that is generated from the yearly membership fees for the period of two months. On considering the remaining part, it can be inferred from the case study that revenue generated from the court fees is based on yearly basis.

To be very specific the cash flow that is generated from the court fees generally remains uneven in every month. An important assertion in this regard is that whenever the business is experiencing the peak time the revenue that is derived from the court fees multiplies double fold and significantly increases by 45% of the total sales (Schuster, 2015). Furthermore, commencing from the period of May to September the instances obtained from the case study has suggested that the amount of court fees has fell down significantly and yields as low as 15% of the total sum of sales revenue.

Direct and Indirect Costs

In the current state of affairs of HLW on applying the newly proposed plans of membership, it is understood that the scheme has yielded approximately 80% of the total sum of sales income inside the first month of the financial year (Mohanty, 2014). In addition to this, HLW would be able to gain benefit of the increased revenue and these benefits are stated below;

1. With the application of the new plans, HLW is in the position of gaining the advantage of the greater increases in the cash flow that would be generated for the operational sources and yearly subscriptions to the memberships (Klychova et al., 2014).
2. On the considering the current stated plan, the club is under obligation of remaining reliant on the single schemes of generating fees such as the hourly fees that is generated from the court would ultimately increase by 50% of the total amount of anticipated revenue from the application of new plans.
3. With the application of the new improved plan, the HLW would be able to generate revenue that would enable the club in generating greater volume of cash in every month (Otley, 2016).
4. The application of the new plan would be considered to be beneficial for the club as the managers of the club would be able to gain more than 80% of the total revenue during beginning phases of the implementation rather than waiting for the completion of six months (Cooper, 2017). Because of this benefit would enable management of the club in making an appropriate use of the accumulated funds by taking account of the several accounting decisions as and when required. 

The evidences that has been obtained from the case study evidently provides that there are several number of issues and because of this there are some specific number of assumptions that is needed to be made (Malmi, 2016). These assumptions would enable in gauging into the effect that is created by the new plans of membership. The necessary assumptions are listed below;

1. Full use of the court should be made by the management of the club during the high business hours
2. Sixty percent of the utilization capacity must be made when the business is not running in in the peak time.
3. It is assumed that that the management to resolve the issue must make around forty per cent of the overall usage of court during the lean business hours (Lanen, 2016).

The proposed sales plan is stated in the below computations that would help in understanding the impact that is created through systematic method of ascertaining the assumptions that has been made previously;

Yearly membership revenue:  

Total sum of court fees: 

Total sum of sales revenue generated

The club under the new scheme of membership would be able to generated sales revenue in the following manner;  

Revenue from the earlier plans of membership:  

Revenue generated from the general membership plans: 

Total sum of sales revenue generated: 

A tabular representation is stated below that assess the effect created on the cash flow and sales revenue depending upon the periodic sales: 

The above stated table evidently provides that the sales revenue that is generated by the HLW has subsequently increased by $287,332 given the circumstances that they commence the application of new plans, which would enable them in gaining the greater usage of court during the peak business time (Andersen et al., 2015). The projection of the sales revenue is carried out under the new plans. In addition to this, the computations in the above stated table provides that usage of new plans would enable the club in generating greater amount of revenue from the sales during the month of October. 

One of the important aspects of the new plan is to understand the sales revenue that is generated is higher under the new plan than compare to the previous plans (Kang, 2015). There are large number of reasons that is required to be taken into the considerations at the time of implementing in the new plan (Datar & Rajan, 2016). The assumptions have been stated below and provides an appropriate justification of the analysis that has been made;

1. As it is understood from the current fees of membership, the revenue that would be derived from the structure of new fees will be higher than the previous plans. However, there are assumptions that there might be a loss of members on the application of new plan (Horngren et al., 2016). The loss is anticipated in the areas of student as they are not self-dependent and they may not be able to afford greater amount of revenue from the renewal of the membership under the improved fees structure.
2. With the application of the new plans, the management is better able to assemble the fees for the beginning period of two or three months as this would enable them in reducing the cost of revenue collection (Tang et al., 2015). Additionally this would also facilitated the members in preparing the records of revenue that would be generated from the new plans. Therefore, it is obligatory for the managers in taking into the account the cost that is involved in the process of assessment.
3. Within the tenure of six months, the management expects that the they would miss out some of the members (Johnson, 2014). As a result of this the managers are required to implement the new plans or else they might fail to attain the expected revenue.
4. The club is also required to perform the special campaign for promoting the new plans. The cost that is incurred in the promotional strategies must be included in the determination of the net income together with the cash flow that is generated on applying the new plans (Gopalakrishnan et al., 2015).

Sales Revenue Generation

Conclusion: 

On arriving at the conclusion, it is noteworthy to denote that the activity method of costing is regarded as the beneficial method of determination of cost. There are several noteworthy assumptions has been considered in this report and the same has been duly complied with the necessary information. The report has provided sufficient understanding that the activity method of costing is an important step forward in determining the actual cost of product and decision-making. Therefore, the report has immensely contributed by stating that the activity based costing is helpful for the business owners in better understating of the business situations and taking necessary corrective actions for improving the operational functions. 

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