How useful to decision makers is the process of allocating marketing and selling

Question

How useful to decision makers is the process of allocating marketing and selling expenses, design, and engineering support expenses to products? Do all companies need ABC systems? Using the Edgar database or Yahoo Finance to locate an annual report, select a firm that you believe needs an ABC system and a firm that you believe does not need an ABC system. Please post links to the annual reports with your initial post. Discuss how many cost pools are needed in the firm you selected that needs ABC compared to Pilgrim’s manufacturing.

Explanation / Answer

Allocating the selling and Distribution expense and Engineering and designing expenses to the products actually helps the decision makers in estimating the true cost of the products, It also eliminates the chances of over and under absorption of overheads. It helps immensily to the decision makers in taking a decision of make or buy, helps in for winning a bid, helps in introducing the new product lines, It gives the management a clear understanding/ breakup application of costs to each products. It is advisable to a company which deals in varios products and incurr huge overhead.

Selling & Adm. Expenses, Designing & Engineering expenses, these are the indirect types of expenses. Hence, they require a lot of attention and skill to allocate them to the product, so that each unit of product reflects the correct cost, but in real situation this does not happen, Managers tend to either over allocate or under allocate these expenses thus not getting the correct cost of the product, which actually hampers the quality of decision they take. Hence, their decision sometime might not correct under this condition. Here, then it becomes very important to allocate these costs correctly. ABC system gives an opportunity to bifurcate the business processes into various activities, these activities are related with cost drivers, cost are allocated from cost pools to these drivers based on the usage of it. Hence, Selling & Adm. Expenses , Designing & Engineering expenses can easily be allocated to the products, It helps in decision making when you have to take decision regarding make or buy, winning a contract, etc. since, you will have correct cost data.

Not all companies need ANC system, companies with huge product portfolio, who deals in various products and incur huge indirect costs are actually advised to use this ABC system, since they only can realise the true worth of ABC system, else ABC systems is costly method of costing. I believe Unilever is a company that definitely needs ABC system, since they deal in huge product portfolio, most of them they manufacture, some of them they procure, for some of them they just do a small process change, hence they deal with huge products that go through various processes and they incur huge indirect cost, which can easily be allocated to products, and they can easily wear the cost of adopting ABC costing system. I believe companies who do not have various product to offer, who deals in less no. of products and do not incur much of indirect cost they can refrain themselves in adapting AMC costing system, companies like Zippo Manufacturing companies, can refrain using ABC.

Below is the link of Unilever annual reports:

http://finance.yahoo.com/q/is?s=UN+Income+Statement&annual

Cost pools are basically designed as per the needs of the business and various process a company’s product pass through, for some companies they need fewer cost pools may be just 4 or 5, but for some they need may be 8 or 10 cost pools, It entirely depends upon the company’s size, its product portfolio, its various processes.

But here in case of Unilever I think we need cost pools such as 1) Selling & Dist. 2) Customer order & Delivery 3) Facility usage 4) Usage of material material turnover 6) Adm. expeses 7) Component supply & storage 8) Product quality check

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