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Zara vs H&M

In: Business and Management

Submitted By udin
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a) (i) The differences in the reported cost estimates calculated under each of the two costing systems are significant. This is especially the case with regard to Job order 973. The management accountant’s calculations for the cost estimates produce the following increase/ (decrease) in reported costs: Job order 973 Job order 974 $ $
Unit cost per job under existing system 1,172·00 620·00
Unit cost per job under activity based costing 1,612·00 588·89
Increase/ (decrease) in reported cost 37·54% (5·02) %

Job order 973 shows an increase in reported cost of 37·54% [(1,612 – 1,172)/1,172] whereas Job order 974 shows a decrease in reported cost of 5·02% [(88·89 – 620)/620].

A common occurrence when activity-based costing is implemented is that low-volume products show an increase in their reported costs while high-volume products show decreases in their reported costs. This is very much the case with regard to the products which are the subjects of Job orders 973 and 974.

The reported costs also differ due to the following:
– Job orders 973 and 974 differ in the way they consume activities in each of the five activity areas within SFS’s premises
– The activity areas differ in their indirect cost allocation bases. In particular no activity area uses direct labor hours as the basis of allocating indirect costs.
Two areas where the differences in reported product costs might be important to SFS are as follows:

Product design – since it is more probable that those involved in the design of products will find the results produced by the activity-based approach to be much more credible. This is especially the case in a machine oriented environment where direct labor hours are unlikely to be the major…...

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