Peer discussion replies

0 comments

Original Discussion: Bob, A cost accountant prepares a product profitability report for his boss, Tom, the production manager. Much to Bob’s surprise, almost one third of the company’s products are not profitable. He say, “Tom, it looks like we will have to drop one third of our products to improve overall company profits. It’s a good thing we decided to look at profitability by product.” Do you think Bob should agree with this approach? Why? What questions would you ask in order to make a better decision on dropping the products?

Requirements: Each reply should be 160 words, include 1 direct question and add to the discussion.

STUDENT 1: Wendy

Hello Class,

This week we are discussing product costing and whether or not products should be dropped if it is determined that they are unprofitable. After studying the textbook chapters and doing a bit of research this week, I would advise Bob and Tom to be very cautious before making the decision to drop any of the company’s products. According to Horngren, Datar and Rajan, “product under costing and over costing causes managers to focus on the wrong products” (2014, p. 152). Depending on the company’s costing process, the profitability report that Bob created for Tom may be very misleading because the “unprofitable” products may actually be over costed causing the low profits. At the same time, under costed products may look highly profitable when, in fact, they are not.

If the company is using a simple costing system, where all indirect costs are pooled together, they may be experiencing product-cost cross-subsidization. This occurs when cost is broadly averaged across several products without taking into consideration the differing level of required resources for individual products. Essentially, the profitable products are subsidizing the unprofitable ones. Activity based costing (ABC) is a technique used to avoid this over/under costing of products by creating several homogeneous activity-cost pools and activity-cost rates. While ABC is more complex and costly than simple costing, it gives managers a much more accurate picture of specific product costs and helps them make better decisions about product mix and product pricing. In addition to helping solve the over-under costing problem, Tsai and Jhong explain that using activity based costing can also “help companies to effectively control costs and increase productivity” (2019).

If Bob and Tom decide to drop the products that look “unprofitable” according to their current costing system, they may be dropping the very products that are keeping the company afloat. Before taking such drastic action, I would advise that they establish a more refined ABC system and reevaluate each product’s cost. If under the new costing system, they find that some products are indeed unprofitable, then I would have much more confidence dropping those products. However, I suspect that the “unprofitable” products don’t turn out to be so.

– Wendy

References

Horngren, C. T., Datar, S. M., Rajan, M. V. (2014). Cost Accounting. [VitalSource Bookshelf]. Retrieved from https://bookshelf.vitalsource.com/#/books/97813234…

Tsai, W., & Jhong, S. (2019). Production decision model with carbon tax for the knitted footwear industry under activity-based costing. Journal of Cleaner Production, 207, 1150–1162. Retrieved from https://www-sciencedirect-com.ezproxy2.apus.edu/science/article/pii/S0959652618328245

STUDENT 2:Amanda

Good afternoon everyone,

In my opinion, Tom should not just agree with the approach of dropping the products that are not profitable. There are things that should be considered first. For starters though, a product’s profitability is its sales price minus its cost. An important question that should be asked is why are these particular products not profitable? Are there ways to cut costs without decreasing quality? Is the selling price where it should be? Tom should look in to ways that could make these products profitable. One of the things Jesse Ness talks about in his article is that there are three groups that products can be divided in to: low margin, medium margin, and high margin (2018). One of the points that Ness makes is that there should be a balance of each category for the products being sold.

Another question to ask is how these products are being marketed. Is the marketing helping or hindering the sale of these products? Are they being marketed at all? Are they located conveniently in the store? A good marketing plan can be really helpful in increasing sales, but it is also an extra cost so it is a decision that should be really thought out considering these products are not currently profitable.

In this situation, I think that it would be a good idea for Tom to use the five-step decision making process. He has already identified the problem as certain products not currently profitable. Next, he should obtain information; I have mentioned above some of the information that would be good to obtain that would bring about options for Tom. Step three is to make predictions about the future. Based on the information gathered in step two, Tom and his team could make predictions about the options – to include dropping the products. How would each option benefit or hurt the company? Tom would then decide which of the options he would like to go with. Finally, Tom would need to implement the decision and then Bob can do another product profitability report to evaluate this change.

– Amanda

References

Ness, J. (2018). Why you should sell unprofitable products: profit margin in assortment planning. Retrieved June 19, 2019 from https://www.ecwid.com/blog/why-sell-unprofitable-p….

About the Author

Follow me


{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}