Acc#5 Farm Financial Standards Council Model Case Essay

Acc#5 Farm Financial Standards Council Model Case - Essay Example GM has adopted traditional cost allocation system wherein the overheads are arbitrarily allocated to the products on the basis of the labor or machine hours. It produces only one product i.e. the corvette and as such apportionment of overhead costs may not be such a big problem except for the fluctuations of production volumes which may distort the contribution margin figures. John & Mary Farmer on the other hand produce two products namely: corn and soybean that too in two farms, for which there are a variety of cost drivers which have to be identified to diversified activities to estimate the differences in cost of production between farms and overall profitability between commodities produced in different years. While adopting traditional cost allocation system, as in GM, may be easier for accounting purposes, it actually does not serve the purpose of arriving at a specific cost structure especially when the direct labor component is in small proportion in the total production process owing to the present automation taking place even in the farming sector. 1. Overheads would have been charged according to the production volumes which may fluctuate from time to time. Hence, the accurate per unit contribution margin which is the basis for competitive managerial decisions in today’s world would be misguiding. 3. The products produced in the case study are corn and soybean that too in different fields of which few are owned by the firm and the others are taken on lease. With such diversified methodology of tie ups with different parties, if ABC is not undertaken, the differences in the production would not be useful in providing effective strategy to minimize risk associated with the business and enhance profitability. 4. With the growing mechanization even in the farm sector, the importance of direct expenses is shrunk day by day