Costing
Activity based costing is a superior cost estimation and allocation method since it allocates specific costs to a certain product not only in batch numbers but also in units form; in the case of California Pizza Kitchen, every department has an allocated cost. For example the restaurants foods and drinks costs are gauged according to the processes involved when making the final product.
The method offers a chance to the management to establish linkages and areas that are not efficient; it ensures that certain cost can be attributed to certain commodities especially when a company is dealing with more than one product (Horngren, Srikant & George, 2006).
When dealing with more than one product: some fixed costs, though incurred by the entire company as a whole, relate more to some products: when accounted for using activity-costing method actual cost to be attributed to a commodity can be precisely known. This makes costs incurred by a certain product to be approximated more precisely (Lucey & Lucey, 2002). To illustrate how the method works, this paper will consider the case of California Pizza Kitchen.
The name and nature of the organization
California Pizza Kitchen is an international company in the hospitality industry offering, California-style cuisine, represented through creative pizzas, pastas, soups, sandwiches, appetizers, and desserts; the company has to determine the best price for its products which is through the use of activity based costing method of approach (CPK, 2011).
The activity and time period
When making a product or offering a service; all the processes involved is documented and a certain cost is associated with the particular product or service; there are some direct costs that can be attributed to a certain unit product while others need to be divided among the products made in equal positions.
The company operates owned, licensed or franchised 265 locations in 321 states and 10 foreign countries; for an effective business, the company ensures that there is consistency in the costing and pricing adopted. This assists in creating uniformity in prices and quality offered (Carlon, 2009).
The inputs
The following are the inputs that were used dividend in the category of cost they belong:
- Direct materials
- Fresh produce (the material is shaped in the shape of the final product)
- Spices (shaped in to fit the final products)
- Packagings
- Adhesives
The above variables can be attributed to a single phone by estimate the costs are as follows:
- Fresh produce = $8
- Spices: $1
- Packaging: $1
- Adhesives: $1
- Packaging 2
The total directs costs are $13.
Fixed costs
The following are the fixed costs that are incurred when making the phone; they are incurred by the entire department that is producing the type of phones and cannot be attributed to a single commodity (Noreen, Brewer & Garrison, 2011).
They include:
- Factory Security
- Water for the factory
- Administrative expenses
- Transport
- Selling and advertising costs
Assuming that the costs were as follows, and the company made 1000 phones, then the cost per phone will be calculated as:
- Factory Security = $1000
- Water for the factory: $100
- Administrative expenses= $900
- Transport: 100
- Selling and advertising costs:$100
Total fixed costs were $2200
The cost attributed to a single phone will be $2200/1000 = $2.2
Thus the total cost of the phone was $20+$2 = $ 22.
References
Carlon, S. et al. (2009). Accounting: Building business skills. New York: John Wiley & Sons.
CPK. (2011). Investors Relations: Financial Information. California Pizza Kitchen Web.
Lucey, T. , & Lucey, T. (2002). Costing. London: Cengage Learning.
Horngren, T., Srikant M., & George F.(2006). Cost accounting: A managerial emphasis. Boston, MA: Pearson Prentice Hall.
Noreen, E., Brewer, B., & Garrison, H. (2011). Managerial accounting for managers. New York: McGraw Hill.