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Accounting Treatments for Identifiable Intangible Assets
Executive Summary
Through extensive analysis of your firm and the costing system you currently use, we believe that your current costing system, that being a traditional costing system isn’t satisfactory for your company anymore. We believe that a change from this system to an activity based costing system would be of significant advantage to your company.
Your company is currently using a system that uses a plantwide overhead rate based on output volume to allocate factory overhead costs to the products, that is only useful when direct labor and materials are the only predetermined factors of production. While your company has many predetermined factors, so we are of the belief that an activity based costing system, which assigns resources to activities, from which these activities are assigned to cost objects based upon the activities used by the company, would benefit your company significantly.
As for the acceptance of the McDonalds Order, there are many factors that have to be evaluated before your company decides if they will or won’t go ahead with the deal. If your company accepts the current offer under the traditional costing system you would have a contribution margin of $55,000, while if its accepted under the activity based costing system your company would have a contribution margin of $79,143.
Even though these figures don’t sound to bad, you will have to way up many qualitative factors, which may affect your company if the deal with McDonalds is accepted, such factors as the lowering of the current cost price per gallon of mix. This could impact very poorly on your company as current and possibly future customers may also ask for these prices, which could severely affect you companies future income levels. On the other hand, if you don’t accept this deal, it could work significantly against your company, due to McDonalds being such a massive fast food chain. Through word of mouth they could tarnish you good name with your current and future customers possibly making them move your competitors. So the decision to go either was with the McDonalds Order could prove vital in the future success for your company.