Business Memo

BUSINESS MEMORANDUM

DATE: March 13, 2012

TO: Martha Glamour, CEO Stylish Living Magazine

FROM: Simpson and Lee Consulting Associates

Thomas Simpson

Richard Lee

RE: Analysis of existing cost system and desirability of switching to ABC.

Thank you for allowing us the opportunity to work with your company.

As requested, we have evaluated the strengths and weaknesses of your company’s existing

cost system and evaluated the desirability of switching from the existing cost system to an

activity based cost system ABC). Our analysis uses Products X and

Y as test cases to understand how the existing and proposed ABC systems would compute

product costs. Based on our study, we have reached the following conclusions:

1. The cost of Product X is higher than Product Y under the current system; the cost Product X is

lower than Product Y under the ABC system.

2. The existing cost system has several weaknesses that make the data unreliable and misleading.

3. We recommend that the company should abandon the existing system and replace it with an

activity based cost system as it will provide better product cost information for decision making.

The rest of this memo explains the basis of our conclusions. We will present our analysis in four parts.

The first part deals with product cost under the existing system. This is followed by . . . The next section

. . . The last section . . .

(The purpose of these sentences is to give the reader a road map to follow your discussion. Note that the four

parts probably correspond to the detailed questions at the back of the case. These questions typically lead you to

address the big issue in the case. If the memo is longer than 2 pages, you may have to use subheadings to avoid

long bodies of texts).

Product Cost Analysis

Our analysis begins by computing the costs of the two products, X and Y, using the current cost system.

Exhibit 1 shows the manufacturing cost of the two products under the existing cost system. As...