Using Activity-Based Costing To Keep Costs Minimal: A Case Study On Golden Casket Essay.

About Golden Casket

Golden Casket is one of the Nation's biggest and perhaps most innovative confectionery organizations in the United Kingdom. Douglas Rae purchased the organization to guarantee the firm’s long-term future which came into existence in 2016, where all manufacturing, storage of goods, and offices have been located. Golden Casket always strives to nurture its business and aims to provide continuous satisfaction to its customers globally (goldencasket.co.uk, 2018). The firm's values are traditional, focusing on consistency in taste and quality, as well as providing excellent customer service. Many famous brands call the Golden Casket home, including Buchanan’s, Millions, Gibb, £One pounder, Fudgy Wedgy, Hills of Hawick, and Gila. The combination of old and new brands under the Golden Casket umbrella is the ideal recipe for the organization to sustain continuous growth in the future.             

As per the information given, Golden Casket decided to make and sell two products that are alike including Min-Choc and Diet-Choc. Golden Casket's financial director considers using activity-based costing instead of traditional absorption costing. But he is not sure what might be entangled. He also wants to keep the cost minimum without adding any new system to entail additional expenses or work. Thus, the main purpose of writing this report is to recommend which type of management accounting technique can help Golden casket keep its cost minimum without incurring any extra expenses.

Management accounting can be fundamentally described as accounting for the management; this means accounting that offers essential information to the management thereby enabling key personnel to perform their function efficiently. Management accounting involves recognizing, measuring, analysing and interpreting the information of accounting.  It does not however cover the same topics like financial accounting. In its place, it emphasizes information that can help managers make better decisions. It also aids in controlling the product price by using cost control devices (commercemates.com, 2020). Managerial accounting has its focuses on pricing and costs. Thus, using the management accounting technique Golden casket can decrease its overhead in various parts without deteriorating the quality of the product that golden casket offers to their customer. It will help the organization to make a decision that will be cost-conscious. In addition to this management accounting also focuses on efficiently distributing resources so that the entity can achieve maximum efficiency (wikiaccounting.com, 2022). It will also help Golden Casket to identify any limitations and bottlenecks in their line of production or sales process (backoffice.com.sg, 2022).

Activity-based costing

The activity-based costing (ABC) system was first started in the year the 1980s as one of the techniques of management accounting. This method can overcome the shortcomings of traditional costing systems that arise in technological and economic developments (Quesado & Silva 2021). Under the system, Activity-based costing (ABC) manufacturing overhead costs are allocated to products more logically than the traditional method of allocating overhead costs based on machine hours. Activity-based costing commences by allocating costs to the activities which are the ultimate source of the overhead. Then it allocates the cost of all those activities to the products that require them (Maheshwari et al 2021).

The absorption costing technique is also referred to as the traditional or full cost method. Under this method of costing, the cost of the product is ascertained by taking into consideration both variable and fixed costs. Since all manufacturing overhead costs are applied to manufactured goods, this technique of product costing is known as absorption costing or full costing. Variable costs, such as direct materials, direct labour, and so on, are attributed directly to the products. On the other hand, fixed costs are distributed fairly on a reasonable basis across the various products produced during the period (Drury 2018).

Introduction to Activity-Based Costing

Marginal costing is another type of costing technique in which the variable cost, or marginal cost, is imposed on units of product cost while the fixed cost for the period is totally written off against the product contribution. Marginal cost can be defined as the amount of variation in total cost when the quantity of goods produced is increased by one (Nan 2019). It is the cost of producing one additional unit of a good. The marginal costing concept is based on the behaviour of costs that changes with a change in output volume (accountingnotes.net, 2016).

Environmental accounting, in summary, characterizes, measures, and provides a report on the distribution of costs, expenditures, environmental resources, and risks to numerous industry groups, to a particular department's entity or projects, procedures or activities used within organizations. The development of the ECA is a more advanced step in the evolution of environmental accounting. It directly assigns a cost to every aspect of the environment and calculates the cost of all forms of environmental actions that are related to each other. Environmental design, Pollution prevention and environmental management are all examples of environmental actions. The main issue with the ECA system is the lack of a standardized definition of environmental costs. Based on different interests, environmental costs could include a wide range of expenses (CGMA, 2022).

Environmental accounting, in summary, characterizes, measures, and provides a report  on the distribution of  costs, expenditures, environmental resources,, and risks to numerous industry groups, to a particular department's entity or projects, procedures  or activities used within organizations. The development of the ECA is a more advanced step in the evolution of environmental accounting. It directly assigns a cost to every aspect of the environment and calculates the cost of all forms of environmental actions that are related to each other. Environmental design,   Pollution prevention and environmental management are all examples of environmental actions. The main issue with the ECA system is the lack of a standardized definition of environmental costs. Based on different interests, environmental costs could include a wide range of expenses. 11

In general, the environmental accounting describes, measures, and reports on the allocation of environmental resources, costs, expenditures and risks to various industry groups, to specific firms, or within firms to specific departments, projects, activities or processes.

Standard costing is an accounting system that involves predetermined standard costs for direct materials, direct labour, and manufacturing overheads. Basically, Standard costing is a technique that is used to make comparison of standard costs and revenues to actual results in order to determine variances and their causes, in order to inform management about any variances that might arise and take corrective action to improve them. Budgetary control is the first cost control technique, followed by standard costing. It is also one of the most recently developed cost accounting refinements. Due to the constraints of historical costing, the standard costing technique is often used in industries (Tamplin, 2022).

In order to analyse the scenario given for Golden Casket, we have determined profit per unit based on two management accounting techniques that are absorption costing and activity-based costing. The result of our analysis showed a difference in cost price per unit under the absorption costing approach and activity-based costing approach. As a result of this the profit earned under both approaches also showed different results due to the difference in the overhead allocation method.

As per the activity-based costing entity will earn $22 and $21 per unit from the sales of two products Mini-Choc and Diet choc; however, under absorption costing entity will earn a profit of $ 15 and $ 22 per unit. The entity will earn more profit by selling Mini choc by using activity-based costing, whereas they will earn less profit from Diet choc in comparison to absorption costing.

After analysing the result of our calculation, it is recommended to the director of Golden casket to make use of Activity-based costing since it will give a more precise result in comparison to absorption costing. The organization will earn more profit if it follows activity-based costing. Under activity-based costing, the overhead rates are determined based on cost drivers’ rates, whereas if we consider the absorption costing method, it uses an average overhead rate; thus, this may not provide an appropriate allocation of overhead over the cost of the product.

Conclusion

Hence, we can conclude that this report provides a detailed understanding of managerial accounting and the different types of techniques that an organization can use. Management accounting can be fundamentally described as accounting for the management; this means accounting that offers essential information to the management thereby enabling key personnel to perform their function efficiently. Accounting information is recognised, measured, analysed, and interpreted by management accountants. However, it does not cover the same topics as financial accounting. Instead, it emphasises information that can assist managers in making better decisions. It also aids in the control of product prices through the use of cost control devices. Our research in this report discusses five types of management accounting techniques; this includes Activity-based costing, Absorption costing, marginal costing, environment costing and standard costing. Based on the analysis done for Golden Casket, we have found that activity-based costing will provide a more precise result to the entity without incurring any additional expenses. Golden Casket can able to earn more profit if they follow activity-based costing instead of absorption costing.

References

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CGMA, 2022. Environmental Management Accounting. CGMA. Available at: https://www.cgma.org/resources/tools/cost-transformation-model/environmental-management-accounting.html [Accessed April 17, 2022].

commercemates.com, 2020. 8 importance of Management Accounting: With PDF. CommerceMates. Available at: https://commercemates.com/importance-management-accounting/ [Accessed April 17, 2022].

goldencasket.co.uk, 2018. About Us. Golden Casket. Available at: https://goldencasket.co.uk/about-us/ [Accessed April 17, 2022].

Nan, N., 2019. Comparative Analysis of Marginal Costing Method and Absorption Costing Method.

Tamplin, A.the A.T., 2022. Standard costing: Explanation, objectives, advantages and types. Finance Strategists. Available at: https://learn.financestrategists.com/explanation/variance-analysis/standard-costing/ [Accessed April 17, 2022].

wikiaccounting.com, 2022. Why is managerial accounting important? Wikiaccounting. Available at: https://www.wikiaccounting.com/managerial-accounting-important/ [Accessed April 17, 2022]