Get Instant Help From 5000+ Experts For
question

Writing: Get your essay and assignment written from scratch by PhD expert

Rewriting: Paraphrase or rewrite your friend's essay with similar meaning at reduced cost

Editing:Proofread your work by experts and improve grade at Lowest cost

And Improve Your Grades
myassignmenthelp.com
loader
Phone no. Missing!

Enter phone no. to receive critical updates and urgent messages !

Attach file

Error goes here

Files Missing!

Please upload all relevant files for quick & complete assistance.

Guaranteed Higher Grade!
Free Quote
wave

Calculation of cost per unit using conventional approach

Calculation of cost per unit using conventional approach

FRED: $166

MARTHA: $249

Table 1: Table presenting calculation of cost per unit and total labour hours

Particular

FRED

MARTHA

(Amount in $)

(Amount in $)

Direct Material

40

60

Direct Labour

30

45

Manufacturing Overhead

96

144

Total cost per unit

166

249

Direct labour hour for one product

2 hrs

3 hrs

Total hours

100*2

500*3

2000

15000

 Calculation of Manufacturing Overhead Rate

Table 2: Table representing manufacturing overhead rate as per conventional method

Particular

Amount in $

Total Hours

2000+15000

17000

Total Manufacturing Overhead

816000

Rate

816000/17000

48

Machine related cost

450000

50

Set up and Inspection

180000

4500

Engineering

90000

900

Plant related cost

96000

50


Calculation of cost per activity for each activity cost pool

Table 3: Table representing allocation of cost as per ABC method

Activity Cost

Cost Driver

Total Units for Cost Driver

Total Cost (Amount in $)

Unit cost per cost driver

Machine-related cost

Machine Hours

9000 hours

450000

50

Set up and Inspection

No. of production runs

40 runs

180000

4500

Engineering

Engineering change order

100 change order

90000

900

Plant-related cost

Square footage of space

1920 sq. feet

96000

50

Total Manufacturing cost

816000

 
Activity Cost per product

Table 4: Allocation of cost to in accordance with cost driver

Expected Use

Cost Assigned

Activity

Cost Driver

Unit Cost

FRED

MARTHA

FRED

MARTHA

Total Cost

Machine related cost

Machine Hours

50

7200

1800

360000

90000

450000

Set up and Inspection

No. of production runs

4500

20

20

90000

90000

180000

Engineering

Engineering change order

900

75

25

67500

22500

90000

Plant related cost

Square footage of space

50

1536

384

76800

19200

96000

Total

594300

221700

816000

FRED: $664.3

MARTHA: $150.42

Calculation of per unit overhead cost under ABC

Per unit overhead cost for FRED

(Amount in $)

Overhead cost assigned to Fred / No. of total units

594300/1000

594.3

Per unit overhead cost for Martha

(Amount in $)

Overhead cost assigned to Martha/ No. of total units

227100/5000

45.42

Calculation of product cost per unit on the basis of FRED and MARTHAs using Activity Based Costing

Table 5: Calculation of total cost as per ABC method

Particular

FRED

MARTHA

(Amount in $)

(Amount in $)

Direct Material

40

60

Direct Labour

30

45

Manufacturing Overhead

594.3

45.42

Total cost per unit

664.3

150.42

Selling price per product

FRED: $797.16

MARTHA: $180.50

Calculation of  price that would be charged for FRED and MARTHA

Table 6: Calculation of selling price after allocating overhead as per ABC method

Particular

FRED

MARTHA

(Amount in $)

(Amount in $)

Total cost per unit

664.3

150.42

Price Charged

120% above total cost per unit

120% above total cost per unit

Manufacturing Overhead

797.16

180.504

Selling price per unit

797.16

180.504

Comparison of Total Cost

Particular

FRED

MARTHA

Cost as per Conventional Method

166

249

Cost as per ABC Method

664.3

150.42

Comparison of Selling Price

Particular

FRED

MARTHA

Charging price as per Conventional Method  (Note)

199.2

298.2

Charging price  as per ABC Method

797.16

180.50


Note:

Calculation of selling price as per conventional method:

FRED:

Total cost +20%

166+ (166*.20)

$199.2

MARTHA

Total cost +20%

249+ (249*.20)

=$298.8

From above comparison, it can be analyzed that a major cost was apportioned to product FRED, but the same was not apportioned to it. Due to same reason the appropriate cost of the product was not ascertainable; as it was allocated on the traditional method. As per traditional method of allotting business expenses, mostly management expenditure costs are allocated in terms of such factors which are machine and labour working hours. Expressing it, in other words, traditional is involved of there is a sole driver of the overheads of the factory, that is machine and labour working hours or any other volume been produced an indicator. In fact, there is the existence of many drivers of the factory outlay; setup of machinery, exceptional inspections, handling, special warehousing and so on. Diversified portfolio or high demands, the higher there will be cost allocation if these different activities through just one activity, like the machine hours of productivity (Stapleton et al., 2004).

According to the traditional method, performing cost of the overall diversified activities will be inclusive in just one cost section, and further, it will be divided by the production machine hour’s number. The result will be considered as the average rates that will be applicable to each and every product irrespective of the number and complexity of the activities, as many diversified cost activities doesn’t relate at all along with the production machine hour’s number, the consequence of this allocation is thus misleading (Mitra, 2009). The same issues existed in case of product MARTHA, i.e. the expenses were allocated more than the amount which was relating to it. Due to it over price was charged to customers and as its competitors were able to sell the product at a lower price because they applied ABC method for allocating the expenses. Hence, they were able to allocate the expenses in more appropriate manner and ascertain appropriate selling price too (Arora, 2012). It can be said as one of the reasons that its competitors had higher sales in comparison to Jackson Ltd.

Calculation of Manufacturing Overhead Rate as per Conventional Method

ABC is aimed to cover up the traditional method’s weakness and threats via containing different costing pools and further allocating all the costing pools based on its root cause. Thus, now Jackson Ltd will be able to improve its sales as well as provide products at appropriate selling price (Drury, 2013).

Advantages of ABC

Kaplan and Bruns firstly defined ABC costing in the late 1980s. It is normally seen as a contemporary alternative to absorption costing, enabling managers to understand the product and net profitability better. This furnishes the company with enhanced information to enable value-based and hence more efficient decisions (Abdel, 2011).

This method is focused on cost drivers, the activities which result in an increase in cost. Traditional absorption costing is focused on volume-based drivers like labour hours, on the other hand, ABC employs transaction-related drivers like the total amount of order received etc. Resultantly, long-run variable overheads, which are customarily considered as a fixed cost, could be traced to the product (Rajasekaran, 2010).

 

Activity-based costing (ABC) offers more of accuracy for the products regarding its costing, decision-making or leading. It boosts understanding of expenses and drivers of costs, and highlights highly expensive and non-value activities in the business, enabling managers to eliminate them from management (Kostakis, Boskou and Palisidis, 2011). ABC also effectual challenges to operating costs in such a way that it can find better ways of eliminating overheads. It also allows developed products and analysis of customer profitability. It promotes position and performance of business tools and techniques like scorecards and rapid improvements. Determination of products by using ABC method is more reliable yet accurate; it is because it aims at the impacts of activities and costs regarding the manufacturing goods (Debarshi, 2011). The complex of the selling price for multiple products as per the ABC is accurate and fair, due to the allocation of outlays in terms of related cost drivers.  

Controlling overhead containing fixed/variable make it more possible in monitoring activities. The relation between activities and costs are purely visible and are determined in ABC. This, it drives opportunities to manipulate overhead costs. Adequate details and information can be acquired in order to make better decisions in regards to profitability of various lines of product. Ascertainment of cost under ABC costing can be said more accurate and reliable as it is based on cause and effect linkage of cost relating to producing goods (Mhamdia and Ghadhab, 2012). Thus, due to same reason, appropriate allocation of overhead is possible. As fixation of the selling price for various products in case ABC costing method is done in a more appropriate manner as it is allocated on the basis of relevant cost drivers. Moreover, other information can also be obtained by this method which assists in making decisions relating to the profitability of different products (Wagener, 2013).

Calculation of cost per activity for each activity cost pool

Disadvantages of ABC

Business entities that adopt ABC method drives the threat of spending more than earning, giving much time and efforts on collecting data. Too much focus and data can frustrate the managers who are engaged in the method of ABC. However, insufficient details can result in lack of data. One other general factor that has a hand in the collapse of ABC is the failure to perform on the consequence that the data has provided. This basically occurs in business which is unwilling to put ABC in their priority.  Another disadvantage is that is not easy to choose the most appropriate cost drivers, and it is also hard to measure cost based on the activities, that are not appropriate for concerns of small manufacturing companies. It is also difficult to determine entire activities which can impact costs (Goektuerk, 2007).

Implementation of ABC method is a big project which demands considerable resources. Once it is incorporated, an ABC system demands high maintenance and is thus expensive. Data related to several activity measures need to gathered, examined and fed into the system. This method furnishes numbers like product margins, which are odds with the figures furnished by conventional costing techniques. However, managers are habitual of using the traditional methods to keep their operations running, and this system is mostly employed in performance appraisal (Zeuner, 2012). The data from ABC method has high chances of being misinterpreted and should be dealt with care when making decisions. Cost designated to items, customers and other objects have just potential relevancy. Prior to making any important decision using ABC data, managers should determine which costs are actually crucial for decisions to be taken. Reports produced by the Activity Based Costing System are not in conformation with the generally accepted accounting principles. Resultantly, a business involved in this costing method must keep two cost systems – one to prepare its external reports and one for internal usage (Kim, 2017).

References

Abdel, M., 2011. Review of Management Accounting Research. Palgrave Macmillan.

Arora, M., 2012. A Textbook of Cost and Management Accounting. Vikas Publishing House.

Debarshi. B., 2011. Management Accounting. Pearson Education.

Drury, C., 2013. Management and Cost Accounting. Springer.

Goektuerk, H., 2007. Activity-Based Costing (ABC) - Advantages and Disadvantages. GRIN Verlag.

Kim, Y., 2017. Activity Based Costing for Construction Companies. John Wiley & Sons.

Kostakis, H., Boskou, G. and Palisidis, G., 2011. Modelling activity?based costing in restaurants. Journal of Modelling in Management, 6(3), pp.243-257.

Kostakis, H., Sarigiannidis, C., Boutsinas, B., Varvakis, K. and Tampakas, V., 2008. Integrating activity?based costing with simulation and data mining. International Journal of Accounting & Information Management, 16(1), pp.25-35.

Mhamdia, A. and Ghadhab, B., 2012. Value management and activity based costing model in the Tunisian restaurant. International Journal of Contemporary Hospitality Management, 24(2), pp.269-288.

Mitra, J., 2009. Advanced Cost Accounting. New Age International.

Rajasekaran, V., 2010. Cost Accounting. Pearson Education.

Stapleton, D., Pati, S., Beach, E. and Julmanichoti, P., 2004. Activity?based costing for logistics and marketing. Business Process Management Journal, 10(5), pp.584-597.

Wagener, D., 2013. Activity-Based Costing and Its Later Development Into Activity Based Budgeting and Management. GRIN Verlag.

Zeuner, P., 2012. Activity-Based Costing. GRIN Verlag.

Cite This Work

To export a reference to this article please select a referencing stye below:

My Assignment Help. (2022). Calculation Of Cost Per Unit Using Conventional Approach And ABC Method In The Essay.. Retrieved from https://myassignmenthelp.com/free-samples/acc200-introduction-to-management-accounting/jackson-ltd-manufactures-file-A96EAC.html.

"Calculation Of Cost Per Unit Using Conventional Approach And ABC Method In The Essay.." My Assignment Help, 2022, https://myassignmenthelp.com/free-samples/acc200-introduction-to-management-accounting/jackson-ltd-manufactures-file-A96EAC.html.

My Assignment Help (2022) Calculation Of Cost Per Unit Using Conventional Approach And ABC Method In The Essay. [Online]. Available from: https://myassignmenthelp.com/free-samples/acc200-introduction-to-management-accounting/jackson-ltd-manufactures-file-A96EAC.html
[Accessed 25 February 2024].

My Assignment Help. 'Calculation Of Cost Per Unit Using Conventional Approach And ABC Method In The Essay.' (My Assignment Help, 2022) <https://myassignmenthelp.com/free-samples/acc200-introduction-to-management-accounting/jackson-ltd-manufactures-file-A96EAC.html> accessed 25 February 2024.

My Assignment Help. Calculation Of Cost Per Unit Using Conventional Approach And ABC Method In The Essay. [Internet]. My Assignment Help. 2022 [cited 25 February 2024]. Available from: https://myassignmenthelp.com/free-samples/acc200-introduction-to-management-accounting/jackson-ltd-manufactures-file-A96EAC.html.

Get instant help from 5000+ experts for
question

Writing: Get your essay and assignment written from scratch by PhD expert

Rewriting: Paraphrase or rewrite your friend's essay with similar meaning at reduced cost

Editing: Proofread your work by experts and improve grade at Lowest cost

loader
250 words
Phone no. Missing!

Enter phone no. to receive critical updates and urgent messages !

Attach file

Error goes here

Files Missing!

Please upload all relevant files for quick & complete assistance.

Other Similar Samples

support
Whatsapp
callback
sales
sales chat
Whatsapp
callback
sales chat
close