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Discuss about the Management Accounting, The company must follow the ABC system since the costs are allocated on the basis of the labour hours or the machine hours and not on the basis of the number of activities that are consumed in the manufacture of the product.

ABC System for Cost Allocation

The following table shows the assignment the costs to the activity centres using the resource driver consumption patterns shown in Schedules 1 and 2:

 (Amounts in $)

 Cost category

 Wages

 Building costs

 Depreciation

 Consumables

 Energy

 Other

 Total

 New product development

        96,000.00

       14,000.00

                      -   

          945.95

                  -   

      1,000.00

   1,11,945.95

                 2.00

            200.00

                      -   

            10.00

                  -   

             2.00

 Sales and dispatch

     3,36,000.00

       35,000.00

                      -   

          945.95

                  -   

      3,500.00

   3,75,445.95

                 7.00

            500.00

                      -   

            10.00

                  -   

             7.00

 Inspecting

        48,000.00

       35,000.00

                      -   

                  -   

                  -   

         500.00

      83,500.00

                 1.00

            500.00

                      -   

                  -   

                  -   

             1.00

 Mincing

     8,16,000.00

       70,000.00

      2,80,000.00

     10,405.41

      42,000.00

      8,500.00

 12,26,905.41

               17.00

         1,000.00

           4,000.00

          110.00

   1,40,000.00

           17.00

 Mixing

     8,16,000.00

       70,000.00

      3,50,000.00

       6,621.62

      63,000.00

      8,500.00

 13,14,121.62

               17.00

         1,000.00

           5,000.00

            70.00

   2,10,000.00

           17.00

 Smoking and Packing

     6,72,000.00

       70,000.00

         70,000.00

     10,405.41

      42,000.00

      7,000.00

   8,71,405.41

               14.00

         1,000.00

           1,000.00

          110.00

   1,40,000.00

           14.00

 Administration

     3,36,000.00

       35,000.00

                      -   

       3,783.78

                  -   

      3,500.00

   3,78,283.78

                 7.00

            500.00

                      -   

            40.00

                  -   

             7.00

 Corporate management

     2,40,000.00

       21,000.00

                      -   

       1,891.89

                  -   

      2,500.00

   2,65,391.89

                 5.00

            300.00

                      -   

            20.00

                  -   

             5.00

 Total

   33,60,000.00

    3,50,000.00

      7,00,000.00

     35,000.00

   1,47,000.00

    35,000.00

 46,27,000.00

               70.00

         5,000.00

         10,000.00

          370.00

   4,90,000.00

           70.00

Calculate the cost of each activity performed in the relevant (to your allocated case) activity cost centre, using the information provided in item 1 above and in Schedule 3:

The following are the various calculations:

 (Amounts in $)

 Particulars

 Set up scales

 Weigh ingredients

 Load mixers

 Operate mixers

 Clean mixers

 Move mixture to smokehouse

 Total

 Wages

     1,68,000.00

  3,36,000.00

   6,72,000.00

  16,80,000.00

  3,36,000.00

       1,68,000.00

 33,60,000.00

 Building costs

        17,500.00

     17,500.00

      35,000.00

    2,10,000.00

     35,000.00

          35,000.00

   3,50,000.00

 Depreciation

    7,00,000.00

   7,00,000.00

 Consumables

       35,000.00

      35,000.00

 Energy

    1,47,000.00

   1,47,000.00

 Other

          1,750.00

       3,500.00

        7,000.00

       17,500.00

       3,500.00

            1,750.00

      35,000.00

 Total

     1,87,250.00

  3,57,000.00

   7,14,000.00

  27,89,500.00

  3,74,500.00

       2,04,750.00

A list of the activities performed and their annual costs is provided in Schedule 4 (some costs will need to be calculated as indicated in item 2 above). In addition the schedule provides an activity driver for each activity and the annual quantity of each activity driver. Calculate the cost per unit of activity driver for the activities listed:

The following table shows the desired calculations:

 (Amounts in $)

 Activity

 Cost

 Base

 Cost per activity

 Corporate management

   2,65,392.0000

      2,65,392.0000

 Process receivables

   1,47,814.0000

        3,500.0000

                42.2326

 Process payables

      82,657.0000

        1,800.0000

                45.9206

 Production planning

   1,47,814.0000

           700.0000

              211.1629

 Reports to Health Dept

        8,350.0000

             70.0000

              119.2857

 Process sales order

   2,32,268.0000

        2,800.0000

                82.9529

 Dispatch sales order

   1,43,178.0000

        1,800.0000

                79.5433

 New Product Development

   1,11,946.0000

      1,11,946.0000

 Inspect meat

      32,050.0000

           700.0000

                45.7857

 Disposal of substandard meat

        8,350.0000

           700.0000

                11.9286

 Move to mincing room

        8,350.0000

           700.0000

                11.9286

 Set up mincer

      85,950.0000

           700.0000

              122.7857

 Load mincer

      85,950.0000

           700.0000

              122.7857

 Operate mincer

   7,11,205.0000

   1,40,000.0000

                  5.0800

 Unload mincer

   1,68,400.0000

           700.0000

              240.5714

 Clean mincer

      85,950.0000

           700.0000

              122.7857

 Move to mixing room

      89,450.0000

           700.0000

              127.7857

 Set up scales

   1,87,250.0000

           700.0000

              267.5000

 Weigh ingredients

   3,57,000.0000

           700.0000

              510.0000

 Load mixers

   7,14,000.0000

           700.0000

           1,020.0000

 Operate mixer

 27,89,500.0000

   1,40,000.0000

                19.9250

 Clean mixer

   3,74,500.0000

           700.0000

              535.0000

 Move mixture to smokehouse

   2,04,750.0000

   1,40,000.0000

                  1.4625

 Pack into skins

   1,87,250.0000

   5,60,000.0000

                  0.3344

 Set up smokehouse

      71,400.0000

      11,200.0000

                  6.3750

 Move to smokehouse

      37,450.0000

      11,200.0000

                  3.3438

 Smoke products

   4,96,905.0000

      11,200.0000

                44.3665

 Unload smokehouse

      37,450.0000

      11,200.0000

                  3.3438

 Inspect finished products

      18,050.0000

      11,200.0000

                  1.6116

 Disposal of substandard product

        8,350.0000

      11,200.0000

                  0.7455

 Move to truck

      40,950.0000

      10,640.0000

                  3.8487

Based on the information calculated in item 3 above and in Schedules 5 and 6, prepare a bill of activities and determine the cost per unit for each of the two product items identified:

The cost per unit is as follows:

(Amounts in $)

 Mettwurst

 Activity driver

 Cost

 Corporate management

     53,078.0000

         53,078.0000

 Process receivables

          400.0000

         16,893.0286

 Process payables

          100.0000

           4,592.0556

 Production planning

            60.0000

         12,669.7714

 Reports to Health Dept

              6.0000

              715.7143

 Process sales order

          350.0000

         29,033.5000

 Dispatch sales order

                     -   

                         -   

 New Product Development

            60.0000

                60.0000

 Inspect meat

            60.0000

           2,747.1429

 Disposal of substandard meat

            60.0000

              715.7143

 Move to mincing room

            60.0000

              715.7143

 Set up mincer

            60.0000

           7,367.1429

 Load mincer

            60.0000

           7,367.1429

 Operate mincer

     28,000.0000

      1,42,241.0000

 Unload mincer

            60.0000

         14,434.2857

 Clean mincer

            60.0000

           7,367.1429

 Move to mixing room

            60.0000

           7,667.1429

 Set up scales

            60.0000

         16,050.0000

 Weigh ingredients

            60.0000

         30,600.0000

 Load mixers

            60.0000

         61,200.0000

 Operate mixer

     28,000.0000

      5,57,900.0000

 Clean mixer

            60.0000

         32,100.0000

 Move mixture to smokehouse

     28,000.0000

         40,950.0000

 Pack into skins

  1,12,000.0000

         37,450.0000

 Set up smokehouse

       1,120.0000

           7,140.0000

 Move to smokehouse

       1,120.0000

           3,745.0000

 Smoke products

       1,120.0000

         49,690.5000

 Unload smokehouse

       1,120.0000

           3,745.0000

 Inspect finished products

                     -   

                         -   

 Disposal of substandard product

                     -   

                         -   

 Move to truck

       1,120.0000

           4,310.5263

 Direct material

      6,72,000.0000

 Selling price

            14.0000

 Batch size

 Annual volume

  1,12,000.0000

 Cost per unit

                16.2906

(Amounts in $)

 Csabai

 Activity driver

 Cost

 Corporate management

                 6,398

                  6,398.0000

 Process receivables

                    100

                  4,223.2571

 Process payables

                    100

                  4,592.0556

 Production planning

                      40

                  8,446.5143

 Reports to Health Dept

                        4

                     477.1429

 Process sales order

                    110

                  9,124.8143

 Dispatch sales order

                    100

                  7,954.3333

 New Product Development

               36,942

                36,942.0000

 Inspect meat

                      40

                  1,831.4286

 Disposal of substandard meat

                      40

                     477.1429

 Move to mincing room

                      40

                     477.1429

 Set up mincer

                      40

                  4,911.4286

 Load mincer

                      40

                  4,911.4286

 Operate mincer

                 6,750

                34,290.2411

 Unload mincer

                      40

                  9,622.8571

 Clean mincer

                      40

                  4,911.4286

 Move to mixing room

                      40

                  5,111.4286

 Set up scales

                      40

                10,700.0000

 Weigh ingredients

                      40

                20,400.0000

 Load mixers

                      40

                40,800.0000

 Operate mixer

                 6,750

             1,34,493.7500

 Clean mixer

                      40

                21,400.0000

 Move mixture to smokehouse

                 6,750

                  9,871.8750

 Pack into skins

               14,000

                  4,681.2500

 Set up smokehouse

                    280

                  1,785.0000

 Move to smokehouse

                    280

                     936.2500

 Smoke products

                    280

                12,422.6250

 Unload smokehouse

                    280

                     936.2500

 Inspect finished products

                    280

                     451.2500

 Disposal of substandard product

                    280

                     208.7500

 Move to truck

                    270

                  1,039.1447

 Direct material

             1,08,000.0000

 Selling price

                      18

 Batch size

 Annual volume

               13,500

 Cost per unit

                       37.9873

Would the difference in costs for the two products be reflected in the conventional costing system?

No since the conventional method allows the division of the costs on the basis of the labour hours or the machine hours.

Do you think that the existing costing system understates or overstates the cost of the two products identified in item 4 above? Explain your answers in detail with reference to your calculations:

The existing system understates the costs since the actual costs under ABC are $16.29 and $37.98 for Wettwurst and Csabai respectively.

Consider and describe the changes in cost structure that are likely to have occurred at the Company over the last 15 to 20 years, and speculate on their causes:

The company must follow the ABC system since the costs are allocated on the basis of the labour hours or the machine hours and not on the basis of the number of activities that are consumed in the manufacture of the product. ABC helps in the efficient allocation of these expenses and so, is much more meaningful.

If ABC would have been followed, then selling price of both the products would have been higher.

Now complete your analysis and prepare your report. Your report should identify if there are any deficiencies inherent in the existing costing system and if so explain (using the outcomes from items 1 to 7 above) how activity-based costing could overcome these deficiencies. If, in your analysis, you determine there are no inherent deficiencies, explain (again using the outcomes from items 1 to 7 above) why not:

The concept of activity based costing is the method wherein the overheads are totalled and then the same along with the direct expenses that relates with the important business activities are allocated in the most systematic way. This is the process which includes the owners of the business and the managers and gives them an opportunity to define out the areas of the manufacturing or sales which generates the maximum amount of profit. Am inherent weakness in the system is the fact that the company uses conventional costing method wherein the costs are allocated on the basis of the labour hours or the machine hours and not on the basis of the number of activities that are consumed in the manufacture of the product. ABC helps in the efficient allocation of these expenses and so, is much more meaningful.

Include in your discussion, what factors the management accountant should consider when deciding whether to use an Activity-based system that includes both manufacturing overhead and non-manufacturing costs. And furthermore outline the benefits, costs and limitations of activity-based costing:

Once the company has decided to implement the method, they are required to decide as to how the system must be implemented which involves the 6 stages of IT implementation initiation, adoption, adaptation, acceptance, routinization and infusion. Each one of the stage is affected by many of the factors and this is of an equal importance when it comes to the motivation of the adaptations of the systems and the opinions of the external experts (Wordpress, 2017).

  • It is more accurate when it comes to the costing of the products and the services
  • It helps in gaining an insight into the overheads
  • It is easier to understand
  • It helps in the utilisation of the costs per unit rather than just the total cost
  • The system integrates well with the 6 sigma and other programs of improvement
  • It helps in ascertaining the non-value added activities
  • It supports the performance management and the scorecards
  • It helps in mirroring the work that has been done
  • It facilitates benchmarking
  • It enables the process of costing, supply chains and the value streams (Small business chron, 2017).

The following are the limitations of ABC:

  • The implementation of the system requires an enormous amounts of the resources.
  • The reports produced by the system cannot be used by the management and so, traditional coting method has to be used when the reports have to be produced.
  • It produces the numbers such as the margins for the products etc which is very much against the numbers that are produced by the traditional costing system. And the so, the data provided by ABC cannot be easily understood.
  • ABC produces the reports that are not in line with the GAAP (Accounting explanation, 2017).

References:

Accountingexplanation.com. (2017). Advantages, Disadvantages and Limitations of Activity Based Costing (ABC) System - AccountingExplanation.com. [online] Available at: https://www.accountingexplanation.com/advantages_disadvantages_and_limitations_of_activity_based_costing.htm [Accessed 16 May 2017].

quytrinh.files.wordpress.com. (2017). Factors influencing the implementation of Activity-Based Costing in Thailand: a case study of a Thai Telecommunications Company. [online] Available at: https://quytrinh.files.wordpress.com/2014/11/factors-influencing-the-implementation-of-activity-based-costing-in-thailand-16.pdf [Accessed 16 May 2017].

Smallbusiness.chron.com. (2017). Advantages and Disadvantages of ABC Analysis Inventory. [online] Available at: https://smallbusiness.chron.com/advantages-disadvantages-abc-analysis-inventory-34202.html [Accessed 16 May 2017].

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