Mgmt Accounting: ABC Costing & Activity-Based Essay.

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].

Cite This Work

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

My Assignment Help. (2021). Management Accounting: ABC Cost Analysis Essay.. Retrieved from https://myassignmenthelp.com/free-samples/act202-management-accounting/costing-system.html.

"Management Accounting: ABC Cost Analysis Essay.." My Assignment Help, 2021, https://myassignmenthelp.com/free-samples/act202-management-accounting/costing-system.html.

My Assignment Help (2021) Management Accounting: ABC Cost Analysis Essay. [Online]. Available from: https://myassignmenthelp.com/free-samples/act202-management-accounting/costing-system.html
[Accessed 27 July 2024].

My Assignment Help. 'Management Accounting: ABC Cost Analysis Essay.' (My Assignment Help, 2021) <https://myassignmenthelp.com/free-samples/act202-management-accounting/costing-system.html> accessed 27 July 2024.

My Assignment Help. Management Accounting: ABC Cost Analysis Essay. [Internet]. My Assignment Help. 2021 [cited 27 July 2024]. Available from: https://myassignmenthelp.com/free-samples/act202-management-accounting/costing-system.html.