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The Case Study About KASE Manufacturing Company Costing,

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Question:

Discuss the Case Study about KASE Manufacturing Company Costing ?

 

Answer:

Introduction:

Costing is a method or a technique that is uses by companies to assign, classified, allocate and arrange the cost to each resource driver and each element of costing and overheads in a manufacturing company. Costing technique must be effective as an effective and significant costing technique offers which offers the required data, fact sheet and information to the managers and the company for managing the orders, reducing the waste and minimizing the cost.

Costing techniques are always used by every production house to enhance the profits and minimize the losses to achieve the goals and enhance the worth of the production house. This report has been prepared to analyze the trading costing method and activity costing method. This report depicts about the deficiencies of both the techniques. Further the case study has been used as a proof to support the arguments. This report also depict about the factors of management accounting which are used by a firm to analyze the right technique according to the nature of the firm. More, benefits, limitation etc has been analyzed of activity based costing to understand the costing concept easily.

 

Case study Summary:

The given case study depict about the KASE manufacturing company which offers a various range of cheese to its customers. Case study depicts that before 15 years company used to produce only 3 types of cheese but currently it is manufacturing various products. Due to extra production, company has faced many issues such as extra machinery charges, low maintenance and reduction of profitability of the production house. The head manager of the company depicted that the sales increment is the only option to enhance the profit. The production manager has identified that due to traditional costing system, they are not able to get the exact data and thus the bas decisions are making an impact over the overall profitability of the company.

Through this case study it has been identified that the company must make the change into the costing technique to analyze the impact of new costing technique over the profitability of the company. So activity based costing technique has been analyzed over the figures and data of the company.

Traditional costing system:

Traditional costing system is oldest technique among all the techniques of cost accounting. This technique is used by the production house and companies to assign allocate and classify the cost to each cost driver and element of cost accounting. This technique does not take a look over the depth information of the production house. It assigns all the cost to the cost center according to the average rate of overhead. This method suggests the company to draw all the indirect overhead and other overhead cost into the production department. This method only uses one cost driver to apply all the cost equally to every product.

 

Deficiencies:        

The main crisis with this technique is its method of assigning. It assigns the entire indirect cost under the production head and it makes an impact over the cost of production by increasing it. This technique influences the decision of the managers regarding the cost (Garrison et al, 2010). In ABC technique, firstly entire cost is assigned to cost centers and then it assigns to the products.

Through analyzing the case study of KAVE manufacturing company, it has been identified that the traditional costing system is not in favor of the company. Due to this costing method, company has faced many issues such as reduction in profits, low maintenance and other issues. It has been found that this technique do not provide the accurate figures to the managers and so that the decision of the company get manipulated.

Activity based costing system:

Activity based costing is newest technique of costing. It resolves all the manufacture house’s actions related with the industrialized and manufacturing of a product. This technique consigns the overhead cost to each cost center and activity according to the operations and nature of cost and the other elements. It establishes the correct cost of the manufacture house and cost per unit.

This technique is used by the production houses to diminish and supervise the inaccuracy in transferring the cost to each and every cost center and element. Through this technique, entire costs are firstly assigned to cost centers and after that the products or services (Rasiah, 2011). The transmission system of ABC technique is totally different from traditional costing.

Deficiencies:

The main crisis with this technique is the complexity while assigning the cost to each cost center. It assigns the cost with depth information and according to the nature of the cost and it are quite more time and cost consuming. It makes an impact over the cost of the company. This technique influences the decision of the managers regarding the cost and profit (Garrison et al, 2010). In traditional costing technique, the entire cost is assigned according to the average cost.

In case of KAVE manufacturing company it has been analyzed that the technique is quite more time consuming but at the same time it is required for the company to make better decisions about the production. This costing technique totally suits the nature and operations of the company.

Factors of management accounting:

As discussed above the KAVE manufacturing company must consider the following points to analyze that whether company must adopt the ABC system or should use the traditional costing system continuously. For taking this decision company must consider the following points:

Nature:

Nature of the company is the main element to identify before analyzing about the costing technique of the company. Nature of the company depicts that which technique would be appropriate for the company to allocate and assign the cost. In KAVE manufacturing, the nature of the company is totally manufacturing which depict that the company must choose the activity based costing as the traditional costing system would not be appropriate to meet all the requirement of the company and thus it would manipulate the decision about the production of the company (Weygandt, Kimmel & Kieso, 2015).

Amount:

The costing technique also depends over the total costing amount of the company. If the amount is not bigger than management is suggested to go for traditional accounting system but if the amount is bigger than company must go for ABC technique. In KAVE manufacturing, the costing amount of the company is quite bigger so the company must choose the activity based costing as the traditional costing system would not be appropriate to meet all the requirement of the company and thus it would manipulate the decision about the production of the company (Rasiah, 2011).

 

Rigidness of employees:

As KAVE manufacturing limited is using the traditional costing method from last 15 years. So it becomes difficult for the employees to understand the new technique and work according to the new technique suddenly. So the management must have a discussion with the employees of the company and make changes over the techniques accordingly (Kaplan & Anderson, 2013).

Number of products:

The costing technique also depends over the total number of products and the units of the company. If the number of products is not bigger than management is suggested to go for traditional accounting system but if the number of products is bigger than company must go for ABC technique. In KAVE manufacturing, the total number of products of the company is quite bigger so the company must choose the activity based costing as the traditional costing system would not be appropriate to meet all the requirement of the company and thus it would manipulate the decision about the production of the company (Hopper, Northcott & Scapens, 2007).

Thus it could be concluded that the company must go for activity based costing as the resulted data of ABC costing is quite better then the result form traditional costing system. The benefits, limitations of ABC are as follows:

Benefit:

  • This ABC technique helps the company and management to classify the cost as per product or service.
  • This ABC technique is quite effortless to recognize, appreciate and concern about the practical life.
  • This technique is quite less time consuming and cost consuming technique than the traditional costing technique (Weygandt, Kimmel & Kieso, 2015).
  • It makes differentiation among the services or products of manufacturing house according to the obligatory resources and nature.
  • This ABC technique enhances the prosperity and profit of a production house.
  • It resolves about the productive as well as non productive activities of the company (Hansen, Mowen & Madison, 2010).

Cost:

The calculations of the company depict that there are huge difference between the amount depicted by traditional costing method and activity based method. It depicts that the activity based costing is the best technique for the company as it would help the company to resolve all the issues and the profitability of the company would enhanced due to this technique (Silvi, Bartolini & Hines, 2007).

Limitation:

  • This ABC technique might give negative or inappropriate result.
  • This ABC technique has many errors.
  • This ABC technique uses depth information to analyze the data (Weygandt, Kimmel & Kieso, 2015).
  • Manipulates the decision.
  • Challenging technique

Summary:

Through the above calculations and analysis, it has been found that the Kase Company is a manufacturing company of Cheese. Earlier company just used to 3 types of cheese but currently it is manufacturing various products. Due to extra production, company has faced many issues such as extra machinery charges, low maintenance and reduction of profitability of the production house.

Through this case study it has been identified that the company must make the change into the costing technique to analyze the impact of new costing technique over the profitability of the company (DRURY, 2013). So activity based costing technique has been analyzed over the figures and data of the company.

Traditional costing system technique is used by the production house and companies to assign allocate and classify the cost to each cost driver and element of cost accounting. This technique does not take a look over the depth information of the production house. It assigns all the cost to the cost center according to the average rate of overhead whereas Activity based costing resolves all the manufacture house’s actions related with the industrialized and manufacturing of a product (Hansen, Mowen & Guan, 2007). This technique consigns the overhead cost to each cost center and activity according to the operations and nature of cost and the other elements. It establishes the correct cost of the manufacture house and cost per unit.

Through analyzing the data and figures of the company, it has been analyzed that if company would consider the traditional costing rather than ABC technique than the assignment of cost to the cost centers would be different. It has been found that if the cost would be assigned to the cost centers according to the ABC costing method than the wages, building cost, depreciation, consumables, energy and other cost would be assign to the cost center according to their nature whereas in traditional costing method, the cost is allocated to the centers according to a common proportion.

Through the calculation of activity and resource drivers, it has been identified that the expenses of production activities of the company would be assigned to the activities of the company to identify the cost of each activity. For it, traditional costing system depict entire expenses could be assigned to the activities according to a common rate whereas the activity based costing technique depict that the expenses must be assigned according to the nature and operations of the company. With the help of calculations, it has been analyzed that expenses has been assigned to the activities according to the labor time and floor areas used by the particular process or activity.

Further, it has been depicted that the cost per unit through both the techniques are quite different from each other. The reason behind being the different result is the different techniques and method (Marshall, McManus & Viele, 2011). Traditional costing method is the old technique which do not uses depth information about the activities and assigns the cost according to the common overhead rate whereas the activity based costing analyzes every activity, their nature and their processing system to assign the cost and thus the cost per unit is different in both the techniques.

More, the Cheddar’s activity and its activity drivers have been analyzed to understand the ABC costing more. It has been analyzed through this study that every activity of cheddar process is different and thus the cost of the production has been allocated to those activities according to their structure, nature, time, machinery uses, labor hours, and electricity uses etc (Langfield-Smith, 2008). It helps the production department to understand that which activity is more cost consuming and what could be done to control over that cost.

It has been found that if the same procedure has been followed by the traditional costing system then the result would be different and the calculation will not be that much complex as well as the provided result would also be complex (Bhimani, Horngren, Datar & Foster, 2008).

Further, the same procedure has been done with Mascarpone cheese to understand the difference between ABC and traditional costing system. It has been analyzed through this study that every activity of Mascarpone process is different and thus the cost of the production has been allocated to those activities according to their structure, nature, time, machinery uses, labor hours, and electricity uses etc (Horngren, 2009). It helps the production department to understand that which activity is more cost consuming and what could be done to control over that cost.

It has been found that if the same procedure has been followed by the traditional costing system then the result would be different and the calculation will not be that much complex as well as the provided result would also be complex.

Thus it could be concluded that KAVE Manufacturing Company must implement ABC technique to settle every issue faced by the company. This technique must be carried by the company according to the requirement of production and nature of the operations.

 

Conclusion:

Both the techniques of costing system i.e. traditional costing system and activity based costing system are essential for a business to investigate entire cost of each cost center and element. ABC technique is the best method for KAVE manufacturing company. It has been initiated that there was huge issues in traditional technique, so ABC is suggested to KAVE to make changes. These costing techniques help the company and manager of the company to make decisions in a better way regarding the production, cost of each costing element, cost per unit, etc.

Thus it could be concluded that KAVE Manufacturing Company must implement ABC technique to settle every issue faced by the company. This technique must be carried by the company according to the requirement of production and nature of the operations.

 

References:

Bhimani, A., Horngren, C. T., Datar, S. M., & Foster, G. (2008). Management and cost accounting (Vol. 1). Pearson Education.

DRURY, C. M. (2013). Management and cost accounting. Springer.

Garrison, R. H., Noreen, E. W., Brewer, P. C., & McGowan, A. (2010). Managerial accounting. Issues in Accounting Education, 25(4), 792-793.

Hansen, D. R., Mowen, M. M., & Madison, T. (2010). Cornerstones of cost accounting. Issues in Accounting Education, 25(4), 790-791.

Hansen, D., Mowen, M., & Guan, L. (2007). Cost management: accounting and control. Cengage Learning.

Hopper, T., Northcott, D., & Scapens, R. (2007). Issues in management accounting. Pearson education.

Horngren, C. T. (2009). Cost accounting: A managerial emphasis, 13/e. Pearson Education India.

Kaplan, R., & Anderson, S. R. (2013). Time-driven activity-based costing: a simpler and more powerful path to higher profits. Harvard business press.

Langfield-Smith, K. (2008). Strategic management accounting: how far have we come in 25 years?. Accounting, Auditing & Accountability Journal, 21(2), 204-228.

Marshall, D. H., McManus, W. W., & Viele, D. F. (2011). Accounting. McGraw-Hill Irwin,.

Rasiah, D. (2011). Why Activity Based Costing (ABC) is still tagging behind the traditional costing in Malaysia?. Journal of Applied Finance and Banking, 1(1), 83.

Silvi, R., Bartolini, M., & Hines, P. (2007). Strategic cost management and lean thinking: A framework for management accounting.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & Managerial Accounting. John Wiley & Sons.

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