ACC200 Accounting Systems - Free Samples to Students
1)Calculate cost per unit of the two models of sewing machines under the current traditional costing system.
2)Calculate cost per unit of the two models of sewing machines under Activity based Costing.
3)Sewing easy sells the advance model at a price of cost (under the current costing system) plus 20% and is willing to give the same selling price to the overseas buyer. The overseas buyer wants to purchase only the advance model. Prepare December 2017 Profit and Loss Statement for the advance model where (a) traditional costing is used to calculate the product cost (b) Activity Based Costing is used to calculate the product cost. Analyse why the overseas buyer is interested to buy only the advance model. In your discussion you should highlight the importance of accurate product costing.
4)Seldom will we see that the actual overhead and applied overhead is the same. Discuss why and state three ways to deal with under/over applied overhead costs.
5)What are the main benefits and limitations of ABC system?
Answer:
Introduction:
It is known that a company charges a mark-up of 20% on the unit cost price for determination of the selling price.
Therefore, the unit sale price for the advance system would be 1.2*890.93 or $1,069.12
Taking into consideration the above pricing and the traditional costing of the product, the profit and loss statement for December 2017 is illustrated as follows (Emmauel and Otley, 2015).
Taking into consideration the above pricing and the ABC costing of the product, the profit and loss statement for December 2017 is illustrated as follows (Drury, 2016).
The above P&L statement is indicative of the precise reason for the interest of foreign buyer in procuring only the advance model. There is under-application of the indirect or overhead costs to the advanced model which leads to lower costing and hence lower price than the actual level. Also, at the given price, the company in reality is incurring losses, thus the foreign buyer is finding this price very lucrative (Heisinger, 2014).
The overheads which are actually used rarely match with the overhead used for cost computation. One of the reasons for the same is the use of traditional costing methods that deploy direct cost as the basis for indirect cost allocation. With regards to usage of activity based costing also, it is imperative that every activity can be broken into further sub-activities but owing to high complexity and cost factors the sub-activities are identified to a particular level only which leads to potential mismatch between the two overheads (Drury, 2016).
In order to manage the above variation in overhead costs, he following three measures are pivotal (Kinney and Rainborn, 2012).
- Firms having more than one product should use activity based costing especially when the products are heterogeneous.
- The company should keep a track of the pricing offered by competition and any failure on the company’s part to meet the competitor’s price or vice versa should have a valid explanation. The inability to account for such observations implies that costing is not accurate.
- In case of multiple products, if a particular product is doing very well while a lower or higher range product is failing in terms of generating sales even though there are no product issues. In such cases also, costing can be an issue and needs to be rectified.
The use of ABC system offers various benefits that are outlined below (Heisinger, 2014).
- The overhead costs are accurately allocated across different product categories which lead to accurate costing.
- Owing to accurate costing, the product pricing become competitive and instances of overpricing or underpricing are avoided.
- Adherence to ABC system and accurate costing leads to improvement in decision making by the management since major production decisions are related to cost only.
However, there are certain limitations with regards to use of ABC system as highlighted below (Emmauel and Otley, 2015).
- This system is high in terms of complexity as compared to traditional costing system. As a result, upfront costs are high with regards to breaking costs into individual activities and determining the cost drivers.
- Even after implementation the decision making may not improve as decision makers find it difficult to inculcate ABC related inputs into their decision making. As a result, incremental training needs to be provided for these decision makers using information generated through ABC system.
- Owing to the high resource requirement in terms of implementation of ABC system, small companies might be discouraged to use the same and may continue with traditional costing.
References
Drury, C. (2016) Cost and Management Accounting: An Introduction. 6th ed. New York: Cengage Learning
Emmauel, R.C. and Otley, T.D. (2015) Accounting for Management Control. 8th ed. London: Cengage Learning.
Heisinger, K.(2014) Essentials of Managerial Accounting 4th ed. London: Cengage Learning.
Kinney, R. M. and Rainborn , A. C. (2012) Cost Accounting: Foundations and Evolutions. 9th ed. New York: Cengage Learning.
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