ACCT204 Management Accounting

1) Perform overhead analysis systematically firstly based on traditional costing system. The overhead analysis under traditional costing system involves two-stage allocation process by assigning all manufacturing overheads to production and service cost centres, and followed by reallocating the costs assigned to service cost centres to production cost centres. Provide the calculations of the manufacturing costs assigned to the two products (Simple luggage and Complex luggage).
2) Perform again the overhead analysis using Activity-based costing (ABC) system. The overhead analysis under ABC system involves assigning costs to activity cost centres. Provide the calculations of the manufacturing costs assigned to the two products (Simple luggage and Complex luggage) based on ABC system.
3) Compare the product costs calculated under the traditional costing system and ABC system and explain the rationale behind the differences in product costs calculated under the two costing systems.
4) Analyse the cost versus benefit considerations in adopting ABC system in Happy Traveller Ltd.
5) Explain in details in what ways the ABC cost management can be applied in Happy Traveller Ltd besides assigning costs to its products.

Introduction 

This research is done on the case study of Happy Traveller Limited. This company is basically a luggage manufacturing company that make different kinds of luggage, such as simple luggage, complex luggage and other luggage. In this research the researcher has used both the types of costing system, which are traditional costing system and activity-based costing system to find the company’s product cost. The first part of this research uses traditional costing method to find out of overhead analysis in a systematically process. While the second part uses activity-based costing technique to find the overhead analysis. In the activity-based costing the costs are divided based on activity centre’s cost. Then the third part of the research deals with the explanation of the difference between the tradi

Cost assignment is the major reason for the difference in product cost for both the systems (traditional costing system and activity-based costing system). Based on this, as per Soltani, Nayebzadeh and Moeinaddin (2014) stated that this part takes in consideration of certain amount of labour and material cost. This cost can easily be measured. The labour cost in both the systems is calculated by multiplication of consumed materials with labour charge per hour; in which as the material cost for both the systems is calculated by multiplication of total consumed material with cost per unit. After the calculation of labour and material cost, overhead cost is added. A percentage of the overhead cost is added to the materials, which can be a percentage of total labour cost or machine worked hours, in traditional costing technique. These labour cost or material cost might not have added to overhead which give rise to the absence of rationale.

In ABC analysis there is a need for the actual overhead on the parts. All the procedures are measured as their cost components. Every overhead procedure is added as per the company’s requirements, which can also be described as the total cost of all the procedures (Otley 2016). Then to find out the unit cost of each procedure, the total overhead cost is divided by the total cost of procedures that are performed by the company.

For Happy Traveller Limited, the overhead cost for simple luggage found by traditional costing system is $67.82 per unit, and by using ABS analysis system the overhead cost is $ 134.65 per unit, thus ABC system overhead cost is higher. Again for complex luggage we see the overhead cost is $200 per unit in traditional costing system, where as for ABC system the overhead cost is $111.38 per unit. This variation in two systems is due to the addition of direct labour hours (Fullerton, Kennedy and Widener 2014). It is known that complex luggage has higher direct labour cost in comparison to simple luggage, so the overhead cost is high for complex luggage while using traditional system. In contrast to the above, in ABC system, direct labour hours are added to find out overhead cost, which gives out the exact distribution of costs.

For the incorporation of ABC system, the Happy Traveller Limited has to establish specific costs and benefits to their company. The incorporation of ABC system requires two forms of costs and those are system development cost of the system and operational running cost of the system. Above all the Happy Traveller Limited needs to have a full functional IT support department. This department’s function is to give require support for incorporation of the ABC system. In addition to this employee training programs are also required to be performed by the company (Chenhall and Moers 2015). This programme ensures the upgradation of employee knowledge as well as surety of their cooperation with the company.

Incorporation of ABC system provides benefits to the Happy Traveller Limited. Recognition of all non-value added procedures is one of the benefits that the company empowers for incorporation of ABC system. This identification of non-value added procedures helps to achieve higher cost efficiency by reducing or removing these procedures (Maas, Schaltegger and Crutzen 2016). In addition the company now can make important decisions based on pricing of products, procedure technology to be used, marketing mix of the company and several others

In order to incorporate ABC system based on the requirements of the Happy Traveller Limited, there are certain important techniques that are described below:

• Grouping of different procedures used by different departments in the Happy Traveller Limited, helps to control the rising competition in the industry, thus ABC system provides system of batch mode for the company (Hopper and Bui 2016).
• Competitive advantages are achieved by Happy Traveller Limited with the help of computers and different technologies. This further helps in increasing the ability to get better and accurate information thus making decisions more accurate.
• ABC system helps to reduce the overall cost of production by taking average of all the overhead cost like volume of the products, process to be set up, complexity in different process and batch size, thus reduces or eliminates the flexibility in demand

Conclusion 

The results of the research show the importance of ABC system in calculation of accurate cost distribution to products, due to which this system’s importance is understood by the manufacturing sector. The research shows that the traditional costing system depends too much of importance on the direct labour for calculation of cost of products, which bring about considerable amount of defect for the calculation of the total overhead costs. This research also shows that ABC system uses different cost drivers, giving the correct cost distribution of different products. Thus from the research it can be concluded that Happy Traveller Limited can achieve reduced production cost by incorporating ABC system, which further provides a platform for a sustainable growth for the company by giving competitive advantages in the market.

Reference List 

Chenhall, R.H. and Moers, F., 2015. The role of innovation in the evolution of management accounting and its integration into management control. Accounting, Organizations and Society, 47, pp.1-13.

Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2014. Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7-8), pp.414-428.

Hopper, T. and Bui, B., 2016. Has management accounting research been critical?. Management Accounting Research, 31, pp.10-30.

Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment, management accounting, control, and reporting. Journal of Cleaner Production, 136, pp.237-248.

Otley, D., 2016. The contingency theory of management accounting and control: 1980–2014. Management accounting research, 31, pp.45-62.

Soltani, S., Nayebzadeh, S. and Moeinaddin, M., 2014. The Impact Examination of the Techniques of Management Accounting on the Performance of Tile Companies of Yazd. International Journal of Academic Research in Accounting, Finance and Management Sciences, 4(1), pp.382-389.