ACC200 Introduction to Management Accounting Assignment

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ACC200: ASSIGNMENT TERM 1 2018

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Executive Summary
There are mainly two methods of costing that are used to allocate the direct as well as
indirect cost to the cost system. The two main costing methods are traditional costing and
activity based costing. The main difference in traditional costing method and activity based
costing method is that way of allocating the overhead costs to different products. In this report a
given case problem has been solved using both traditional costing method and activity based
costing model. In this assignment advantages and limitations of the activity based costing has
been discussed in detail to have an overview on how activity based costing helps cost manager to
allocate various types of cost to the cost system. The give case problem is solved to find out the
cost per unit under traditional costing system and activity based costing system. It has been
found that Activity base costing model has used more sensible approach to allocate all the
indirect to given products: Basic Model and Advance Model. Activity based costing has applied
cost driver for each cost and on the basis of that overhead rate for each activity is determined to
allocate these overhead costs to each of product line. In this way overhead cost has been
proportioned to products on the basis of resources used by each product in each activity.

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Introduction
In the field of management accounting the two main costing methods used to allocate the
indirect (Overhead) costs are activity based costing and traditional method. In both these
methods cost overhead rate of the production are calculated are assign to the total cost of product
using the cost driver rate. Traditional costing system uses only one cost driver rate while activity
based costing uses many cost driver rate to allocate the overhead cost to the total production cost.
In this report a typical case scenario has been given to calculate the cost per unit of
products using both traditional costing and activity based costing system. The given case
scenario is of Sewing Easy Limited that manufactures two models of sewing machines and these
models are basic model and advance model. In the given case problem management at Sewing
Easy Limited is concerned why oversea buyers are interested only in advance model not in the
basic model. Company currently is using the traditional method for allocating the cost and wants
to move to activity based costing system. In order to find out the reason why oversea buyer are
interested in advance model not in basic model, calculation has been made to find out cost per
unit using both traditional costing method and activity based budgeting method.
Solution-1: Calculation of cost per unit under the traditional costing system
The traditional method of cost accounting is used for allocation of manufacturing
overhead costs as per the manufactured products. The method is used for allocation of indirect
costs as per the volume of products manufactured. The method is highly useful for the business
managers to gain an overview of the overall indirect costs involved in the manufacturing process
of the company. The indirect costs are allocated on the basis of number of units produced or on
the basis of direct labor or the machine hours. The method involves identifying the indirect cost
related to the manufacturing process of the company on a regular basis (Tulsian, 2006).
The most significant advantage of the method is that it is relatively simple to be applied
as it is easy for the business managers to identify the indirect costs as per the products produced
or labor and machine hours consumed. The method also has a significant drawback that the
method is less reliable to be sued in the firms involved in manufacturing of large volume of few
products. This is because the increase in the amount of overhead expenses can increase the
chances of error occurrence in allocating the overhead costs to different products (Drury, 2008).

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The cost per unit of the models is as below:
Particulars Basic Advance
Direct material cost 325.00 560.00
Direct Labor cost 150.00 260.00
Allocated indirect overheads 89.84 70.83
Other costs* (201,700/1,500) 134.47
Total cost per unit 564.84 1,025.30
The cost per unit for Basic Model is $564.84 and for Advance Model is $1,025.30.
*Other costs include the following:
Selling & Admin expense 140,600
Interest expense 25,200
Office rent 35,900
Total expense 201,700
WN-1 – Calculation of predetermined overhead rate
Predetermined Overhead Rate = Total Indirect Overhead/ Total Machine hours
= 250,000/8000
= $31.25
WN-2 – Calculation of allocation of indirect overheads
Particulars Basic Advance
Total machine hours 4,600 3,400
Units produced and sold 1,600 1,500
Machine hour per unit (total machine 2.88 2.27