Journal of Management Accounting Research

Running head: INTRODUCTION TO MANAGEMENT ACCOUNTING
Introduction to Management Accounting
Name of the Student:
Name of the University:
Author Note

1INTRODUCTION TO MANAGEMENT ACCOUNTING
Table of Contents
1a) Determining the company’s predetermined overhead rate using direct labour cost as the
single customer:.........................................................................................................................2
1b) Determining the product cost and selling price of 1 kg of Kona Coffee and 1kg of
Malaysian coffee:.......................................................................................................................3
2) Developing new product cost using activity-based costing for 1kg of Kona Coffee and 1kg
of Malaysian coffee:...................................................................................................................3
3a) Comparing the cost of the product calculated in requirement 1 and 2, providing
explanation as to why the product cost using the traditional costing system are different from
ABC method:.............................................................................................................................5
3b) Making relevant recommendations for pricing of the two products based on the analysis:8
References and Bibliography:..................................................................................................10

2INTRODUCTION TO MANAGEMENT ACCOUNTING
1a) Determining the company’s predetermined overhead rate using direct labour cost as
the single customer:
Kona Malaysian
Direct
material $2.40 $2.60
Direct labour $0.50 $0.60
Activity Activity Driver Quantity of activity driver Budgeted cost
Purchasing Purchase orders $1,019 $509,500
Material handling Setups $1,520 $1,064,000
Quality control Batches $760 $95,000
Roasting Roasting hours $81,600 $816,000
Blending Blending hours $40,800 $408,000
Packaging Packaging hours $27,200 $544,000
Kona Malaysian
Budgeted sales (kg) 2000 100000
Batch size (kg) 500 10000
Setups (per batch) 9 10
Purchase order size (kg) 500 25000
Roasting time (per 100 kg) in Hour 1.5 1.5
Blending time (per 100 kg) in Minute 45 45
Packaging time (per 100 kg) in Hour 0.2 0.2
Particulars Value
Total manufacturing overhead cost $3,436,500
Budgeted direct-labour cost $600,000
Predetermined overhead per direct-labour 6
The above calculations directly help in determining the predetermined overhead per
direct labour, which could be used for directing the level of expense that is required for
understanding the current costing of a particular product. The calculations have been
conducted on the basis of traditional costing system, which is considered a basis strategy that
is used by companies to determine the level of expenses for a particular product. The values

3INTRODUCTION TO MANAGEMENT ACCOUNTING
of the predetermined overhead are mainly calculated by dividing the total manufacturing
overhead cost with the budgeted direct labour cost of the company. Otley (2016) indicated
that traditional costing system is simple and can be used efficiently by companies to derive
their costing structure and make relevant pricing for their products.
1b) Determining the product cost and selling price of 1 kg of Kona Coffee and 1kg of
Malaysian coffee:
Particulars Kona Malaysian
Direct material $2.40 $2.60
Direct labour $0.50 $0.60
Overhead 2.86 3.44
Product cost $5.76 $6.64
Mark up
(@30%) $1.73 $1.99
Selling price $7.49 $8.63
The information in the above table states about the pricing of 1kg of Kone Coffee and
Malaysian Coffee after adding the mark-up price of 30% to the total product cost. The
calculations mainly add the overall direct material and direct labour with the overhead cost
experienced for each section of the manufacturing process. This mainly helps in determining
the actual overhead cost for the product and is used for deriving the total cost for the pricing
process. Thus, a mark-up percentage of 30% is mainly added to the total cost for deriving the
total sales price, which could be used for the product. Fullerton, Kennedy and Widener
(2014) argued that traditional costing system does not allow the company to adopt
competitive pricing strategy, which is essential for improving competitiveness in the market
place.
2) Developing new product cost using activity-based costing for 1kg of Kona Coffee and
1kg of Malaysian coffee:
Particulars Unit cost