ACC200 Assignment on Overhead Costing and Activity Based Costing

ACC200 Term 2 2018 Assignment

Executive Summary:
The assignment is a good representation of the common issue of inaccurate allocation of
overhead costing that is being faced by many business organization holding manufacturing
facilities. The assignment also describes that the most common reason for which the issue arise is
the use of the traditional costing method where a fixed predetermined overhead rate is being
applied for the allocation of the overhead cost among the different divisions of the organisation.
The assignment advocates in terms of a case study situation that application of activity based
costing and dynamic overhead rate is the most suitable method of resolving the issue.

Table of Contents
Importance of accurate product costing...........................................................................................3
Problems associated with using traditional costing system (used by Beztec).................................3
Cost drivers under activity based costing (ABC)............................................................................3
Cost of each model under ABC costing:.........................................................................................4
Gross profit & gross profit percentage for each model under ABC costing...................................5
Advice to Sue Smith with respect to accounting standard of APES 110 Code of Ethics................6
Causes of over and under allocation of overhead cost while predetermined overhead rate is used 7
Three ways of disposing over and under application of over head allocation.................................9
Conclusion:......................................................................................................................................9
Reference:......................................................................................................................................11
Appendix:......................................................................................................................................12

Importance of accurate product costing
Companies need an accurate product costing systems to track the accurate costs of their
operations and to allocate the costs properly by choosing an appropriate unit. The units that are
often used for allocation of the overhead costs are machine-hour or labour hour. The selection of
an accurate product costing system can represent a manufacturing process represented as
profitable and thus offer the scope to the business to continue with the current manufacturing
process. Otherwise it will not be possible for a business to continue with manufacturing line
having little or no profit margin(DRURY, 2013).
Problems associated with using traditional costing system (used by
Beztec)
In the traditional costing system that is often followed by most of the manufacturing business
organizations the overhead costs are allocated either on the basis of the direct labour hour
consumed or the number of machine hours used. The problem arises with the traditional costing
method when the basis of allocation is much smaller than the amount of cost to be allocated.
The problem become more acute with the costing process when due to a small change in the
volume of resources consumed leads a huge change in the amount of overhead applied per unit
of direct labour hour or machine hour. Thus the issue has become more prominent with the
company Beztec that is engaged in manufacturing operation and is having an automated
production environment and the amount of overhead cost to be allocated is much higher than the
basis that is total machine-hours being used in the operational process(Plank, 2018).
Cost drivers under activity based costing (ABC)
As per the suggestions of Sue smith the Activity Based Costing has been applied where the
major cost drivers that are being identified with respect to the product divisions of Lexon
And Protox under Beztec Limited are Soldering (number of solder points),Shipments (number of
shipments), Quality control (number of inspections), Purchase orders (number of orders,