(Pdf) Activity Based Costing System Research Article 2022

Accounting and Finance
1

Introduction
The management accountants are presently emphasizing over the use of new method of
costing such as Activity-Based Costing (ABC) over the traditional method of costing. This is
largely due to criticism that the conventional system of accounting is receiving on account of its
inadequacy to determine the overhead costs related with the products. In this context, the essay
discusses the use of different management accounting system for calculating the cost of an
individual project, service or activity.
Use of Management Accounting Systems for Allocating Product Costs
Calculating the Cost of an Individual Project with the use of Management Accounting System
Management accounting systems are proving to be highly useful for the business
managers to gain accurate information related to the product costs that assist them in making
short as well as long-term decisions. As such, the management accountants are largely
emphasizing on adopting the use of quality cost accounting systems for taking short as well as
long-term managerial decisions. The effectiveness of decisions taken by the business manager
requires the use of an adequate costing tool that leads to determination of accurate prices of
products (Akgün, 2004). The costing systems are known as information systems primarily used
by management accountants to attribute the costs on the basis of products or services. This
requires the management to acquire information about the costs of product which is useful in
determination of their selling price and assessing the product profitability (Akyol, 2007).
The business managers are emphasizing on the use of Activity-Based Costing (ABC)
system for taking accurate decisions regarding the product costs. This is because the system of
ABC is proving to be highly useful for taking accurate decisions regarding the overhead costs
that are actually consumed by the product (Kim, 2017). The usefulness of ABC system for
calculating the cost of an individual project can be demonstrated with the use of following
example:
Example on Activity based costing
Information for example purpose
Type of products Type 1 Type 2
2

Total units 2000 3500
Sale price of per unit of product $
350.00 $ 400.00
Cost per unit:
Direct material $
120.00 $ 130.00
Direct labour $
45.00 $ 65.00
Machine hours required 1000 2000
Machine Set up rounds 50 75
No of rounds material is handled 35 65
No of deliveries 40 85
Overhead
Annual
Budgeted
cost
Cost Driver
Cost in machine department $
300,000.00 Total machine Hours
Machine set up cost $
25,000.00 No of times machine is set up
Machine inspection and quality control $
59,000.00 No of times machine is set up
Cost of material handling $
39,000.00 No of rounds material is handled
Cost of deliveries $
30,000.00 No of deliveries
Total Overheads $
453,000.00
Cost per driver unit
Overhead Cost Cost Driver Driver
units
Overhead
cost per
driver unit
Cost in machine $ Total machine Hours 3000 $
3