Finance and Accounting Assignment Solution

Running head: ACCOUNTS AND FINANCE
Accounts and finance
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1ACCOUNTS AND FINANCE
Table of Contents
Introduction................................................................................................................................2
Activity based costing (ABC)....................................................................................................2
Example..................................................................................................................................2
Limitations.............................................................................................................................4
Absorption costing.....................................................................................................................4
Example..................................................................................................................................5
Limitation...............................................................................................................................6
Conclusion for decision making.................................................................................................7
Reference....................................................................................................................................8

2ACCOUNTS AND FINANCE
Introduction
As per the traditional method of costing the manufacturing overheads associated with
the products are allocated on the basis of machine hours required for the product or labour
hours required for the product or the number of the units produced. Usage of machine hours
for overhead allocation states that the machine hours lead to generation of factory overhead
(Mellor, Hao and Zhang 2014. Pp. 194-201) However, in recent times it is recognized that the
manufacturing overhead are caused by various other factors. For instance, some customers
may ask for additional operation for manufacturing process for their special product or they
can ask uniform products in large quantity. Therefore, in recent times the traditional method
for overhead allocation is receiving criticism as it is not considered as relevant anymore.
However, the other methods that can be used for computing the cost of a product are activity
based costing and absorption costing (Ahmed and Duellman 2013. Pp. 1-30).
Activity based costing (ABC)
ABC is the method of managerial accounting that recognizes the overhead costs
associated with the product and then allocates then to the objects. It is the way of allocating
overhead over the departments or products which generate these overheads while production
process is carried out. ABC system is more systematic as compared to the traditional method
as ABC is focussed on recognizing the production processes or activities that is used for
processing the job. These cost drivers are known as the activity cost driver. Though ABC
method is the multi-step procedure, it is much more accurate for allocating the indirect costs
or overheads (Accounting for Overheads - Activity Based Costing (ABC), 2016. Pp. 5-6).