Application of Activity Based Costing System in Beztec Limited

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ACC200 term 2 2018 Assignment

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Executive Summary
The report demonstrates the application of activity based costing system in Beztec
Limited. Beztec currently uses traditional cost management system to determine the cost of
products they manufacture. Beztec produces two models of printers: The Lexon and other one is
Protox. The Protox is the new introduced model while Lexon is older model. Under traditional
cost system the operating profit of Lexon is less than the Protox that forces the management to
discontinue the Lexon. The management accountant Smith has opted for activity based costing
and find out Protox is providing losses while operating profit of Lexon is much more as it was in
traditional costing method. The manager Kay asked Smith to alter the costs under the activity
based costing approach so that there will be profit from both the products. As per APES 110
code of ethics it has been advised to Smith that altering the actual cost of product will be
unethical and it will give undue advantage to Kay with future losses to Beztec.

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Introduction
The cost accounting system is used to determine the product cost and profit. The two
main cost accounting systems are traditional cost system and activity based costing system.
There are many differences in both of these cost systems. Traditional costing system allocate
overhead cost either through labour hour rate or machine hour rate while under activity based
costing system overhead costs are allocated on the basis of consumption of different activities by
each product. So it can be said that traditional costing allots cost without providing the base of
allocation and activity based costing frames a base before proceeding with the allocation.
The purpose of this report is show the application of activity based costing and to provide
the analysis of difference between the traditional costing approach and activity based costing.
Beztec is currently using traditional costing method and management accountant wants to apply
the activity based costing to ascertain the actual profit provided by the two products
manufactured by Beztec. There will be discussion on professional code of ethics on the part of
management accountant for the purpose of giving advice to the management on profitability
position of each printer model.
Solution 1:
Importance of Accurate Product Costing & Problems Associated with Using Traditional
Costing System Adopted by Beztec
The determination of accurate cost of products is very important as it has a direct impact
on the profit reported by a company. The method of accurate product costing adopts the use of
standard cost methodology for calculating the cost of component items. The accurate cost of a
product depends on determining the cost of a unit of production by studying every resource that
is sued in its production. The final cost of product is calculated by incorporating the cost from all
streams. The determination of accurate cost of products is very essential for taking well-informed
decisions regarding the future growth and development of an organization. The accurate
determination of product cost is dependent on adequately estimating the calculation of cost of
goods sold. This involves calculating the manufacturing cost that involves calculation of cost of
direct labor, indirect labor and overhead. This is followed by calculating the cost involved in
designing of products and then recording the cost of each product line or item (Drury, 2008).
The calculation of accurate cost enables a business to achieve higher growth as it helps in
determining the prices of sale at a competitive margin. The establishment of base cost helps in
determining the mark-up cost to be added for calculate the right sale spruce for a product. The
accurate calculation of product cost helps in making a right forecast of the next accounting
period by gaining actual figures of expenses and revenues. As such, it can be said that the
method of accurate product costing is becoming extremely essential for business companies to
determine actual profit.