Activity Based Costing System PDF

MANAGERIAL
ACCOUNTING

EXECUTIVE SUMMARY
This report is sited to define the meaning of ABC costing system. Concept of traditional
approach of costing and ABC costing elaborated subject to organisation. Managers would be
able to understand the use of ABC costing system in order to determine the cost of each activity
form under manufacturing and production process.

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION ..........................................................................................................................1
MAIN BODY...................................................................................................................................1
Activity based costing ...........................................................................................................1
Traditional based costing........................................................................................................1
Comparison between ABC and traditional approach of costing............................................3
Calculation of overhead costs and profitability according to Activity Based Cost information.4
Conclusion in respect with advantages and disadvantages of ABC for management accounting
................................................................................................................................................8
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Managerial accounting refers to the process that involves making reports, and with the
help of these reports managers take decisions. Activity based costing is a method of calculating
cost of operations by dividing the cost among different activities. This accounting concentrates
on internal performance of an organization which ultimately lead to success and growth (Dale
and Plunkett, 2017). This report is based on Angelo Limited, which manufactures parts of
laboratory equipments. Details of Activity based costing and its comparison with traditional
approach to costing has been given. After that, calculation of profits and comparison of profit
percentage have been done on the basis of information given about two parts. Lastly, advantages
and disadvantages of ABC for management accounting are discussed.
MAIN BODY
Activity based costing
This technique of costing also known as ABC costing, it determines all those activities
which are associated with the production, analyse the cost of those activities and determines the
cost of product. Activity based costing is a system to recognize the relation between costs,
activities and manufactured products and it is also identifies the cost which is assigned to
activities overhead and then it is assigned to those cost of product. This costing is mostly used in
manufacturing industries where they enhance the costing data. This costing system is used in
product, target, for analysing profits, customer profits etc. It is widely popular when an
organizations is developing a better focus on corporate and making cost strategies better. This is
based on the system where the unit of work, events, task with specified goals, setting new
machines for production, designs for new products, providing finished goods etc. It is helpful in
transferring the costing of high volume products to the lover volume products and raising the
unit cost of lower volume of products. This costing is used in accounting methods to
management, salaries to office members (DRURY, 2013).
Traditional based costing
This technique decides the cost of products based on average overhead rate. This method
includes all indirect costs in production and applies these costs equally across the board using a
consistent technique such as machine hour etc.
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