Importance of Cost Allocation Methods in Decision Making for Beztec Limited

Introduction to Management Accounting
1

Executive Summary
The following study contains a detailed analysis on the various types of cost allocation
method. It also contains information on importance of choosing the collection costing method
for an organisation. There are recommendations made in order to help an accountant with the
decisions making function.
2

Contents
Executive Summary...................................................................................................................2
Introduction................................................................................................................................4
Traditional system of costing and its disadvantages..................................................................5
Activity based costing................................................................................................................6
Importance of using correct costing method..............................................................................7
Analysis of cost data of Beztec Limited....................................................................................8
Recommendation for Sue Smith..............................................................................................11
Analysis of gross profit margin of the company......................................................................12
Treatment of under-over recovery of overheads......................................................................13
Recommendation and conclusion............................................................................................14
Bibliography.............................................................................................................................15
3

Introduction
The management of an organisation is entrusted with the one of the most important parts of
decision making which is product costing. Determining the cost of a product is one of the
most complicated tasks. It is important that decision be taken taking into considerations all
the factors. Taking a wrong step might end up affecting the financial viability of the whole
organisation. (Atkinson, 2012)
The company, Beztec limited produce two models of printers, Lexon and Protox. The
management of the company is looking forward to phase out the older model, Lexon, based
on the fact that it has lower operating returns. The accountant Sue Smith is of the view that,
use of inappropriate costing methods has lead to these results. If the company will opt for
change in cost allocation methods, then it would help the management take correct measures.
In the following report we have discussed about two methods of cost allocation, and why it is
important to have proper allocation method. Also, we have laid down facts which will help
the management to take correct decisions.
4