Cost Allocation Methods: Traditional vs Activity Based Costing

ACC 200

EXECUTIVE SUMMARY
A detailed analysis of cost allocation method has been carried out in this assignment. It also
states the significance of adopting correct allocation method that is suitable for the
organisation. Certain recommendations are also made at the end of the project.

Contents
Introduction................................................................................................................................4
Traditional costing system.........................................................................................................5
Activity Based Costing..............................................................................................................6
Importance of using correct costing method..............................................................................7
Analysis of cost data of Beztec limited......................................................................................8
Recommendation for Sue Smith (Accountant)........................................................................11
Analysis of gross profit margin of the company......................................................................12
Treatment of under- over recovery of overhead......................................................................13
Recommendation and Conclusion............................................................................................14
Bibliography.............................................................................................................................15

Introduction
There are many functions that has to be performed by the management. One of the most
important functions that it has to perform is decision making. It is the responsibility of the
management to do product pricing. Product pricing is a difficult job as it requires all the
information related to cost and all the information should be correct and reliable. If the
management uses wrong or past data then it might take wrong decision which might hurt the
financial viability of the company (Atkinson, 2012).
Beztec limited is a company that is engaged in the production of printer. The name of the
printer is Lexon and Protox. The management of the company has decided to stop the
production of Lexon because it is able to generate very low returns. It is important for the
management to evaluate the reason behind this and then take decision. The accountant of the
company is of the view that this financial outcome is because of the inappropriate costing
method.
In this assignment, the two types of cost allocation methods are discussed and explained. A
proper analysis has been done of which method should be adopted and what is the reason for
it (Berry, 2009).