Costing Analysis: Traditional and ABC Costing

This document provides an analysis of traditional and activity-based costing methods. It includes a comparison of cost per unit, importance of accurate product costing, and allocation techniques for overhead costs.

Running Head: COSTING ANALYSIS
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Costing Analysis
Traditional and ABC Costing

COSTING ANALYSIS
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Table of Contents
Answer to Question-1................................................................................................................2
Answer to Question-2................................................................................................................4
Answer to Question-3................................................................................................................7
Analysis................................................................................................................................10
Importance of accurate product costing...............................................................................10
Answer to Question 4...............................................................................................................11
Answer to Question 5...............................................................................................................12
Bibliography.............................................................................................................................14

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Question-1
Particulars Direct
Material
cost per
unit
Direct
Labor
cost per
unit
Total
overhead
costs
other
overheads
Total units
produced
Cost
per
unit
Basic Model 595000 297500 160488 0 1052988 1700 619
Advanced
Model
928000 448000 119512 383500 1495512 1600 935
Traditional costing
Costing is by and large named as a movement of breaking the expenses into the individual
units and recognizes each expense cautiously. The main philosophy behind the investigation
and evaluation of the expenses is, because of the net profit and its impact on the performance
of the organization and finding a way to enhance the position. The two noteworthy strategies
utilized by the company are the conventional method of costing and the activity based costing
method. The main ideology behind the investigation of the costing is to determine the
overheads and to give an entire look of the costing to the investors interested in the buying
the products produced by the company. This helps the investors to make a feasible decision
and decide the relevancy of the product the investor is going to buy (Bennett and James,
2017).
It's vital for the company to perceive the potential expenses and the advantages related with
them and if the business fizzles at last the decisions are not in favour or not fruitful for the

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future health of the company. Additionally the cost examination assists in allowing a chance
to administer and get into the deep analysis of the funds and their spending.
Traditional costing also known as the conventional costing is the method of calculating the
costs to be allocated to the product. There are different techniques that are under process
required by the management and the accountants to make a legitimate administration of the
money related matters of the business. One such strategy is known as the traditional costing
framework. It is a strategy or technique under which the benefits are anticipated by deeply
analysing the profits incurred by the business and also after considering the circumstances
relevant to the indirect costs (Cooper, 2017).
Under the Conventional costing the allocation of the overhead is done by loading the
percentage of the overall overheads on the particular item or segment. The rate so calculated
is commonly the rate derived from the machine hours in comparison to the general rates and
the machine hours are treated as the baseline to calculate the overall factory overheads.
From the above table it can be stated that the cost per unit of the Sewing easy’s product that
is the basic model and the advanced model is $619 and $935. This can be seen in the first
table of the report and the same shall be considered under the traditional costing system
which the company is currently applying.
Question-2
Calculation of cost per unit under activity based costing method
Particulars Basic Model Advanced
Model
Direct Material cost per unit 350 580
Direct Labor cost per unit 175 280

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Overhead costs per unit 52 120
Other operating Expenses 383500
Operating Expenses per unit 240
Total cost per unit a 577 1220
Activity based costing model
Activity based costing method is the framework is the arrangement of the activities that are
dependent on the individual activities and their respective key drivers. The system is majorly
into the focus of the product line, the income of the organization. This framework causes the
association to move their attention fundamentally on the evaluating and the methodology
required to keep up the costs which are gotten a handle on in the better way (Mahal and
Hossain, 2015).
Under the ABC framework a movement is additionally considered as the exchange cost or the
key component or the cost driver which is treated as the base of the allocation. There are
certain cost drivers, for example, the quality examinations, the requests in number with the
end goal of the generation, the support, the machine set ups and the power consumed by the
organization to deliver the merchandise and the administrations (Pitel and Alioshkina, 2016).
Under the action based costing model the selling costs, the workplace rent and the finance
costs are additionally included. Additionally to calculate the overhead rate the organization
delegated the expenses on the basis of the individual drivers set by the company for the
respective products (Plank, 2018).
For example the product scheduling driver is based on the product scheduling rate and
similarly the assembly expenses are based on the assembly rate. Under the activity cost the

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cost of the total overheads that are calculated are specified with the rate of the basic and the
advanced model and the rates are $52 and $120 (Popesko, Papadaki and Novák, 2015).
Answer to Question-3
Traditional Costing System
Sewing Easy
Income Statement
For the year ending 31st March 2017
Particulars Advanced
Model
Amount
Sales 1944166
Cost of goods sold
Direct
materials
928000
Direct labors 448000
overheads 503012
Total Expenses 1879012
Gross Profit 65154
Net Income 65154
Activity Based Costing System

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Sewing Easy
Income Statement
For the year ending 31st March 2017
Particulars Advanced
Model
Amount
Sales 1944166
Cost of goods sold
Direct
materials
928000
Direct labors 448000
overheads 575801
Gross profit 1951801
Total -7636
Net Income -7636
Analysis
After dissecting the calculations and the estimations the principle philosophy behind taking
the advanced model by the overseas buyer is due to the less price under the conventional
method and the overall profit earned by the company under the traditional method of costing
however, under the activity based costing method the correct calculation is performed where
the rates are specified for the individual items according to their key drivers and the elements

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and the same are allocated on the basis of their respective rate and hence the company is
selling the advanced model under the ABC costing method at $1225 which is higher than the
normal selling price of $1215 after the cost plus 30% under the traditional method and hence
the overseas buyer is more interested in choosing the advanced model rather than the activity
based costing model (Schram, et al 2015).
Importance of accurate product costing
For any organization the financial statements are the proof that the operations of the company
are true or false. The users of the financial statements are much in prevalence only because
these are the reports the investors can rely upon once they have decided to invest in the
products of the business. The accurate item costing causes the financial specialists to take the
essential choices in choosing whether the assets put by the speculator are right way or not.
The accurate item costing aides in deciding the effect of the spending where the expenses are
planned for the future based on the present expenses. This gives the genuine and reasonable
perspective of the expenses to find out the first position to the financial specialists putting
resources into the organization. Not only this but the asset and the inventory are also under
the impact of the accurate product costing as these two figures are the major and the critical
issues from the point of the view of the investors and the shareholders. The precise item
costing won't just help in improving the monetary position of the business yet additionally
helps in having the upper hand over the contenders (Plunkett and Dale, 2018).
Furthermore, the income statement is also dependent upon the cost of goods sold and the
selling price of the product as well. This gives the true and fair view of the costs to ascertain
the original position to the investors investing in the company. The assets and the inventory
are also affected by the implications of the accurate product costing and moreover if the
product costs are not calculated correctly the value of the inventory will be inaccurate. This

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will distort the calculation and the picture will not be transparent henceforth, these are the
several reasons that determine the importance of the accurate product costing (Angelopoulos
and Pollalis, 2017). The accurate product costing will not only help in enhancing the financial
position of the business but also helps in having the competitive advantage over the
competitors.
Question 4
The accounting incorporates the wide scope of the terms and two such terms are the actual
overhead and the applied overhead. The actual overhead of any organization can be termed as
the facility expenses of the circular nature that have been brought about or spent for in
actuality. This incorporates all the overhead expenses aside from the immediate material and
the expense of the work. The example so incorporated are Equipment repairs and
maintenance, manufacturing plant protection, plant utilities, creation supplies, production line
lease, industrial facility property charges. There may a slight distinction between the actual
overheads and the applied overheads which depends on the standard rate of the overhead
(Christian, 2018).
Applied overhead is the overhead under the strategy for the costing. Applied overhead can be
named as the settled charge allocated to a generation employment or division inside an
organization. Rather than the general overheads the applied overheads have the equivalent
significance. Depreciation and the insurance are the best example of the applied overheads
(Hada, Chakravarty and Mukherjee, 2014).
From the perspective of the administration the applied overheads is considered as the
standard piece of the budgetary arranging and the investigation strategy. So as to serve and
encourage the better capital planning choices the survey of the applied overheads is important

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and vital for the administration. Further the genuine overhead and the applied overhead is not
the same at the need of the day because the difference arises with the change in the
uniformity of the rates and the implication of the rates at the different time period. The
decisions of the business can be changed with the change in the choice of the actual or the
applied overhead (Horngren, et al 2012).
Likewise if the overheads that are relegated more than the actual sum than the overheads are
named as the applied overhead generally the case is the inversion case. As and when the
expense of cogs of the company is determined below the actual amount it is considered as the
under applied overheads (Jiménez Duarte and Afonso, 2015).
There are couple of techniques to manage the circumstances where there are under and the
over connected issues.
• The first technique enables the exchange of the sum to the following budgetary year.
• The second technique the diary section is passed and the sum is exchanged to the
benefit and misfortune account.
• A beneficial rate is considered against the standard rate.
Question 5
300000 210000
Account balance Account balance
before Proration After Proration
Work in 60500 3% 9073 6351 75924

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progress
Finished Goals 90000 4% 13497 9448 112944
cost of goods sold 1850000 92% 277431 194201 2321632
Total 2000500 300000 210000 2510500
Allocation technique for the costing is the strategy for costing where the overheads depend on
the genuine overheads of the firm. With the utilization of this technique the whole of all sums
is charged to the undertaking of the overhead. The allocated overhead rate is determined
based on the aggregate sum of the work in advancement, cost of merchandise sold and the
completed products sold. Rest the sum is bifurcated based on the distributed and the applied
overhead (Detek, 2018). Therefore the method of the proration of the costs of the overheads
are utilised by the company when both the applied and the actual overhead are given to the
company and the combination of both is required.

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References
Angelopoulos, M., and Pollalis, Y. (2017) Activity Based Costing (ABC) as a tool for Lean
Transformation: The Case of the Greek Power Public Corporation (PPC).
Bennett, M. and James, P., (2017) The Green bottom line: environmental accounting for
management: current practice and future trends. Routledge.
Christian, D. (2018) Building Cost Management: Case Study Using Costing
Methods. IJAME.
Cooper, R., (2017) Target costing and value engineering. New York: Routledge.
Detek, (2018) Proration Method of Overhead Allocation [online] Available from
https://help.deltek.com/Product/Vision/7.6/oa_proration_method_of_overhead_allocation.ht
ml [Accessed on 18th January 2019]
Hada, M. S., Chakravarty, A., and Mukherjee, P. (2014) Activity based costing of diagnostic
procedures at a nuclear medicine center of a tertiary care hospital. Indian journal of nuclear
medicine: IJNM: the official journal of the Society of Nuclear Medicine, India, 29(4), 241.
Horngren, C.T., Bhimani, A., Datar, S.M., Foster, G. and Horngren, C.T. (2012) Management
and cost accounting. Harlow: Financial Times/Prentice Hall.
Jiménez, V., Duarte, C., and Afonso, P. (2015) Cost System Under Uncertainty: A Case
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Environment (pp. 325-333). Springer, Cham.
Mahal, I. and Hossain, A., (2015) Activity-Based Costing (ABC)–An Effective Tool for
Better Management. Research Journal of Finance and Accounting, 6(4), pp.66-74.

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Pitel, N.Y. and Alioshkina, L.P., (2016) ABC analysis as a tool of optimization of marketing
management of export-led enterprises, New York: Springer.
Plank, P., (2018) Introduction. In Price and Product-Mix Decisions Under Different Cost
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Popesko, B., Papadaki, Š. and Novák, P., (2015) Cost and reimbursement analysis of selected
hospital diagnoses via activity-based costing. E+ M Ekonomie a Management.
Schram, D.J., Kohn, C.F., Ashare, S., Maldonado, J., Rieske, D.W. and Rasavong, L., SC
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