Improving VVC's Method for Applying Overhead: A Business Report

BA230- Advanced Management Accounting
Table of Contents
Executive Summary................................................................................................................................1
Introduction...........................................................................................................................................1
Issues relating to the system for applying overhead that is currently used by VVC...........................1
Ways to improve VVC’s method for applying overhead by describing how it should revise its
product costing system......................................................................................................................1
Recommendations to improve VVC’s method for applying overhead by describing how it should
revise its product costing system for following departments:............................................................1
Cutting and finishing department..................................................................................................1
To accommodate automation in the Moulding department..........................................................2
Various product costing systems...........................................................................................................2
Traditional approaches to overhead cost allocation..............................................................................2
Limitations/shortcomings of traditional approaches to overhead cost allocation.................................2
Contemporary approach to overhead cost allocation (Activity Based Costing).....................................2
Limitation/impediments of introducing Contemporary approach to overhead cost allocation.............2
Conclusion and recommendations.........................................................................................................2
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BA230- Advanced Management Accounting
Executive Summary
In the present report the company is analysing the various cost methods that are present in the
market and the various methods that are going to yield the best results in respect of the entity. For
this purpose all the costing method shave been discussed in detail in the report. In addition to that
an extensive study and comparison has been conducted with between the ABC model of costing and
the traditional method of costing. It has been found that the cost involved in the implementation of
ABC model of costing and the integration of the same in the operational structure of the company is
going to be quite costly for the entity. At the same time the information that is yielded by the
method is very accurate.
Introduction
In the case of any business entity especially in the case of a manufacturing concern the way the
overhead costs are being allocated to the departments and the resultant products forms a very
important and crucial part. The reason for this is that without the proper allocation of the same it
will not be possible for the entity to ensure that the costing of the products is being ascertained
objectively. For the purpose of ascertaining the same an effort is being made to recognise a costing
method that will objectively and reliably estimate the cost that has been incurred by the entity in
respect of the overhead of the various activities that have been performed. Special attention has
been given on the comparison between the ABC model of costing and the traditional method of
costing.
Issues relating to the system for applying overhead that is currently used by VVC
Ways to improve VVC’s method for applying overhead by describing how it should revise its
product costing system
Product costing is accounting process to determine all the business expenses relating to the
production of the companies. These costs may include raw material purchase, worker wage,
production transportation cost and the retail stocking fee. The companies also use product costing
for finding ways to rationalize the production cost to maximize their profits.
The company should revise its product costing system to improve method for applying overhead by
using Activity-based costing system.
In regards to improve the distribution of costs for applying overhead in the cutting and finishing
departments, company administration should develop an activity-based costing system. Company
should follow:
 Create activity-cost pools for each specific activity that is supposed to be performing in
future.
 It is very essential to make a selection of appropriate cost driver for each activity to analyse
the relationship of the cost driver or activity with overhead costs occurred.
On the other hand, to accommodate the automation of the moulding department for applying
overhead costs, the company should:
 Develop a separate pool and rate to allocate overhead for this department.
 Clearly identify the fixed & overhead costs and then establish overhead rates for both costs.
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