Management Accounting: ABC Method, APES 110 Code of Ethics, Overhead Cost

This study compares traditional costing and activity-based costing methods for overhead allocation, discusses APES 110 code of ethics for professional accountants, and explains overvaluation and undervaluation of overhead cost. Includes calculations for cost driver rates and cost of goods sold for Lexon and Protox. ACC200 term 2 2018 Assignment.

Introduction to management accounting
ACC200 term 2 2018 Assignment

TABLE OF CONTENTS
Introduction......................................................................................................................................3
Question 1........................................................................................................................................3
Question 2........................................................................................................................................3
Calculation of cost driver rates for the various activities identified in activity based costing
system..........................................................................................................................................3
Question 3........................................................................................................................................4
Calculation of the cost of Lexon and Protox under ABC method...............................................4
Question 4........................................................................................................................................5
Profitability analysis of Lexon and Protox..................................................................................5
Question 5........................................................................................................................................5
APES 110 code of ethics for professional Accountants..............................................................5
Question 7........................................................................................................................................7
Over valuation and undervaluation of overhead cost..................................................................7
Conclusion.......................................................................................................................................8
References......................................................................................................................................10

INTRODUCTION
Allocation of the overhead by applying the activity-based costing gives more reliable and
accurate data, because in this method allocation is based on the activity of the product, and
therefore the product which consumes more resources, results in the greater allocation of the
overhead cost and vice versa. Therefore this method assists the manager to take the right decision
(Haroun, 2015). The present study is based on the comparative evaluation of costing method for
allocation of the overhead using the traditional method of costing and the activity-based costing
method. The present study also describes provisions of APES 110 code of ethics for professional
standards issued by accounting professional and Ethical standards boards (APESB). In addition
to this, accounting for over and undervaluation of manufacturing overhead has been discussed.
QUESTION 1
It is important to ensure accurate product costing system to provide external users of financial
statements with reliable information about earnings and net worth and to provide internal
managers with the information they need for decision making (Ball, Tyler, and Wells, 2015).
Therefore, accurate product costing provide appropriate inventory cost information and
managers are able to make relevant financial decisions (Ax, and Greve, 2017).
Traditional costing system does not provide accurate information about product costing as it
makes use of blanket rate for cost allocation which is not viable. By considering the given case
of Beztec Limited, overhead cost is comprised of various costs, but all costs are allocated as per
blanket rate computed by using machine hours which is not viable and as a consequence overall
cost information is wrong and therefore the accuracy of profitability of the business is directly
affected.
QUESTION 2
Calculation of cost driver rates for the various activities identified in an activity-based costing
system
Table 1: Calculation of cost driver

Sr.
No.
Activities
Identified Cost Driver Cost
Associated
Total Number of
activities
Cost/
Activity
1 Soldering Number of Solder
Points 1165725 1766250 0.66
2 Shipment Number of
Shipments 1064250 22500 47.30
3 Quality
Control
Number of
inspection 1534500 87188 17.60
4 Purchase
Orders
Number of
Purchase Orders 1176120 213840 5.50
5 Machine
Power
Number of Machine
Hours 71280 216000 0.33
6 Machine set
up
Number of Machine
setups 928125 33750 27.50
QUESTION 3
Calculation of the cost of Lexon and Protox under ABC method
Table 2: Total cost of each product under the ABC method
Particulars
Number of
Activity
Cost/
Activi
ty Lexon
Number
of
Activity
Cost/
Activit
y Protox
Direct Material 5491200.00 3854400.00
Direct Labor 475200.00 277200.00
Machine 3801600.00 475200.00
Production
Overhead
Soldering 1333125.00 0.66 879862.50 433125.00 0.66 285862.50
Shipment 18225.00 47.30 862042.50 4275.00 47.30 202207.50
Quality Control 63225.00 17.60 1112753.62 23963.00 17.60 421746.38
Purchase Orders 90113.00 5.50 495621.50 123727.00 5.50 680498.50
Machine Power 198000.00 0.33 65340.00 18000.00 0.33 5940.00
Machine set up 18000.00 27.50 495000 15750 27.50 433125.00
Total Cost of
Goods Sold 13678620.12 6636179.88
Total
Production 24000.00 6000.00
Cost of Goods
sold/ Unit 569.94 1106.03

QUESTION 4
Profitability analysis of Lexon and Protox
Table 3: Profitability analysis
Particulars Lexon Protox Total
Revenues 23760000 7524000
31284000.0
0
Cost of Goods Sold
13678620.1
2 6636179.88
20314800.0
0
Gross Margin
10081379.8
8 887820.12
10969200.0
0
Selling and
Administrative Exp. 6996000 1613700 8609700.00
Operating Income 3085379.88 -725879.88 2359500.00
Units Produced and sold 24000 6000 30000
Operating Income / unit
sold
128.557495
1
-
120.9799802
QUESTION 5
APES 110 code of ethics for professional Accountants
In the present study, Accountant of the company named Smith shows the result of the total cost
and total profit by applying the activity-based costing method of the product Lexon and Protox to
her manager named as Kay. By applying the ABC costing, the cost of the product can be
measured in a more accurate manner. Since, due to the ABC costing, the total cost of the
products increased, which is more accurate, but the manager Kay didn’t want to remove the
product from the market, therefore Kay suggest to Smith that ABC analysis is not an accurate
method, as there are so many activities and if all the activities are included then result may be
different, and Kay suggests to Smith about the change in figure. Smith didn’t agree with the
argument of the Kay as the ABC analysis calculates the profitability of the Lexon and Protox,
through making use of different activity drivers, which is fairly accurate. Analysis based on the
ABC results in a number that closely approximate to those methods of detailed analysis. Further,
the bonus of the accountant is also based on the revenue of the product; this is the factor which
can influence the decision.

In Australia, Accounting professional and Ethical standards boards limited (APESB) issues
APES 110 code of ethics for professional standards with the aim to ensure accountants are acting
in the public interest. In this standard, five main principles for the professional accountant are
described, which are integrity, objectivity, professional competence, due care, confidentiality and
the professional behaviour (Krupenye et al., 2016). Further, the decision of the accountant
should not be influenced by unethical aspects, and they should not allow for partiality and
conflict of interest. The accountant should apply the professional skills and knowledge at all
level, so that client receives the competent professional services which are based on the current
development and at the same time accountant should work in accordance with the applicable
technical and professional standards. Moreover, the accountant should not disclose any
information to the third party without any specific permission of the client and also nor use the
information for the personal advantage of the member or third parties. Along with this
accountant should comply with relevant laws and regulations which are applicable.
This standard requires the framework which is applied by the accountant in respect of their
professional judgment. The accountant should identify any threat to compliance with
fundamental principles, and therefore evaluation of the significance of the threat is to be done.
On the basis of it, safeguards are applied to removing the threats or to reduce them at the
acceptable low level (George, Jones, and Harvey, 2014). Threats may be self-interest threats,
self-review threats, Advocacy threat, familiarity threat, and Intimidation threat. The threat which
is created by the financial or other interest which inappropriately impacts the decision of the
accountant is a self-interest threat. Self-review threat comes into existence if the member will not
appropriately review the result of the previous judgment. Further; through the advocacy threat
the position of the client or the employer enhanced by compromising the objectivity of the
accountant. Familiarity threat is due to a close relationship with the client, and the last
intimidation threat arises due to undue influence over the accountant (Andrews, 2018).
Part C of the APES 110, describes the conceptual framework for the members of business,
industry, commerce, services and so on. Member in business faces a threat to compliance with
the fundamental principles. Further section 310 of this standard describes that accountants of the
organization are anticipated for the maintenance of the legitimate and ethical objectives, and
rules and regulations of the organization, therefore they may face the pressure from the

organization that create the threats to the fundamental principles. Moreover, section 340 of this
standard suggests that a member cannot manipulate the information or use the information for
their personal gain.
In the present case accountant Smith should not agree with the suggestion of the Kay. As if an
accountant applies the recommendation of the Kay then the fundamental principle such as
integrity, professional competence, objectivity, due diligence and professional behaviour will be
compromised. Further Kay decides the bonus of the smith on the basis of the revenue from the
product, this creates the self-interest threat for the accountant, since if in the report by applying
any other method of costing, revenue rise then, and accountant wants to use that method even if
that costing method is not appropriate. Further in this case advocacy threat also comes into
existence as the manager Kay, forces to Smith for change in the costing method of the product,
which leads to the position of the manager achieved by compromising the objectivity of the
accountant. The accountant should evaluate the significance of the threat and apply the
safeguards to eliminate the threats and reduce them to an acceptable level.
QUESTION 7
Overvaluation and undervaluation of overhead cost
Allocation of the overhead by applying the predetermined overhead rate results in overvaluation
and undervaluation of the overhead cost. The predetermined overhead rate is the tool to allocate
the estimated manufacturing overhead cost to the product cost, during a particular period of time.
The allocation of the manufacturing overhead may be based on the direct labour hours, direct
material, or machine hours (Otley, 2016). Since the predetermined rate is totally based on the
estimated value, therefore it differs from the actual, the over and under applied manufacturing
overhead are generally debited or the credited to the balance of manufacturing overhead account
(Fullerton, Kennedy, and Widener, 2014).
The method of disposition of the over and undervalued manufacturing overhead is by allocating
them into Work in process account, finished goods account or cost of goods sold account or by
transferring the whole amount in the cost of goods sold account (Dekker, 2016).

If the balance in the manufacturing overhead account is treated as immaterial, then it is adjusted
to the cost of goods sold account. It is because; the cost of goods sold account is the product
account which comprises with the significant manufacturing cost at the year-end. Therefore at
the end of financial year, the adjustment has to be made, if the balance in the manufacturing
overhead account is debit, means undervalue of the manufacturing cost then it is adjusted by
debiting the cost of goods sold account and crediting the manufacturing overhead account, and if
the balance in the manufacturing overhead account is credit, means overvalue of the
manufacturing cost, then adjustment is made by crediting the cost of goods sold account and by
debiting the manufacturing overhead account.
On the other hand, if the balance in the manufacturing account is considered as material, then it
is allocated proportionally to the cost of goods sold the account, work in progress account, and
the finished goods account.
Another method of disposition of the over-allocated or under allocated overhead is by applying
the adjusted allocation rate approach which restates all the overhead entries on the basis of the
actual overhead rates in spite of the budgeted overhead cost.
CONCLUSION
On the basis of the above study, it has been concluded that the allocation of the manufacturing
overhead by implementing the traditional costing system is very simple and easy since this
method allowed the allocation of the overhead on the basis of direct labour hours or on the
machine hours. However, the allocation of the overhead from this method does not reflect the
accurate consumption of cost by the end product. Therefore the activity-based costing system is
more suitable for the allocation of the overhead since in ABC costing allocation of the overhead
based on the activities used for the production of the product, and therefore it is considered as a
more reliable method of allocation of the cost.
Apart from the above, accounting professional and Ethical standards boards limited (APESB),
issued a standard for the accountant APES 110, which prescribe the guidelines, which have to be
followed by the accountants at the workplace. In this standard, principles for the accountants
have been prescribed, which lead to the fact that the decision of the accountant should not be

influenced by any unethical aspect (Subiaul, 2016). APES 110 code of ethics provision has been
introduced with the aim to provide guidelines for working with the professional accountants to
ensure their activities must be in the public interest. The accountant has to follow all the
guidelines which are prescribed in this standard so that stakeholders can get informed about the
true picture of the organization. Further, this study also suggested different methods for
accounting about the undervaluation and overvaluation of the manufacturing overhead on the
basis of the materiality of the amount involved in the same.

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