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Case Study of Activity-Based Costing for Diverse Limited

   

Added on  2020-02-05

10 Pages2990 Words453 Views
Management accounting 1

TABLE OF CONTENTSINTRODUCTION................................................................................................................................3Case study.............................................................................................................................................3A. Calculation of total cost of the product on the basis of using machine hour for the overhead absorption.........................................................................................................................................3B. Calculation of the total cost of every product using Activity-Based costing...............................5C. Report using results of both the A & B and explaining the importance of ABC costing for Diverse Limited to maximize profitability and drawbacks of introducing such a system...............6CONCLUSION....................................................................................................................................9REFERENCES...................................................................................................................................102

INTRODUCTION The process by which business administrators such as executives, managers and othermembers of board of directors uses and analyze internal as well as external business information istermed as the management accounting. It is really fruitful for businesses to make the mostappropriate decision for accomplishing targets and goals. Cost determination is one of the mostimportant integral information that is used by the administrators for employing best cost controllingmeasures for the profit maximization purpose (Agrawal, 2013). The product and/or service cost canbe measured either through using traditional model or Activity Based Costing model. In the former,it often uses direct labour hours and average overhead rate as a cost driver for the allocation ofoverheads, in contrast to this, ABC costing uses a separate cost driver which is related to thecomponent cost for the overhead distribution. The aim of the present assignment is to differentiateboth traditional versus ABC making critical evaluation of pros and cons associated herewith.CASE STUDYIn accordance with the scenario stated, Diverse Limited produces four types of products A,B, C & D by using the same method of manufacturing and equipments. Now, company is usingtraditional or conventional product costing system for determining the cost, although, managers arelooking to incorporate activity based costing for measuring cost accurately & proficiently. A. Calculation of total cost of the product on the basis of using machine hour for the overhead absorptionAs Diverse Limited is being engaged in goods manufacturing process, therefore, it becomesimportant for the policy makers to estimate their product cost so as to determine the amount of totalexpenditures incurred. Companies use various costing methods to identify the total as well as unitcost for each item produced or manufactured (Sandborn, 2017). There are two types of costs whichare often paid by a business and that are direct as well as indirect cost, described hereunder:Direct cost: Those expenditures which are directly in connection with the goods or serviceproduced are called as the direct cost. It goes up with the high level of production and droppeddown at less output (Akyol, Tuncel and Bayhan, 2005). For instance, Diverse Limited needs topurchase raw material and recruit labourers for the conversion of items into finished goods arecalled direct cost. Indirect cost: In contrast to the above, indirect expenditures comprises of those that cannotbe charged directly to every unit or item manufactured by the firm (Yang and Hao, 2017). In thestated scenario, set-up costs, expending & scheduling, Material Handling & short-run variable costs3

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