Management Accounting for Beztec Limited: A Case Study

This report presents a case study of Beztec Limited and suggests the implementation of Activity Based Costing for accurate product costing and decision making. The report also discusses the ethical considerations for the management accountant in the decision-making process.

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Management Accounting

Running Head: Management Accounting
Introduction:
This report presents the case of Beztec Limited which is engaged in the business of producing
printing machines. The company is currently dealing in two types of printers: Lexon and
Protox. Currently, the use of traditional costing approach is being made by the company for
the determination of product cost. Under traditional costing approach, the cost of each
product is calculated on the basis of pre-determined overheads recovery rate. The overhead
recovery rate is applied to the number of machine hours or labour hours actually consumed in
manufacturing the products. In the present case of Beztec Limited, the overhead recovery rate
for both the printers is commonly applied to the number of machine hours utilised in
producing each individual type of printer as to calculated the total factory overheads.
Part 1
Accurate product costing is necessary in order to identify the actual cost involved in
producing and selling the products dealt by the company. The information regarding the true
cost of the product helps the manager in fixing the selling price of such products by setting a
desired profit margin on the basis of cost. The availability of accurate information about the
cost involved in manufacturing the products is not necessary from the price fixation
perspective but also for various other purposes. When correct cost information available with
the firm it becomes easy to decide on the matters like whether to manufacture a particular
product internally or to buy such product from the outside market. Further, to implement
control or cost reduction methods and to decide on the matters like product continuation or
discontinuation decisions, determination of appropriate product mix, the availability of
accurate cost information is vital for the business.
In the case of Beztec Limited, the allocation of overheads to both the products is done in
accordance with the traditional costing approach in order to determine the total costs of the

Running Head: Management Accounting
products. Thus, the production overheads of the company are allocated on the basis of pre-
determined overhead recovery rate. The given rate is applied to the number of machine hours
consumed in both the products. But looking at the nature of activities involved in the
production of Lexon and Protox, it can be suggested that the company must have adopted the
activity based costing in place of traditional costing for the purpose of cost allocation. There
are various factors that are driving the production overhead of the company such as Machine
set-ups, Machine power, Purchase orders, Quality control, Shipments and Soldering. Under
the traditional costing system, the overall costs of performing of all the different activities of
the company are contained in only one cost pool and such cost pool is divided by the total
number of machine hours consumed in the production of both the products (Molis, 2018).
This has resulted in application of common average rate to both the products irrespective of
the total number of activities and the complexity involved in the activities (Accounting
Coach, 2018). Moreover, the cost of different activities do not correspond at all to number of
machine hours consumed such as soldering cost, shipment cost, quality control and purchase
orders. All these practices leads to provision of inaccurate information to the mangers
regarding the actual cost involved in the production of Lexon and Protox. The inaccurate
information could lead to incorrect decision making by the top management if they use it is
for the purpose of price fixation of Lexon and Protox. Moreover, the inaccurate product
costing could lead to disrupting the true profitability position of both the printers. In order to
undertake decision making, the company must adopt the system of activity based costing
which will provide them accurate information regarding product cost. Activity based costing
will allow the allocation of production overheads to both the products on the reasonable
basis. As there are multiple activities involved in the production of both the printers, the cost
related to each cost is assigned to both the printers in the proportion of their usage or
consumption. The activities that are involved in the production process of the company are

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called as cost pool and the units of activities that drives changes in the cost of activity are
called as Cost drivers (Granof, Platt & Vaysman, 2000). The cost related to soldering activity
involved in the present case shall be allocated to the both the printers in the proportion of
number of soldering points made in both the products as this is the most reasonable basis of
allocation of cost related to soldering. The shipment cost must be allocated to the printers on
the basis of number of shipments undertaken for both the printers. The quality control of the
company is also an activity which is undertaken in respect of both the products and hence
such cost shall be assigned to both the printers in the proportion of number of inspections
carried in respect of such printers individually as this is the most reasonable basis of
apportionment of cost (Drury, 2013). Further, the purchase orders have been made for both
the printers and hence such cost must allow be apportioned to both of them on the basis of
number of respective purchase orders. Furthermore, the cost related to machine set-ups must
also be allocated among both the printers on the basis of number of machine sets involved in
the production of both the units. All these allocations will promote the appropriate
assignment of the costs to the two different products of the company (Dickinson & Lere,
2003).
Part 2
Overheads Cost Pool Cost Driver Total Rate
Soldering Cost $ 1,165,725.00
Number Of Solder
Points 1766250
$
0.66
Shipment Cost $ 1,064,250.00 Number Of Shipments 22500 $ 47.30
Quality Control $ 1,534,500.00
Number Of
Inspections 87188 $ 17.60
Purchase Cost $ 1,176,120.00 Number Of Orders 213840
$
5.50
Machine Power Costs $ 71,280.00 Machine-Hours 216000
$
0.33
Machine Set up Costs $ 928,125.00 Number Of Set-Ups 33750 $ 27.50
Total Production Cost $ 5,940,000.00

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Cost driver rates are determined by dividing the total cost pool with the total cost drive
activities. The rates then determined are applied to individual printers in the proportion of use
or consumption of such cost driver in the individual projects (Horngren, et. al., 2002).
Part 3
LEXON PROTOX
Rate
Soldering Cost 0.66
$
879,862.50
$
285,862.50
Shipment Cost 47.30
$
862,042.50
$
202,207.50
Quality Control 17.60
$
1,112,753.62
$
421,746.38
Purchase Cost 5.50
$
495,621.50
$
680,498.50
Machine Power Costs 0.33
$
65,340.00
$
5,940.00
Machine Set up Costs 27.50
$
495,000.00
$
433,125.00
Total Production Overheads
$
3,910,620.12
$
2,029,379.88
LEXON PROTOX
Number of units produced and
sold 24000 6000
Production Overheads
$
3,910,620.12
$
2,029,379.88
Direct materials
$
5,491,200.00
$
3,854,400.00
Direct production labour
$
475,200.00
$
277,200.00
Machine
$
3,801,600.00
$
475,200.00
Cost of goods sold
$
13,678,620.12
$
6,636,179.88
Part 4
LEXON PROTOX

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Revenues
$
23,760,000.00
$
7,524,000.00
Cost of goods sold
$
13,678,620.12
$
6,636,179.88
Gross Profit
$
10,081,379.88
$
887,820.12
Gross Profit per unit
$
420.06
$
147.97
42.43% 11.80%
Selling price per unit
$
990.00
$
1,254.00
Cost of goods sold
$
569.94
$
1,106.03
Gross Profit
$
420.06
$
147.97
Part 5
The profession of accounting has a distinguishing feature of accepting the responsibility of
acting in the best interest of general public. The members of the accounting profession are
therefore responsible not only to satisfy the individual needs of their clients or their
employers but also to perform their functions in such a way that their professional obligations
are duly fulfilled. In order to act in the interest of public, a professional accountant must
comply with the code set in this regard. APES 110 Code of Professional Accountants has
been issued by the regulatory bodies for all the members of accounting profession. It contains
various principles that each accountant must follow while performing the professional
practices. These principles are integrity, objectivity, professional competence and care,
confidentiality and professional behaviour (APESB, 2010). The principle of integrity requires
the accountants to remain straightforward as well as honest in all their professional and
business relationships. The principle of objectivity requires the accountants to not entertain
any type of biased behaviour, conflict of interest and the undue influence of any party to
override their professional judgements. The principle of professional competence and care

Running Head: Management Accounting
requires the accountants to use professional knowledge and skills while providing the
professional services to their clients or their employers. While performing the professional
duties it is possible that the accountant might have to face the ethical dilemmas or ethical
conflicts. In such situations the accountants are required to thoroughly the relevant matter
involved and then determine the possible and adequate course of actions. After identifying all
the possible actions courses, they must weigh the consequence or repercussions of each
alternative course of action and then select the option which sounds to be most appropriate as
per the requirements of the situation (APESB, 2010). Whenever there is matter which
involves the conflict of interest of management and accountant, the accountant must consult
or communicate with the entity’s board of directors. If the matter remains conflicted the
accountant may choose to consult an expert or professional with respect to the matter. Even
after applying all the possible actions, the matter remains unresolved; the accountant shall
refuse to stay associated with the client organisation, if doing so is possible in the given
situation. The principle of integrity requires the accountant to make use of fair dealings and
truthfulness while in practice of his professional duties (Smith, 2003). In the present case,
Bextec Limited is currently using the traditional costing method where they are allocating the
total production overhead cost to their products in the proportion of machine hours consumed
and using this method they are determining the profitability of the individual products. The
traditional costing method is showing that Protox which is recently introduced by the
company is more profitable than the Lexon printer that was introduced few years back. The
senior management of the company is considering to phase out the production of Lexon
printers and to use the spare resources in the manufacturing of Protox printers. This decision
is based on the profitability of both the printers as determined under traditional costing
system. However, the approach used by Beztec Ltd is not showing the true picture of actual
cost involved in the production of printers. Therefore, before undertaking the decision

Running Head: Management Accounting
regarding the termination of manufacturing the Lexon printers the company must use an
advanced technique of management accounting to allocate the production overheads to the
printers. For this purpose Activity Based Costing technique could be made by the company
which would enable it to appropriately allocate the production overheads on the reasonable
business (Zimmerman & Yahya-Zadeh, 2011). The implementation of ABC technique will
prevent the overstatement or understatement of the prices of the printer.
After applying the ABC method, it has been found that Lexon is more profitable and Protox
is a loss generating product unit of Beztec Limited. As per the results of this technique, the
company must phase out the production of Protox. It is a well-established fact the phasing out
of any of the product unit will negatively affect the compensation of Steve Kay, the CEO of
the company as a considerable portion of CEOs bonus is dependent on the revenues of both
the product units. Although, CEO of the company is not in agreement with the decision of
implementation of ABC system, the management accountant must take into account the
ethical and professional consideration of the case. The accountant must encourage the CEO
of the company to implement ABC system by introducing them with the core benefits of
using such technique of cost allocation (Garrison, et. al., 2010). Merely, because of CEO’s
supervision to alter the costs of the products under ABC system for his personal interest of
earning higher incentive compensation, the management accountant must not accept his
supervision. Sue Smith (management accountant) must apply the principles of objectivity
while applying his professional judgement in respect of selecting the most appropriate
method of cost allocation. Also, the management accountant must also make efforts to
resolve the conflicts of interest on part of management of the company. Further, the
fundamental principle of professional competence and care as well as professional behaviour
must be followed by Miss Smith so to fulfil the professional duties in the most appropriate
manner (Smith, 2003).

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Part 6
Traditional Costing LEXON PROTOX
Pre-determined Overhead Recovery Rate
per hour
$
27.50
$
27.50
Machine hours 192000 24000
Production Overhead
$
5,280,000.00
$
660,000.00
ABC Technique LEXON PROTOX
Production Overheads
$
3,910,620.12
$
2,029,379.88
The reasons of under-application of the overheads in case of protox printer is due to the fact
that actual overheads calculated using actual hours are less than the budgeted overheads and
the over-application of production overhead in case of Lexon printer is because actual
overheads is higher than the budgeted overheads (Horngren, et. al., 2002).
If the amount of under or over- applied overhead is considerable enough, it must be allocated
among all the accounts containing the applied overheads such as Work In Progress (WIP )
inventory, Finished Goods Inventory and the Cost of Goods Sold (COGS) (Putra, 2008).
Conclusion:
From the above report, it can stated that the use of accurate cost information is necessary for
the purpose of undertaking various decisions by the managers of a manufacturing concern.
The use of traditional costing could deteriorate the information regarding the true cost
involvement in the production of any process. Therefore, use of Activity Based Costing is
more appropriate in order to determine the true cost involved in the production process. ABC
allows the allocation of cost on the most reasonable basis. The application of ABC in the
present case of Beztec has revealed that the company must phase out the production of its
new product Proxton printers.

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Running Head: Management Accounting
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