Management Accounting for Beztec Limited: A Case Study

Running Head: Management Accounting
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

Running Head: Management Accounting
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