Management Accounting I - Conventional Costing vs Activity Based Costing

This article discusses the difference between conventional costing and activity based costing in Management Accounting I. It explains the advantages of using activity based costing and how to calculate overhead absorption rate and cost per unit. It also covers the challenges of aggressive accounting and budgeting with a cash-flow budget for Skyscraper Hotels and Resorts. The article includes references to relevant books and journals.

Management Accounting I

Table of Contents
MAIN BODY..............................................................................................................................................................................................3
REFERENCES............................................................................................................................................................................................1

MAIN BODY
Part A Case Study
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Conventional costing and activity based costing are two different methods of accounting by which indirect costs of the
products are allocated to such products. Both of these methods are used to determine the production related overhead costs and
allocate it to products on the basis of cost –driver rate. The difference between the two methods are because of their complexities and
accuracy they give. Conventional costing is simple and less accurate while activity based costing is complex and have high accuracy.
The conventional costing assigns indirect costs to products on the basis of average rate that is capricious while in ABC costing
overheads are allocated to activities then to products on the basis of their activities usage, hence the accuracy is high.
There are various advantages that company can have if it uses activity based costing. To begin with the product cost derived
from ABC method is accurate. Adapting to this method brings reliability and accuracy in company’s costing method. This method is
focussed on relationship between cost and effect for incurrence of cost (Quesado and Silva, 2021). The basic idea that the method
follows and forms the basis is that the cost is incurred for the activities and not consumed by the products. A manufacturing
environment that consists of advancements in large amounts out of the total costs this particular method is used to get product costs in
a realistic manner. In firms where there are great diversities in the type of products or services offered or manufactured correct cost to
each can be determined (Al-Dhubaibi, 2021). Further the information about the cost function is gathered from this method. The real
cost nature can be identified and cost reduction becomes easier to identify such activities that are performed by the manufacturing firm
but does not add to the products’ value. The fixed overhead costs can be controlled using ABC method by the managers.
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Total Overhead Calculation
Overheads $
Staff Support 180000

In –house Computing 136400
Miscellaneous Office Charges 25600
Total 367600
All the overhead expenses that are incurred by the business are first summed up.
Calculation of Overhead Absorption Rate
Particulars M –commerce
marketing consulting
Accounting
Information Systems
Integration
Total
Production 1900 3100
Computer Hours per
unit
1.05 1.19
Total Computer Hours 1800 2600 4400
Overhead absorption rate = 367600 / 4400 = 83.54
The overheads total has been distributed in the activities of the consultancy firm.
Calculation of Cost per unit
Particulars M –commerce
marketing consulting
Accounting Information
Systems Integration
Overhead (computer hours *
$77.72)
1.05 * 83.54 1.19 * 83.54
Per Unit Cost 87.72 99.41
The cost is calculated for each of the units. Here billable hours in the unit.
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Calculation of Overhead Absorption Rate
Cost Pool $ Cost Driver M
–
commerce
marketing
consulting
Accounting
Information
Systems
Integration
Rate of Overhead Per
Unit($)
M
–
commerce
marketing
consulting
Accounting
Information
Systems
Integration
Staff Support 180000 Number of
Clients
36000 144000 18
.94
46.45
In –House
Computing
136400 Number of
computer hours
55800 80600 29.36 26
Miscellaneous 25600 Number of
clients
transactions
15360 10240 8.08 3.3
Total 342000 107160 234840 56.38 75.75
The above calculation computes cost per unit on the basis of following the procedure of ABC method.
4
The firm’s partner Mark Stephen should change its attitude. A customer reaching the firm may generally expect both kind of
services but it is not necessary that each and every customer of the firm option to have both the services that it provides. It may happen
that the client only has work related completely to the M- commerce marketing consulting or accounting information system
consulting (Alsayegh, 2020). So allocating the resources like making to payments on the basis of the billable hours is not advisory.

The professional time consumed for each of the department should be calculated separately so that the over payments to the activity
can be eliminated. If it is assumed by default that each customer of the company seeks both the services and in reality only one of the
service is used by the buyer, then the company will distribute the professional hours cost for both the services. Hence to sum up the
payments of the professional hours consumed must be allocated on the basis of the actual amount of hours worked by each service
department.
5
Aggressive accounting is a type of accounting practice that is specifically designed for the purpose of overstating financial
performance of a company. This type of accounting practice is similar to another practice that is creative accounting. Creative
accounting means delaying in recognizing loss can be done by the company. Spark and shipper company will hide the expenses it
incurs and represent an inflated price of earnings if it follows this practice.it is opposite of conservative accounting procedure. It is not
recommended for the company to use aggressive expansion strategy as there a number of challenges that are to be faced by the
business if it is decided to have aggressive expansion. The company will not find itself capable to meeting the demands of its new
customers (Tew and et.al., 2020). It will end up in having shortage of cash balances, requiring business to borrow funds in order to
meet its requirements. The capital requirements rise significantly with aggressive expansion techniques. The control over the business
activities may lose as it is required to delegate the activities and work of the business more importantly for the purpose of expansion.
Also there will be a huge increase in the potentiality to incur losses because of the adverse result compromise with the quality of
products and productivity of the company overall.
The fall in levels of employee morale is the biggest disadvantage of the process. Employees are one of the most essential
element of the company whose contribution to the success of the company is maximum. The most crucial challenge any enterprise
faces during its excessive growth is reduction in the employee morale. Internal reconstruction takes place while the company
experience quick growth that forms the reason behind cross – departmental disorganization and burnout of employees. Losing sight of
liquid flows is another challenge. One of the another adverse impact of aggressiveness nature of growth is high levels of employee

turnover ratio, making visibility in relation to cash flow vulnerable. The persons designated with the task of cash management may
leave and there creates the lack of communication regarding the person currently managing the cash flows of the company.
Furthermore, it results in a situation where company ends up in employing larger number of employees then it can actually
afford. Having a perspective of aggressive expansion of one service calls the need for hiring large number of employees in the view of
handling the increase level of operations increasing with the growth of company (Ware and et.al., 2020). Recruiting employees of
large number means expense incurrence over the training of employees, making payments against the expenses of benefits, holidays,
leave pay. Hence, over hiring of employees can be every costly for the firm.
Part B: Budgeting
Forecasted Cash-Flow Budget
Cash Inflows : February March April May June Total of 2nd
quarter
Month Projected
Sales Beginning Cash Balance 50000 50000 $50,000 $50,000 $50,000 $250,000
January $830,000 Sales $148,000 $144,000 $176,000 $164,000 $140,000 $772,000
February $740,000 Sales $498,000 $444,000 $432,000 $528,000 $492,000 $2,394,000
March $720,000 Sales $99,600 $88,800 $86,400 $105,600 $380,400
April $880,000 Sales $41,500 $37,000 $36,000 $114,500
May $820,000 Sales
June $700,000 Sales
July $910,000 Sales
Total Cash Inflow $646,000 $687,600 $738,300 $815,400 $773,600 $3,660,900
Cash Outflows:
Cost of Goods Sold $399,600 $388,800 $475,200 $442,800 $378,000 $2,084,400
Acc Payable(1st Month After
Purchase) $664,000 $592,000 $576,000 $576,000 $656,000 $3,064,000
Acc Payable(2nd Month After
Purchase) $166,000 $148,000 $144,000 $176,000 $634,000
Wages $207,200 $201,600 $246,400 $229,600 $196,000 $1,080,800

General & Admin 120000 120000 120000 120000 120000 $600,000
Property Taxes $12,000 $12,000
Capital Purchase 0 0 0 0 0
Interest $34,520 $39,200 $35,210 $25,420 $58,640 $192,990
Total Cash Outflow $1,025,72
0
$1,030,40
0
$1,026,41
0
$1,016,62
0
$1,049,84
0 $5,148,990
Net Cash Flow -$329,720 -$292,800 -$238,110 -$151,220 -$226,240 -$1,238,090
Borrowings 345200 392000 $352,100 254200 586400 $1,929,900
Repayments of borrowings 0 0 0 0 0 $0
Borrowings carried to the next
month $329,720 $292,800 $238,110 $151,220 $226,240 $1,238,090
Closing Cash Balance $50,000 $50,000 $50,000 $50,000 $50,000 $250,000
Above is the cash budget for the Skyscraper Hotels and Resorts. The amount for the sales made by the company in a particular
month is received in several portions. 20% of the sales amount is received in the month in which the sale occurs and rest amount is
received in portions of 60%, 12% and 5% in the months following 1, 2, & 3 months respectively. The cash budget has been prepared
providing all the adjustments related to sales, costs and borrowing terms. A trend of having $50000 as the opening cash balance for
each of the month is followed by the firm. The amount is met by borrowing funds at an interest of 10 %.

REFERENCES
Books and Journals
Quesado, P. and Silva, R., 2021. Activity-based costing (ABC) and its implication for open
innovation. Journal of Open Innovation: Technology, Market, and Complexity. 7(1).
p.41.
Alsayegh, M. F., 2020. Activity Based Costing around the World: Adoption, Implementation,
Outcomes and Criticism. Journal of Accounting and Finance in Emerging
Economies. 6(1). pp.251-262.
Al-Dhubaibi, A., 2021. Optimizing the value of activity based costing system: The role of
successful implementation. Management Science Letters. 11(1). pp.179-186.
Tew, B. Y. and et.al., 2020. Patient-derived xenografts of central nervous system metastasis
reveal expansion of aggressive minor clones. Neuro-oncology. 22(1). pp.70-83.
Ware, M. B. and et.al., 2020. Suppressive myeloid cells are expanded by biliary tract cancer-
derived cytokines in vitro and associate with aggressive disease. British journal of
cancer. 123(9). pp.1377-1386.
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