Management Accounting: Cost Allocation Methods and Decision Making

MANAGEMENT ACCOUNTING

Executive summary
This assignment contains a detailed analysis of the different cost allocation method that a
company uses to allocate its overhead. It also discusses about the importance of cost
allocation method and also the impact on the decision making process. A recommendation
has been made at the end of the project in order to help the accountant of the company in
choosing the correct cost allocation method.

Contents
Introduction................................................................................................................................3
Traditional system of costing and its disadvantages..................................................................4
Activity Based Costing..............................................................................................................5
Importance of using correct costing method..............................................................................6
Analysis of cost data of Beztec limited......................................................................................7
Recommendation for the accountant........................................................................................10
Analysis of gross profit margin of the company......................................................................11
Treatment of under-over recovery of overheads......................................................................12
Conclusion and Recommendation............................................................................................13
Bibliography.............................................................................................................................14

Introduction
It is the duty of the management of the company to do product costing correctly and in the
most appropriate manner. Product costing is a difficult and a complex task that is assigned to
the management. There are various factors that a company has to look upon before taking a
final decision (Datar, 2015). If the company does not study the factors efficiently then it
might take wrong decisions which will have an adverse effect on the company financially
(Atkinson, 2012).
In the given case study, the company engages in the production of two types of printers
namely, Lexon and Protox. Since, the company is earning low operating income from Lexon
it is thinking of stopping its production. The accountant of the company, Sue smith is against
stopping the production as she thinks the low operating income has resulted because of wrong
selection of the cost allocation method. The results will be different if the company changes
the method by which it allocates the cost. There are two types of cost allocation method
which are explained in this report (Berry, 2009).