Management Accounting - Costing Methods and Overhead Allocation

This article discusses traditional and activity-based costing methods and overhead allocation in management accounting. It covers department-wise overhead allocation and overhead cost per activity driver. It also explains the difference between traditional and activity-based costing methods. The article is based on a case study and includes tables and figures to illustrate the concepts. References are provided for further reading.

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student:
Name of the University:
Author’s Note:

1MANAGEMENT ACCOUNTING
Table of Contents
Requirement 1:.................................................................................................................................2
Department Wise Overhead Allocation:......................................................................................2
Overhead Allocation of Service Department:..............................................................................2
PRODUCTION COST UNDER TRADITIONAL METHOD:..................................................3
Requirement 2:.................................................................................................................................3
Overhead Cost per Activity Driver:.............................................................................................3
PRODUCTION COST UNDER ABC METHOD:.....................................................................4
Requirement 3:.................................................................................................................................4
References:......................................................................................................................................5

2MANAGEMENT ACCOUNTING
Requirement 1:
Department Wise Overhead Allocation:
Particulars Total Machine Centre A
Machine
Centre B Assembly Stores Maintenance
Area Occupied (Square Mtr.) 52000 9000 8000 12000 15000 8000
Lighting & Heating $5,50,000 $95,192 $84,615 $1,26,923 $1,58,654 $84,615
Insurance of Buildings $3,00,000 $51,923 $46,154 $69,231 $86,538 $46,154
Property Taxes $8,50,000 $1,47,115 $1,30,769 $1,96,154 $2,45,192 $1,30,769
Nos. of Employees 1100 340 210 350 100 100
Salaries of Works Management $11,00,000 $3,40,000 $2,10,000 $3,50,000 $1,00,000 $1,00,000
Book Value of Machinery $1,52,00,000 $80,00,000 $55,00,000 $8,00,000 $4,00,000 $5,00,000
Insurance of Machinery $2,50,000 $1,31,579 $90,461 $13,158 $6,579 $8,224
Depreciation of Machinery $16,00,000 $8,42,105 $5,78,947 $84,211 $42,105 $52,632
Total Other Overheads $46,50,000 $16,07,915 $11,40,946 $8,39,676 $6,39,069 $4,22,394
Indirect Wages & Supervision $77,80,000 $12,00,000 $10,00,000 $16,00,000 $21,00,000 $18,80,000
Indirect Materials $13,20,000 $5,00,000 $6,50,000 $1,50,000 $0 $20,000
TOTAL MANUFACTURING OVERHEAD $1,37,50,000 $33,07,915 $27,90,946 $25,89,676 $27,39,069 $23,22,394
Overhead Allocation of Service Department:
Particulars Total Machine Centre A
Machine
Centre B Assembly
Material Procurement $80,00,000 $40,00,000 $30,00,000 $10,00,000
Overhead Cost of Stores Dept. $27,39,069 $13,69,534 $10,27,151 $3,42,384
Direct Labor Hours 3900000 900000 1000000 2000000
Overhead Cost of Maintenance Dept. $23,22,394 $5,35,937 $5,95,486 $11,90,971
Total Overhead of Service Dept. $50,61,463 $19,05,471 $16,22,636 $15,33,355
Other Manufacturing Overhead $86,88,537 $33,07,915 $27,90,946 $25,89,676
TOTAL OVERHEAD OF PRODUCTION CENTRE $1,37,50,000 $52,13,386 $44,13,583 $41,23,031
Cost Driver Machine Hours
Machine
Hours
Direct Labour
Hours
Machine/Labour Hours 2000000 1200000 2000000
Overhead Cost per Machine/Labour Hours $2.61 $3.68 $2.06

3MANAGEMENT ACCOUNTING
PRODUCTION COST UNDER TRADITIONAL METHOD:
Particulars Simple Luggage Complex Luggage
Machine Hour in Machine Centre A 4 10
Overhead Cost per Machine Hour $2.61 $2.61
Overhead Cost of Machine Centre A per unit $10.43 $26.07
Machine Hour in Machine Centre B 10 20
Overhead Cost per Machine Hour $3.68 $3.68
Overhead Cost of Machine Centre A per unit $36.78 $73.56
Labour Hours in Assembly Centre 10 20
Overhead Cost per Labour Hour $2.06 $2.06
Overhead Cost of Labor Centre A per unit $20.62 $41.23
Total Overhead Cost per unit $67.82 $140.86
Direct Cost per unit $80.00 $200.00
TOTAL PRODUCTION COST PER UNIT $147.82 $340.86
Requirement 2:
Overhead Cost per Activity Driver:
Particulars Cost Driver Amount
Units of Cost
driver Cost per Unit
Overhead of Store Dept.:
Purchasing Material Purchase Order $10,95,628 9600 $114.13
Receiving Material Material Receipts $5,40,123 5000 $108.02
Disburse Materials Production Runs $11,03,318 2000 $551.66
TOTAL $27,39,069
Overhead of Maintenance Dept.:
Production Scheduling Production Runs $12,77,317 2000 $638.66
Set-Up Machines Set-Up Hours $6,20,300 12000 $51.69
Quality Inspection Inspections $4,24,777 1000 $424.78
TOTAL $23,22,394
Overhead of Machine Centre A Machine Hours $33,07,915 2000000 $1.65
Overhead of Machine Centre B Machine Hours $27,90,946 1200000 $2.33
Overhead of Assembly Centre Direct Labour Hours $25,89,676 2000000 $1.29

4MANAGEMENT ACCOUNTING
PRODUCTION COST UNDER ABC METHOD:
Particulars Cost Driver
Cost Driver
per unit
Cost Driver
per Batch
Units per
Batch
Cost per
Driver Unit
Cost per
Unit
Simple Luggage:
Overhead Cost of Machine Centre A Machine Hours 4 100 $1.65 $6.62
Overhead Cost of Machine Centre B Machine Hours 10 100 $2.33 $23.26
Overhead Cost of Assemble Centre Direct Labor Hours 10 100 $1.29 $12.95
Material Purchase Cost Purchase Order 1 100 $114.13 $1.14
Material Receipt Cost Material Receipts 1 100 $108.02 $1.08
Material Disbursement Cost Production Runs 5 100 $551.66 $27.58
Production Scheduling Cost Production Runs 5 100 $638.66 $31.93
Set-Up Cost Set-Up Hours 50 100 $51.69 $25.85
Quality Inspection Inspections 1 100 $424.78 $4.25
Total Overhead Cost per Unit $134.65
Direct Costs $80.00
PRODUCTION COST PER UNIT $214.65
Complex Luggage:
Overhead Cost of Machine Centre A Machine Hours 10 200 $1.65 $16.54
Overhead Cost of Machine Centre B Machine Hours 20 200 $2.33 $46.52
Overhead Cost of Assemble Centre Direct Labor Hours 20 200 $1.29 $25.90
Material Purchase Cost Purchase Order 1 200 $114.13 $0.57
Material Receipt Cost Material Receipts 1 200 $108.02 $0.54
Material Disbursement Cost Production Runs 1 100 $551.66 $5.52
Production Scheduling Cost Production Runs 1 100 $638.66 $6.39
Set-Up Cost Set-Up Hours 10 100 $51.69 $5.17
Quality Inspection Inspections 1 100 $424.78 $4.25
Total Overhead Cost per Unit $111.38
Direct Costs $200.00
PRODUCTION COST PER UNIT $311.38
Requirement 3:
Particulars Simple Luggage Complex Luggage
Traditional Costing Method $147.82 $340.86
Activity Base Costing Method $214.65 $311.38
Difference -$66.83 $29.47
Remarks Under Valued Over Valued
Difference between Two Methods:

5MANAGEMENT ACCOUNTING
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monitoring, and motivating performance. Wiley Global Education.
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Operations Management, 32(7-8), pp.414-428.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John
Wiley & Sons
Wouters, M., Selto, F.H., Hilton, R.W. and Maher, M.W., 2017. T Course: Management
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(B. Sc.)