Management Accounting

Running head: MANAGEMENT ACCOUNTING
Management accounting
Name of the Student
Name of the University
Student ID
Author Note

1MANAGEMENT ACCOUNTING
The overhead coast to production can be allocated by the two different methods. One
is traditional Costing and another is activity based costing (ABC) method. Both the methods
are used to estimate overhead costs related to production and then these costs are assigned to
products based on a cost driver rate (Mahal & Hossain, 2015). Both these methods are
different from each other in the term of accuracy and complexity. The traditional method is
simple and less accurate that assigns overhead cost to products based on an arbitrary average
rate, while ABC method is more accurate as well as complex that assigns the cost to products
in accordance with the products usage of the activities.
Answer to Question (i)
Answer to Question (ii)
The departmental rates are $56.52 for the Machining Department and $11.67 for the
Assembly Department while the Plant wide rate computed by the manager is $47.14.
Analysing both the rates, it can be stated that the department rates are clearer and easily
understandable. Further, the plant wide rate only calculated one rate considering only one
base for the entire departments of the factory. On the contrary, the departmental rates are
calculated separately for each department which help to understand the working cost
departmental wise easily but from the plant wide rate is become difficult to calculate the cost

2MANAGEMENT ACCOUNTING
for the department wise (Kim et. al,2016). The plant wide cost also assumes the departmental
cost because it only consider the based cost for every department which may vary from the
actual cost that will have an impact on the pricing of product. However, the departmental
costing provides the exact cost of the each department. Therefore, it can be said that
departmental costing method is rational and scientific.
As per the analysis, the Rex’s plant wide overhead allocation method is not
appropriate because Rex simply divided the overhead cost by labour hour and calculates the
overheads by the plant wide cost. The plant wide cost is calculated by using only one base
cost. As plant cost is only based on a single cost or in the average cost therefore, the actual
cost of each product cannot be correctly calculated (Haroun, 2015).This method is further not
appropriate as this is the historical based costing system which is less accurate but easy to
calculate. This is also a main reason behind losing the sale of product R907 to his competitor
who was able to sell a similar product at a lower price because by following this method, Rex
is not able to calculate the actual cost of the product and it comes high by cost. The actual
overhead allocation should be made by dividing the overhead cost by machine hours
consumed in Machining Department and by dividing the overhead cost by the direct labour
hours consumed for the Assembly Department for the each product separately. This method
will help Rex to understand the cost of each product more accurately and more clearly
(Esmalifalak, Albin & Behzadpoor, 2015). If Rex follows the above stated method to allocate
the overhead, he will able to ascertain the actual overhead of the each product that is $
1334.57 for the Product X123 and $ 521.25 for the Product R907. It will also help Rex to sell
Product R907 in a lower price to compete with his competitors who provides the similar
product in the lower price. Further, this method is more rational and scientific.
Based on the above discussion, it can be recommended that Rex should use $ 1344.57
cost per unit for the Product X123 and $ 521.25 as the cost per unit for the product R907.