(DOC) Management Accounting : Assignment
Added on 2020-10-22
12 Pages3222 Words226 Views
Finance
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Management accounting
Table of ContentsINTRODUCTION...........................................................................................................................1A). Explanation of activity based costing...................................................................................1B). Explaining the purpose of studies and research which needs to be explore from study.....3C). The similarities and differences in the findings of two studies.............................................4D). The outcomes from two studies that are useful for management accountants in Australian.....................................................................................................................................................7Companies...................................................................................................................................7CONCLUSION................................................................................................................................7REFERENCES................................................................................................................................8
INTRODUCTIONEvery business organisation has a primary objective to maximize its profit. In order tomake profit, its important to reduce the cost of production from revenue earned by selling ofproduct. Because of changes in different techniques of manufacturing different products, a newcosting techniques are required to evaluate costing techniques for product and services. Activitybased costing developed to overcome the drawbacks and shortcomings of traditional costingsystem. Activity based costing is a modern technique to absorption costing which allows themanager to understand profitability of both product and customer. The present report is based onthe study of two articles that which will help in understanding the need of developing activitybased costing system in operations of companies. However, the report will discuss theimplementation of ABC model in Australian manufacturing and agricultural farms. The reportwill present the purpose and objectives of research. Further, the similarities and differences infinding from both article will be discussed. The suggestions for management accountant areincluded on the outcomes from the two studies. A). Explanation of activity based costing.Companies need new accounting system to track the costs of their operations. There areseveral different methods that accountant uses to manage the financial operations of thecompany. Two of the most commonly used costing system are traditional costing method andActivity based costing method. Traditional costing system is an accounting method which isused to ascertained the future profit of organisation (Activity-Based Costing Method inAccounting, 2018). These method uses cause and effect techniques for determining direct andindirect expenses in business operations. This system uses average overhead rate to the directcosts of manufacturing products. Despite of being an easy and inexpensive costing system, itdoes not present a clear picture of product cost. There are many unexpected expenses incurred inmanufactures process. Hence, the profit will be affected as total cost of manufacturing a productbecomes much more than the actual cost expected. As total cost increases, the revenue earnedwill decrease unexpectedly.Here comes a need of a new techniques of costing to companies, Activity based costingdeveloped to overcome the drawbacks and shortcomings of traditional costing system. The ABCeach activity has an assigned cost. Activity based costing first assigns costs to that activities
which are real cause for overhead. It than assign cost to that activities only to products that areactually needed for activities. According to the ABC, it is the activity that consumes resourcesand cost, not a product (Greasley, 2017.). Hence, activities are not necessarily based on thevolume of production. It helps the management to understand which activity will make moreprofit and where money is to be in cost-effective activity.Activity based costing is a modern technique to absorption costing which allows themanager to understand profitability of both product and customer. There are two stage allocationprocess of Activity Based Costing:in first stage, important activities in manufacturing products are identified,and ,manufacturing overhead are assigned to each activity as per the organisation's cost used byactivity. There is a cost centre (activity cost pool) where overhead are assigned to each activities.In second stage, the unit of an activity that causes changes that causes the change in thecost of that activity is identified. Then the overheads are allocated from each activity cost centreto each product as per the amount of cost consumed by that products.Benefits of Activity based costing:ABC system helps in improving product cost information in a manufacturing process,which allows accurate information to managers about the costs of making and sellingvarious products (Dale and Plunkett, 2017). ABC system helps in giving detailedinformation of production which was deformity of information in traditional costingsystem.One of the key benefit of ABC system are cost control and cost reduction that helps toimprove profitability. Cost reduction in ABC helps to identifying the activities thatresponsible for over cost of an activities.. thus the cost analysis by activity based costinghelps in improving the operations and increases the operations and increasesprofitability.Activity based costing is also assist in increasing the complete cost data for performancemeasurement and assist the management of company to make to make proper decisionson product pricing, product design, customer mix and profitability etc. the activity costsare used to set targets and score goals around performance of the activity.
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