Management Accounting for Planning and Control

Management accounting for planning
and Control

Table of Contents
General problem related with the imple..........................mentation of traditional costing system
.....................................................................................................................................................3
Calculation of the Cost per Unit as per the Activity based costing system and target price.......3
Cost and benefits of the adoption of Activity based costing system for the General Electrical
Corporation..................................................................................................................................5
References........................................................................................................................................7

GENERAL PROBLEM RELATED WITH THE IMPLEMENTATION OF
TRADITIONAL COSTING SYSTEM
In the traditional costing system, the overhead is allocated on the basis of average overhead rate.
Generally, it is determined on the basis of direct labor hour relating to production of goods. It is
very simple to allocate the cost on the basis of traditional costing system, however it does not
provide reliable or the accurate result (Namazi, 2016). Further, manager of the company cannot
analyze the detail aspect of the cost through traditional costing. Along with, optimum utilization
of the resources in the division is not possible through the traditional costing system, since the
overhead are implemented on the basis of single rate, thus wastage of resources cannot be
ascertained, which assist in the inefficiency in the productivity.
In the given case, it has been stated that General Electrical Corporation produces the three
product and apply job costing system in which the manufacturing overhead cost is allocated on
the basis of direct labor hour. At present, according to the traditional costing system, Standard
model cost has total product cost $ 157.5. The pricing policy of the company is 110% over the
total product cost. Due to the enhanced competition, the price of the standard model should be
below the $110. It has been identified by the CEO of the company, those other companies selling
the same model for $ 160, which is just $ 2.5 more than the production cost of standard model. It
is the indication that, method of allocation of the product costing distorting the cost of the
product.