Introduction to Management Accounting

Introduction to Management Accounting
1

Executive Summary
The report below discusses the basis of cost allocation by concerns engaged in production.
The cost allocation process depends on the complexity of the production process and also the
number of divisions. In order to ensure correct data is used by the management for decision
making, proper cost allocation techniques should be applied.
2

Contents
Introduction...........................................................................................................................................4
Importance of use of correct manner of costing.....................................................................................5
Tradition costing and its disadvantages.................................................................................................6
Activity based costing...........................................................................................................................7
Ethical dilemma in change of costing methods......................................................................................9
Effect of costing method on profitability.............................................................................................10
Under and over recovery of overheads and there treatment.................................................................12
Conclusion and Recommendation.......................................................................................................14
Bibliography........................................................................................................................................15
3

Introduction
In a production facility, it is important that all cost are collected appropriately and allocated
amongst the products in order to ensure correct pricing of the product (Holtzman, 2013). The
costing data helps the management take important decisions, regarding the operations of the
business. Beztec Limited had two major products, Lexon and Protox. Lexon is an old product
and Protox in the newly introduced model. The management is in a fix about the decision of
whether they should continue with the new model or not. It is important that the profitability
of the product be checked in order to take the appropriate decision. Using a correct costing
system is important so that correct profitability can be determined (Horngren, 2012).
4