Management Accounting

This document discusses the concept of management accounting and its significance in decision making. It explains the difference between department wise rate and plant wide rate for overhead allocation. The document also explores the advantages of activity based costing.

Running head: MANAGEMENT ACCOUNTING
Management accounting
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Answer (i)
Answer (ii)
As per the computation, department wise rate for machining department was $ 56.52 and
for assembly department it was $ 11.67. However, as per the computation of manager, Rex, plant
wide rate was $ 47.14. If both the rates are analysed it can be recognised that the department
wise rate is more justified as compared to the plant wide rate. The reason behind this is that
while the plant wide rate has been calculated only factory departments have been taken into
consideration (Hudakova & Bajus, 2015). On the other hand, while the department wise rate has
been calculated cost for each department has been taken separately. This basis is more justified
as the consumption rate of each department is different and taking entire department as single
base is not correct. Hence, it is identified that the department wide rate is more accurate and
rational. Based on the analysis and computation it can be stated that the method used by Rex that
is allocation of overhead at plant wide rate is inappropriate as he computed the rate through
simply dividing the total overhead cost by total labour hour. Inappropriate overhead allocation
also led to losing sales for the product R907 against its competitor who were able to recover all

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the production costs and selling the similar product at reduced price. Hence, using the
department wide rate will enable Rex to calculate the overhead allocation rate correctly
(Klemstine & Maher, 2014). As per the department wide rate the actual overhead for product
X123 is $ 1344.57 and for product R907 it is $ 521.25. Hence, it can be recommended to Rex
that he shall use $ 1344.57 for product X123 and $ 521.25 for product R907 as cost per unit.
Answer (iii)
Activity based costing is a method for allocating overhead more precisely through
assigning the overheads to different activities. It uses different cost pools those are organised by
the activities for allocating the overhead costs. Once the costs are allocated to the activities, costs
can be allocated to cost objects for using those activities. This approach can also be used for
targeted reduction of the overhead costs. Main advantage of ABC is that is it is more accurate for
costing the product as it allocate the overhead to each activities based on the consumption.
Unlike the allocation system on department wide or plant wide where the overhead is allocated
on the basis of machine hour or labour hours, under ABC system various activities are identified
and the overheads are allocated (Collier, 2015). Further, the ABC system improves the efficiency
of production process, prices the products appropriately with accurate cost information for the
product, reveal the unnecessary costs that may be targeted for elimination and identifies
unprofitable products. Hence, the organisations those use the ABC system will have better
costing as well as pricing systems. On the contrary, under department wide or plant wide
allocation system only the machine hour or labour hour is considered for allocating overhead that
may lead to inappropriate allocation and inappropriate costing for the product (Kaplan et al.,
2014). It can be therefore concluded that the department wide rate or plant wide rate for
allocating the overhead shall be replaced by ABC system.

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Reference
Collier, P. M. (2015). Accounting for managers: Interpreting accounting information for decision
making. John Wiley & Sons.
Hudakova, S. L., & Bajus, R. (2015). Cost management using activity-based costing
model. Актуальні проблеми економіки, (2), 373-386.
Kaplan, R. S., Witkowski, M., Abbott, M., Guzman, A. B., Higgins, L. D., Meara, J. G., ... &
Wertheimer, S. (2014). Using time-driven activity-based costing to identify value
improvement opportunities in healthcare. Journal of Healthcare Management, 59(6),
399-412.
Klemstine, C. F., & Maher, M. (2014). Management Accounting Research (RLE Accounting): A
Review and Annotated Bibliography. Routledge.