Managerial Accounting Pristine Limited

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Added on 2020-11-12

Managerial Accounting Pristine Limited

Added on 2020-11-12

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MANAGERIALACCOUNTING

TABLE OF CONTENTSINTRODUCTION...........................................................................................................................11. Two problems of Pristine Limited’s traditional costing system..............................................12. Four indicators that current costing system is outdated and flawed........................................23. Calculation of activity cost rates to be used in activity based costing system........................24. Calculation using activity based costing of income statement of product group process anssupport costs to product group.....................................................................................................35. Difference in product cost and net profit margins between the two costing systems..............46. Presenting report on the benefits, costs and issues of adopting the activity costing system.. .47. Suggesting methods to improve profitability of Pristine Limited’s customer.........................5CONCLUSION................................................................................................................................6REFERENCES................................................................................................................................7

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INTRODUCTIONCosting system is a framework used by firms to estimate the cost of products forprofitability analysis and expenditure control. It’s essential to estimate the cost of production forprofitable operations. Pristine Limited is a manufacturing company whichis currently facingissues regarding fall in profit margin on its metal safes products. The present report will criticallydiscuss the requirement of adopting activity based cost system . Present report will providedeeper insight about problem of traditional costing which Pristine Limited is facing. Further, theindicators about outdated current costing system will also be presented along with its limitations.A brief reporting document is prepared to managing director which reports about importance ofimplicating activity based costing in Pristine Limited. Suggestion for company to increaseprofitability so as to enhance the customer's profitability is included in present report.1. Two problems of Pristine Limited’s traditional costing system.Traditional method is allocation of manufacturing overhead costs to the production ofproducts. This method assigns factory's indirect costs to items manufactured on the basis ofvolume such as number of unit produced, direct labour hour, production machine hours. PristineLimited manufactures metal and plastic safe, despite of increasing in high volume sales in plasticsafes Pristine Limited is facing falling in overall profitability with the decrease in sales pf plasticsafes (Weygandt, Kimmel and Kieso, 2015). The problem identified in Pristine Limited’straditional costing methods are:Pristine limited allocates cost on overhead volume based like labour and machine hour’sonly. Allocating costs on overhead volume on labour and machine hour will result in under orover costing as resources consumed by product and costs allocated may not match (TraditionalCosting Vs. Activity-Based Costing, 2018). This leads the company to deceasing in overallprofitability as despite of getting cheaper resources overall production is complicated.The cost of performing all diverse activities will be contained in one costing and dividedby number of production machine hours. Which leads to over using of machines hour thatincreases the expenditure of Pristine Limited and decrease in profitability of company.1

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