Managerial Accounting: Problems with Traditional Costing System and Benefits of ABC Costing System

Managerial Accounting

TABLE OF CONTENTS
Task 1).............................................................................................................................................3
Task 2).............................................................................................................................................3
Task 3).............................................................................................................................................4
Task 4).............................................................................................................................................6
Task 5).............................................................................................................................................7
Task 6).............................................................................................................................................8
Task 7).............................................................................................................................................9
References......................................................................................................................................10

TASK 1)
The problems which are being faced by Pristine Limited in the application of traditional costing
system are discussed below:
 Inappropriate allocation of expenses: It can be assessed by the statement of the manager
that the allocation of expenses is not appropriate. Due to the same sales of metal safes
was falling and therefore the target which has been set up by the company is not
achieved. Moreover, despite the increase in overall sales of the company the sales value
of metal safes are decreasing.
 Enhancement in loss even though sales are increasing on a continuous basis: This
problem was related to losses of the department of metal safes despite an increase in
sales. Further, the marketing director has stated that augmented sales of plastic sales will
compensate for the declining margin of metal safes. The justification of the statement
provided by the director was the reduction in the prices decided for metal safes sales due
to high competition in the market.
TASK 2)
Four Indicators that Present Costing System is Outdated and Flawed
Particulars Disadvantages
Allocation of overheads on a
volume basis
Traditional costing system assigns overheads only on volume
basis such as labour/ machine hour. The same will result in
under or over costing as product cost or service cost does not
match with the same. The specified issues arise as higher the
volume; greater the portion is allocated to same. The concept
does not eventually lead to appropriate apportionment. Thus
the traditional costing system is believed to be flawed and
outdated (Bokor and Markovits-Somogyi, 2015).
Intricacy in administration In accordance with the study of Ebele and Meshach (2016),
another limitation of cost accounting is many people consider
that cost accounting requires more resources and many big
processes are involved in it which makes the accounting
complex. Apart from this, it requires specialized