ACC200: Investigating Costing Methods for Sewing Easy Ltd, 2018

This report analyzes the costing methods employed by Sewing Easy Ltd, focusing on traditional costing versus activity-based costing (ABC) for their basic and advanced sewing machine models. The assignment examines why an overseas buyer is exclusively interested in the advanced model, highlighting potential issues with the company's current traditional costing system. It explores the discrepancies between actual and applied overheads, suggesting a shift towards ABC costing for more accurate cost allocation and pricing strategies. The report also discusses the benefits and challenges of implementing ABC costing, emphasizing its potential to improve management decision-making related to production, outsourcing, and special orders. The analysis reveals that the advanced model may be sold at a loss under the traditional costing method, explaining the buyer's interest and indicating a need for pricing adjustments based on a more accurate costing system.

ACCOUNTING
STUDENT ID:
[Pick the date]

Question 1
The costing of the two models as per the traditional costing is exhibited below.
Question 2
The costing of the two models as per the ABC costing is exhibited below.

Question 3
The company has a policy of determining price by applying a 20% mark-up on the cost.
Estimated selling price for one unit of advance system = (1+ (20/100))*890.93 = $1,069.12
Considering the cost price of the advance system equivalent to the cost under traditional
costing, the P&L statement for 2017 is referred to as highlighted below (Drury, 2016).

Apparently, the current costing indicates that the company is incurring profits by selling the
advance model to the tune of $ 65,585.
Considering the cost price of the advance system equivalent to the cost under ABC costing,
the P&L statement for 2017 is referred to as highlighted below
Unlike the estimates by the company, it becomes evident from the computation above that at
current pricing, there is a loss for the company for the sale of advance model. This clearly
explains why the foreign company has shown interest in procurement of this model as it finds
this price very competitive owing to the company selling at a loss. Also, the above
computation would indicate that the pricing of basic model is done at very high price since
the overheads are underapplied for the advance model. Clearly, this costing anomaly needs
to be eliminated by migrating to ABC base costing (Damodaran, 2015).
Question 4

It is quite common to witness that there tends to be a deviation between overheads that ar
actually incurred and those that are applied. Two possible reasons in this regards are outlined
below (Northington, 2015).
1) The allocation of overheads cost on the basis of the traditional costing method leads to
issue of over-allocation and under-allocation.
2) While this issue can be addressed through ABC based costing, but considering the
practical constraints to sub-divide the activities to smaller units, the process is not 100%
accurate but provides reasonable or working accuracy.
Considering that the above is a common phenomenon, hence measures or ways tom deal with
the above situation are required as highlighted below (Parrino and Kidwell, 2014).
 A shift should be made by companies towards ABC costing owing to more accurate
cost allocation. This is especially true for firms have multiple products and are in
manufacturing business.
 Besides, the underlying costing of the product, while pricing the product the company
must also consider the prevalent prices in market which provide an estimated of likely
cost over estimation or under estimation.
 The sales team must have regular updates with regards to prevailing market price of
the product and any significant deviation of the company’s price from the same needs
to be analysed further particularly with regards to costing of product.
Question 5
The use of ABC based costing system tends to lead to a plethora of benefits for the firm
which are outlined below (Petty et. al., 2015).
 The overhead or indirect costs incurred by the firm are appropriately allocated to the
respective products and their cost is accurately determined. This sets the way for
accurate pricing which is pivotal for the success of the product along with company’s
reputation.

 The availability of accurate information on costing improves the management
decision making related to production, outsourcing and dealing with special orders.
This is not possible if accurate cost information is not available.
Despite the advantages, the deployment of ABC based costing system also has some potential
issues mentioned below (Brealey, Myers and Allen, 2014).
 In comparison to traditional costing system, ABC based costing is much complex and
thereby in order to make the switch from traditional to ABC costing, specialised
manpower, time and financial resources are required.
 Even the implementation of ABC system may not bring about improvement in
decision making as the managers tend to find hard to interpret and use the information
available through ABC costing system for making successful decisions.
 Owing to the above, incremental training costs would have to borne making ABC
costing system an expensive affair with significant upfront costs.

References
Brealey, R. A., Myers, S. C. and Allen, F. (2014) Principles of corporate finance, 2nd ed.
New York: McGraw-Hill Inc.
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York:
Wiley, John & Sons.
Northington, S. (2015) Finance, 4th ed. New York: Ferguson
Parrino, R. and Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London:
Wiley Publications
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M. and Nguyen, H. (2015).
Financial Management, Principles and Applications, 6th ed.. NSW: Pearson Education, French
Forest Australia.
.