ACC200 Costing Analysis: Traditional and Activity Based Costing

This report provides a comprehensive costing analysis for Fantori Ltd, comparing traditional and activity-based costing (ABC) methods to understand why an overseas buyer is only interested in the advanced sewing machine model. The analysis includes calculations of cost per unit under both costing methods, income statements, and a discussion of the importance of accurate product costing. It also explains the difference between actual and applied overhead, and the proration method of costing. The report concludes that the traditional costing method may underestimate the cost of the advanced model, leading to the buyer's preference, while ABC costing provides a more accurate view of individual costs. The report highlights the importance of accurate product costing for informed decision-making and maintaining a competitive advantage. Desklib provides a platform for students to access similar solved assignments and past papers.

Running Head: COSTING ANALYSIS
0
Costing Analysis
Traditional and ABC Costing

COSTING ANALYSIS
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Table of Contents
Answer to Question-1................................................................................................................2
Answer to Question-2................................................................................................................4
Answer to Question-3................................................................................................................7
Analysis................................................................................................................................10
Importance of accurate product costing...............................................................................10
Answer to Question 4...............................................................................................................11
Answer to Question 5...............................................................................................................12
Bibliography.............................................................................................................................14

COSTING ANALYSIS
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Answer to Question-1
Particulars
Direct
Material
cost per
unit
Direct
Labor
cost
per
unit
Total
overhead
costs
other
overheads
Total units
produced
Cost
per
unit
Basic Model 595000 297500 160488 0 1052988 1700 619
Advanced
Model
928000 448000 119512 383500 1495512 1600 935
Traditional costing
There are various methods that are under process by the accountants and the book keepers to
make a proper management of the financial aspects of the business. One such method is
known as the traditional costing system. It is an accounting method under which the profits
are predicted by taking into account the cause and effect relationship of the direct as well as
the indirect costs of the business (Mahal and Hossain, 2015).
Costing is generally termed as an activity of breaking the costs into the individual units and
the individual report is prepared in detail to identify each cost carefully. The basic ideology
behind the analysis of the costs is there overall impact on the net profit of the company and
taking immediate and the necessary steps to improve the position. The two major methods
used are the traditional method, activity based costing method one more new method that
have been introduced is the proration method for the purpose of allocation of the overhead
cost. The analysis of the costing is necessary as helps in the decision making and ease down

COSTING ANALYSIS
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the complex transactions into the simpler ones. It’s necessary of the business to recognise the
potential costs and the benefits associated with them and if the business fails it results into the
sub optimal decisions ultimately. Also performing the cost analysis helps in giving an
opportunity to the management to dive into the specifics of the particular funds required to
spend on the product. The act of defining and the identification of the costs is a technical one
and it reduces time and energy of the employees (Bennett and James, 2017).
Traditional costing is the method where the cost of the overhead is calculated by loading the
percentage of the total overhead costs to the particular and the significant component. The
percentage so arrived is generally the percentage of the machine hours as compared to the
overall percentages and therefore the machine hours are treated as the base for the purpose of
the calculation of the factory overhead (Xu, Frankwick and Ramirez, 2016).
The first table represent the calculation of the cost per unit of the Sewing Easy under the
traditional method. For the purpose of the calculation of the overhead costs the machine
hours are made as the base and thereafter the figure of the overhead calculation is arrived at
60 and 80 respectively for the basic as well as the advanced model (Cooper, 2017).
Further the second table displays the cost per unit taking into consideration the cost of the
direct labour materials per unit and the labour per unit (Patiar, 2016).
Answer to Question-2
Calculation of cost per unit under activity based costing method
Particulars
Basic Model Advanced
Model
Direct Material cost per unit 350 580
Direct Labor cost per unit 175 280

COSTING ANALYSIS
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Overhead costs per unit 52 120
Other operating Expenses 383500
Operating Expenses per unit 240
Total cost per unit a 577 1220
Activity based costing model
The ABC system is the system of the accounting that is based on the activities which can be
bifurcated into the events, task, the small goals or setting up of the machines and the products
used for the designing of the finished goods. This system of costing is used to target the
product line, the earnings off the company, the service pricing. This system helps the
organisation to shift their focus mainly on the pricing and the strategy required to maintain
the costs which are grasped in the better manner (Patiar, 2016).
Under the ABC system an activity is also considered as the transaction cost or the key
element or the cost driver which acts as the allocation base. There are certain example of the
cost drivers such as the quality inspections, the orders in number for the purpose of the
production, the maintenance requests, the machine set ups and the power consumed by the
company to produce the goods and the services (Pitel and Alioshkina, 2016).
Under the activity based costing model the selling expenses, the office rent and the interest
expense are also included. Also for the purpose of calculating the overhead rate the company
assigned the costs on the individual basis or rather say on the basis of their respective key
drivers and the elements. For example the inspection overhead is calculated on the basis of
the inspection rate. Similarly the same formula is applied for the Assembly, Production
scheduling and machine set up (Tsai, 2016).

COSTING ANALYSIS
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Under the activity based costing the total overhead rate that has been calculated is $52 for the
basic model and $120 for the advanced model. The observations also state that the company
is earning profit while using the activity based costing method more.
Answer to Question-3
Traditional Costing System
Sewing Easy
Income Statement
For the year ending 31st March 2017
Particulars Advanced
Model
Amount
Sales 1944166
Cost of goods sold
Direct
materials 928000
Direct labors 448000
overheads 503012
Total Expenses 1879012
Gross Profit 65154
Net Income 65154

COSTING ANALYSIS
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Activity Based Costing System
Sewing Easy
Income Statement
For the year ending 31st March 2017
Particulars Advanced
Model
Amount
Sales 1944166
Cost of goods sold
Direct
materials 928000
Direct labors 448000
overheads 575801
Gross profit 1951801
Total -7636
Net Income -7636
Analysis
After analysing the calculations and the situations the main ideology behind accepting the
advanced model is that under the traditional product costing the cumulative costs are taken
into consideration and thus it reduces the price of the advance model in the traditional based

COSTING ANALYSIS
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costing system. Further under the activity based costing system the overall loss is also
suffered by the company and hence the overseas buyer accepted the idea of the advanced
model because of the low price. Whereas in reality the correct method of calculating is the
activity based costing method that gives the transparent idea of the individual costs (Plank,
2018).
Importance of accurate product costing
For any company the authenticity and the accuracy of the financial statements is the most
important factor not only from the point of view of the managers but also from the point of
view of the investors and the shareholders. The accurate product costing helps the investors
to take the important decisions in deciding whether the funds invested by the investor are in
correct direction or not. The accurate product costing helps in determining the impact of the
budget where the costs are budgeted for the future on the basis of the current costs.
Furthermore, the income statement is also dependent upon the cost of goods sold and the
selling price of the product as well (Schram, et al 2015). This gives the true and fair view of
the costs to ascertain the original position to the investors investing in the company. The
assets and the inventory are also affected by the implications of the accurate product costing
and moreover if the product costs are not calculated correctly the value of the inventory will
be inaccurate. This will distort the calculation and the picture will not be transparent
henceforth, these are the several reasons that determine the importance of the accurate
product costing. The accurate product costing will not only help in enhancing the financial
position of the business but also helps in having the competitive advantage over the
competitors (Stark, 2015).

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Answer to Question 4
The accounting includes the wide range of the terms and two such terms are the actual
overhead and the applied overhead. The actual overhead of any company can be termed as
the factory costs of the indirect nature that have been incurred or spent for in reality. This
includes all the overhead costs except the direct material and the cost of the labour. Few
examples of the costs that are under the category of the actual overheads are Equipment
maintenance, factory insurance, factory utilities, production supplies, factory rent, factory
property taxes. There may a slight difference between the actual overheads and the applied
overheads which is based on the standard rate of the overhead (Vaxevanidis and Petropoulos,
2018).
Applied overhead is the overhead under the method of the costing. Applied overhead can be
termed as the fixed charge assigned to a production job or department within a company. In
contrast to the general overheads the applied overheads have the equal importance. The
applied overhead can be displayed by the best example of the depreciation and insurance
(Accounting Coach 2018).
From the point of view of the management the applied overheads is considered as the
standard part of the financial planning and the analysis method. In order to serve and
facilitate the better capital budgeting decisions the review of the applied overheads is
necessary and crucial for the management. For the purpose of the calculation most of the
industries make use of the standard rate rather than bifurcation of the same (Popesko,
Papadaki and Novák, 2015).
Further the actual overhead and the applied overhead is different from each other at the end
of the day because since the future overheads along with the machine hours cannot be judged
with the certainty and in relation to this the actual hours of the machine will not occur in the

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uniform manner therefore there will always be the difference between the actual as well as
the applied overhead.
In addition to this if the overheads that are assigned more than the actual amount than the
overheads are termed as the applied overhead otherwise the case is the reversal case. As and
when the cost of goods is calculated the amount it is in excessive nature it can be termed as
the under applied overhead.
There are few methods to deal with the situations where there are under and the over applied
issues.
 The first method allows the transfer of the amount to the next financial year.
 The second method the journal entry is passed and the amount is transferred to the
profit and loss account.
 A supplementary rate is considered against the standard rate.
Answer to Question 5
300000 210000
Account balance Account balance
before Proration After Proration
Work in progress 60500 3% 9073 6351 75924
Finished Goals 90000 4% 13497 9448 112944
cost of goods
sold
1850000
92%
277431 194201
2321632
Total 2000500 300000 210000 2510500

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Proration method of the costing is the method of costing where the overheads are based on
the actual overheads of the firm. With the use of this method the sum of all amounts is
charged to the project of the overhead (Detek, 2018). The prorated overhead percentage rate
is calculated on the basis of the total amount of the work in progress, cost of goods sold and
the finished goods sold. Rest the amount is bifurcated on the basis of the allocated and the
applied overhead (Manunen, 2013).

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Bibliography
Accounting Coach (2018) What is the difference between actual overhead and applied
overhead? [online] https://www.accountingcoach.com/blog/dfifference-actual-overhead-
applied-overhead [Accessed on 15th January 2018].
Bennett, M. and James, P., 2017. The Green bottom line: environmental accounting for
management: current practice and future trends. Routledge.
Cooper, R., 2017. Target costing and value engineering. New York: Routledge.
Detek, (2018) Proration Method of Overhead Allocation [online] Available from
https://help.deltek.com/Product/Vision/7.6/oa_proration_method_of_overhead_allocation.ht
ml [Accessed on 18th January 2019]
Mahal, I. and Hossain, A., 2015. Activity-Based Costing (ABC)–An Effective Tool for Better
Management. Research Journal of Finance and Accounting, 6(4), pp.66-74.
Manunen, O. (2013) An activity-based costing model for logistics operations of
manufacturers and wholesalers, International Journal of Logistics, 3(1), 53-65.
Patiar, A., (2016) Costs allocation practices: Evidence of hotels in Australia, Journal of
Hospitality and Tourism Management, 26(1), pp.1-8.
Pitel, N.Y. and Alioshkina, L.P., (2016) ABC analysis as a tool of optimization of marketing
management of export-led enterprises, New York: Springer.
Plank, P., 2018. Introduction. In Price and Product-Mix Decisions Under Different Cost
Systems (pp. 1-5). Springer Gabler, Wiesbaden.

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Popesko, B., Papadaki, Š. and Novák, P., 2015. Cost and reimbursement analysis of selected
hospital diagnoses via activity-based costing. E+ M Ekonomie a Management.
Schram, D.J., Kohn, C.F., Ashare, S., Maldonado, J., Rieske, D.W. and Rasavong, L., SC
Johnson and Son Inc, 2015. Accurate Product Placement. U.S. Patent Application
14/104,896.
Schram, D.J., Kohn, C.F., Ashare, S., Maldonado, J., Rieske, D.W. and Rasavong, L., SC
Johnson and Son Inc, 2015. Accurate Product Placement. U.S. Patent Application
14/104,896.
Stark, J., 2015. Product lifecycle management. In Product Lifecycle Management (Volume
1) (pp. 1-29). Springer, Cham.
Tsai, W.H., (2016) Activity-based costing model for joint products, Computers & Industrial
Engineering, 31(3), pp.725-729.
Vaxevanidis, N. M., and Petropoulos, G. (2018) A literature survey of cost of quality
models, Journal of engineering, 6(3), pp. 274-283.
Xu, Z., Frankwick, G.L. and Ramirez, E., 2016. Effects of big data analytics and traditional
marketing analytics on new product success: A knowledge fusion perspective. Journal of
Business Research, 69(5), pp.1562-1566.