Happy Traveller Limited: Traditional vs. ABC Costing Analysis Report

This report presents a comprehensive analysis of the Happy Traveller Limited case study, focusing on the application of traditional and activity-based costing (ABC) systems. The study begins by outlining the company's background as a luggage manufacturer and introduces the two costing methodologies used to determine product costs. The first part of the report details the traditional costing system, including department-wise overhead allocation and production cost calculations. The second part delves into the ABC system, explaining overhead costs based on activity drivers and production costs under this method. A significant portion of the report contrasts the two systems, highlighting the differences in cost assignment and the rationale behind these differences. The analysis includes specific cost comparisons for simple and complex luggage, illustrating how ABC provides a more accurate distribution of costs. The report then discusses the costs and benefits associated with implementing an ABC system, including the need for IT support, employee training, and the identification of non-value-added procedures. Furthermore, it outlines techniques for incorporating ABC based on the company's requirements, such as grouping procedures and leveraging technology. The conclusion emphasizes the importance of the ABC system in accurately allocating costs and its potential to reduce production costs, thereby offering Happy Traveller Limited a path to sustainable growth and competitive advantages.

Running head: ACCOUNTING
Accounting
Name of the Student:
Name of the University:
Author’s Note:

1
ACCOUNTING
Table of Contents
Introduction......................................................................................................................................2
Requirement 1:.................................................................................................................................3
Department Wise Allocation of Overhead..................................................................................3
Overhead Allocation of the Service Department.........................................................................3
Production Cost within the Traditional Process..........................................................................4
Requirement 2..................................................................................................................................5
Overhead cost as per the Activity Driver....................................................................................5
Production Cost under ABC process...........................................................................................6
Requirement 3:.................................................................................................................................7
Requirement 4..............................................................................................................................9
Requirement 5................................................................................................................................10
Conclusion.....................................................................................................................................11
Reference List................................................................................................................................12

2
ACCOUNTING
Introduction
This research is done on the case study of Happy Traveller Limited. This company is
basically a luggage manufacturing company that make different kinds of luggage, such as simple
luggage, complex luggage and other luggage. In this research the researcher has used both the
types of costing system, which are traditional costing system and activity-based costing system
to find the company’s product cost. The first part of this research uses traditional costing method
to find out of overhead analysis in a systematically process. While the second part uses activity-
based costing technique to find the overhead analysis. In the activity-based costing the costs are
divided based on activity centre’s cost. Then the third part of the research deals with the
explanation of the difference between the traditional costing system and activity-based costing
system to find out the product cost of the company items. As ABC system is used for the
analysis, so the company’s cost-benefit considerations are also discussed by the researcher.
Finally, the end this research will show the best ways for the application of the above stated
systems in the company apart from the allocation of cost to its products.

3
ACCOUNTING
Requirement 1:
Department Wise Allocation of Overhead
Overhead Allocation of the Service Department

4
ACCOUNTING
Production Cost within the Traditional Process

5
ACCOUNTING
Requirement 2
Overhead cost as per the Activity Driver

6
ACCOUNTING
Production Cost under ABC process

7
ACCOUNTING
Requirement 3:
Cost assignment is the major reason for the difference in product cost for both the
systems (traditional costing system and activity-based costing system). Based on this, as per
Soltani, Nayebzadeh and Moeinaddin (2014) stated that this part takes in consideration of certain
amount of labour and material cost. This cost can easily be measured. The labour cost in both the
systems is calculated by multiplication of consumed materials with labour charge per hour; in
which as the material cost for both the systems is calculated by multiplication of total consumed
material with cost per unit. After the calculation of labour and material cost, overhead cost is
added. A percentage of the overhead cost is added to the materials, which can be a percentage of
total labour cost or machine worked hours, in traditional costing technique. These labour cost or
material cost might not have added to overhead which give rise to the absence of rationale.
In ABC analysis there is a need for the actual overhead on the parts. All the procedures
are measured as their cost components. Every overhead procedure is added as per the company’s
requirements, which can also be described as the total cost of all the procedures (Otley 2016).
Then to find out the unit cost of each procedure, the total overhead cost is divided by the total
cost of procedures that are performed by the company.
For Happy Traveller Limited, the overhead cost for simple luggage found by traditional
costing system is $67.82 per unit, and by using ABS analysis system the overhead cost is $
134.65 per unit, thus ABC system overhead cost is higher. Again for complex luggage we see the

8
ACCOUNTING
overhead cost is $200 per unit in traditional costing system, where as for ABC system the
overhead cost is $111.38 per unit. This variation in two systems is due to the addition of direct
labour hours (Fullerton, Kennedy and Widener 2014). It is known that complex luggage has
higher direct labour cost in comparison to simple luggage, so the overhead cost is high for
complex luggage while using traditional system. In contrast to the above, in ABC system, direct
labour hours are added to find out overhead cost, which gives out the exact distribution of costs.

9
ACCOUNTING
Requirement 4
For the incorporation of ABC system, the Happy Traveller Limited has to establish
specific costs and benefits to their company. The incorporation of ABC system requires two
forms of costs and those are system development cost of the system and operational running cost
of the system. Above all the Happy Traveller Limited needs to have a full functional IT support
department. This department’s function is to give require support for incorporation of the ABC
system. In addition to this employee training programs are also required to be performed by the
company (Chenhall and Moers 2015). This programme ensures the upgradation of employee
knowledge as well as surety of their cooperation with the company.
Incorporation of ABC system provides benefits to the Happy Traveller Limited.
Recognition of all non-value added procedures is one of the benefits that the company empowers
for incorporation of ABC system. This identification of non-value added procedures helps to
achieve higher cost efficiency by reducing or removing these procedures (Maas, Schaltegger and
Crutzen 2016). In addition the company now can make important decisions based on pricing of
products, procedure technology to be used, marketing mix of the company and several others.

10
ACCOUNTING
Requirement 5
In order to incorporate ABC system based on the requirements of the Happy Traveller
Limited, there are certain important techniques that are described below:
 Grouping of different procedures used by different departments in the Happy Traveller
Limited, helps to control the rising competition in the industry, thus ABC system
provides system of batch mode for the company (Hopper and Bui 2016).
 Competitive advantages are achieved by Happy Traveller Limited with the help of
computers and different technologies. This further helps in increasing the ability to get
better and accurate information thus making decisions more accurate.
 ABC system helps to reduce the overall cost of production by taking average of all the
overhead cost like volume of the products, process to be set up, complexity in different
process and batch size, thus reduces or eliminates the flexibility in demand.

11
ACCOUNTING
Conclusion
The results of the research show the importance of ABC system in calculation of accurate
cost distribution to products, due to which this system’s importance is understood by the
manufacturing sector. The research shows that the traditional costing system depends too much
of importance on the direct labour for calculation of cost of products, which bring about
considerable amount of defect for the calculation of the total overhead costs. This research also
shows that ABC system uses different cost drivers, giving the correct cost distribution of
different products. Thus from the research it can be concluded that Happy Traveller Limited can
achieve reduced production cost by incorporating ABC system, which further provides a
platform for a sustainable growth for the company by giving competitive advantages in the
market.