Semester 1 AYB225 Task B Report: Costing Method Analysis

This report analyzes the costing methods used by Chung Accounting Service, a firm offering bookkeeping and taxation services in Sydney, as they plan to expand into advisory services. The report compares the traditional costing approach, which distributes costs equally across departments, with Activity-Based Costing (ABC), which allocates costs based on activities and cost drivers. The analysis includes a comparison of cost allocation and net profit calculations under both methods, revealing that ABC provides a more accurate and logical distribution of costs. The report highlights the misleading results of the traditional method, especially for the bookkeeping department, and recommends that Chung Accounting Service implement ABC to make informed decisions on pricing, client negotiation, and overall profitability. The report concludes that ABC provides more accurate data for decision-making related to billable hours and labor costs.

AYB225 ASSIGNMENT TASK B: REPORT (600 words, 1.5 spaced)
Chung Accounting Service offers services in bookkeeping and taxation to clients in Sydney. They
are planning to venture into advisory service as they foresee great opportunity in the area. The firm
currently employs a very simplistic traditional costing approach wherein they distribute the total
costs of the firm equally between the departments. The firm now with entry into the advisory
services also aims to review the possibilities of allocating costs based on ABC – Activity Based
Costing Method which is more logical, rational and beneficial in decision making. We will first
review both the methods as below:
1. Traditional Costing Approach:
Simple, easy to understand and implement traditional costing approach collects all the
support cost of the firm and distributes it evenly to the departments which the company has.
2. Activity Based Costing
ABC is a time taking approach but is more logical in allocating overhead to the various
departments of the company. This costing methodology is initiated with the identification of
activities that causes support costs for the company. The approach then identifies the cost
drivers against each of the identified support cost and then allocates them to the departments
based on their usage of the activity. (AccountingCoach.com, 2019)
Both these methods provide varied results and the difference is vital to any organization for decision
making on their pricing decision and their negotiation value with the clients. This information helps
them in better decision making by monitoring and controlling costs divided as per the support
activity and costs of the organizations.
The total support cost budgeted for the year 2019 is $368,179 which is distributed among the three
departments as below under both existing and ABC method:
Existing Allocation of
Support Costs
ABC Allocation of
Support Costs
Allocated Support costs
$
Allocated Support Costs
$
Tax $ 1,29,653 Tax $ 1,38,653
Bookkeepin
g
$ 1,11,393 Bookkeeping $ 74,963
Advisory $ 1,27,133 Advisory $ 1,54,564
Semester 1, 2019

AYB225 ASSIGNMENT TASK B: REPORT (600 words, 1.5 spaced)
We see that the support cost that bookkeeping actually uses is much less if based on the activity that
it uses evident form the lower cost allocation under ABC system. Similarly, it is the advisory
department which uses the maximum cost of $154,564 which is 42% of the total costs.
Let us now see the Net profit computation under both the methods:
Budgeted Profit by
Service - existing
allocation
Budgeted Profit by
Service - ABC
allocation
Net Profit $ Net Profit $
Tax $ 1,26,907 Tax $1,17,907
Bookkeeping $ 3,072 Bookkeeping $ 39,502
Advisory $ 64,867 Advisory $ 37,436
Here, as well the results under existing method are misleading as that shows bookkeeping has the
lowest net profit which is actually not the case. The ABC method reveals that advisory will be the
lowest generator of net profit for the firm and taxation the highest net profit department.
ABC method allocates the cost in a better way which is more accurate and based on the usage of
resources by the department rather than simply distributing them equally (Bragg,2019). The results
from ABC method provides accurate information which the firm can use to take decision on the
pricing of the billable hours, labour cost etc. to ensure that the profits are intact.
Recommendation:
Based on above analysis, the firm should implement ABC method for allocation of costs among
departments as the results from ABC are more logical, rational and accurate, enabling the firm to
take an informed decision of pricing and negotiation with the client.
Semester 1, 2019

AYB225 ASSIGNMENT TASK B: REPORT (600 words, 1.5 spaced)
References
AccountingCoach.com. (2019). Activity Based Costing | Explanation | AccountingCoach. Retrieved
from https://www.accountingcoach.com/activity-based-costing/explanation on 22 Apr. 2019
Bragg, S. (2019). Job costing. [online] AccountingTools. Retrieved from
https://www.accountingtools.com/articles/2017/5/14/job-costing on 22 Apr. 2019
Semester 1, 2019