University Cost Accounting Report: Laurie Manufacturing Case Study

This report analyzes the cost accounting systems of Laurie Manufacturing Ltd., a company that manufactures lawn mowers. The report compares the simple costing system, currently used by the company, with an activity-based costing (ABC) system. The analysis includes detailed calculations of product costs under both systems, considering direct materials, direct labor, and various indirect costs. The findings highlight significant differences in cost per unit and profitability between the two methods, particularly for the standard and deluxe mower models. The report then explores how the ABC system can improve the company's market share by providing a more accurate allocation of costs, potentially allowing for adjustments in selling prices. The report also discusses the limitations of the case, such as the cost of implementing ABC and the need for management adaptation, and provides references for further reading.

Foundations of
Management
Accounting
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Table of contents
• EXECUTIVE SUMMARY
• INPUTS OF THE CASE
• ANALYSIS OF THE CASE – SIMPLE COSTING SYSTEM
• ANALYSIS OF THE CASE – ACTIVITY BASED COSTING SYSTEM
• FINDINGS OF THE ANALYSIS – DIFFERENCE IN TWO SYSTEM
• DECISION MAKING – HOW ABC CAN IMPROVE MARKET SHARE
• LIMITATIONS OF THE CASE
• REFERENCES

Executive Summary
 REPORT PREPARED FOR THE COMPANY LAURIE MANUFACTURING LTD.
 BUSINESS OF MANUFACTURING LAWN MOWERS
 2 TYPES OF MOWERS BEING MANUFACTURED: STANDARD AND DELUXE
 COMPANY USES THE SIMPLE COSTING SYSTEM
 MAKES ALLOCATION OF ALL THE INDIRECT COSTS BASED ON THE
MACHINE HOURS
 COMPANY’S OWNER WORRIED ON DECLINING MARKET SHARE OF
STANDARD MODEL
 DIFFERENT METHODS OF COST ALLOCATION BEING STUDIED AND
ANALYZED TO SOLVE THE ISSUE, ABC SYSTEM AND SIMPLE COSTING
SYSTEM

Inputs of the case
THE INPUTS GIVEN IN THE LAURIE MANUFACTURING LIMITED CASE HAS
BEEN SHOWN BELOW:
Particulars Standard Deluxe
Units sold 3200 1800
Selling price 125 200
Direct material cost per unit 30 45
Direct manufacturing labor cost per hour 16 16
Direct manufacturing labor-hours per unit 1.5 2.25
Production runs 40 85
Material moves 72 168
Machine setups 45 155
Machine hours 5500 4500
Number of inspections 250 150
Laurie Manufacturing Ltd.
Particulars Standard Deluxe
Units sold 3200 1800
Selling price 125 200
Direct material cost per unit 30 45
Direct manufacturing labor cost per hour 16 16
Direct manufacturing labor-hours per unit 1.5 2.25
Production runs 40 85
Material moves 72 168
Machine setups 45 155
Machine hours 5500 4500
Number of inspections 250 150
Laurie Manufacturing Ltd.

Analysis of the case – simple costing system
Particulars Standard Deluxe
Units sold 3200 1800
Selling price 125 200
Less: Direct material cost per unit 30 45
Less: Direct Labour cost 24 36
Revenue per unit 71 119
Total revenue 227200 214200
Less: Indirect costs
Less: Production scheduling cost 55:45 52250 42750
Less: Material handling cost 55:45 24750 20250
Less: Machine set up cost 55:45 13750 11250
Less: Assembly cost 55:45 33000 27000
Less: Inspection cost 55:45 4400 3600
Less: Marketing costs 24000 21600
Total indirect costs 152150 126450
Profit/(loss) 75050 87750
Cost per unit 47.55 70.25
Standard Costing System
Calculation of the cost of Lawn Mowers
Particulars Standard Deluxe
Units sold 3200 1800
Selling price 125 200
Less: Direct material cost per unit 30 45
Less: Direct Labour cost 24 36
Revenue per unit 71 119
Total revenue 227200 214200
Less: Indirect costs
Less: Production scheduling cost 55:45 52250 42750
Less: Material handling cost 55:45 24750 20250
Less: Machine set up cost 55:45 13750 11250
Less: Assembly cost 55:45 33000 27000
Less: Inspection cost 55:45 4400 3600
Less: Marketing costs 24000 21600
Total indirect costs 152150 126450
Profit/(loss) 75050 87750
Cost per unit 47.55 70.25
Standard Costing System
Calculation of the cost of Lawn Mowers

Analysis of the case – activity based costing system
Particulars Standard Deluxe
Units sold 3200 1800
Selling price 125 200
Less: Direct material cost per unit 30 45
Less: Direct Labour cost 24 36
Revenue per unit 71 119
Total revenue 227200 214200
Less: Indirect costs
Less: Production scheduling cost 40:85 30400 64600
Less: Material handling cost 72:168 13500 31500
Less: Machine set up cost 45:155 5625 19375
Less: Assembly cost 55:45 33000 27000
Less: Inspection cost 25:15 5000 3000
Less: Marketing costs 24000 21600
Total indirect costs 111525 167075
Profit/(loss) 115675 47125
Cost per unit 34.85 92.82
Activity Based Costing System
Calculation of the cost of Lawn Mowers
Particulars Standard Deluxe
Units sold 3200 1800
Selling price 125 200
Less: Direct material cost per unit 30 45
Less: Direct Labour cost 24 36
Revenue per unit 71 119
Total revenue 227200 214200
Less: Indirect costs
Less: Production scheduling cost 40:85 30400 64600
Less: Material handling cost 72:168 13500 31500
Less: Machine set up cost 45:155 5625 19375
Less: Assembly cost 55:45 33000 27000
Less: Inspection cost 25:15 5000 3000
Less: Marketing costs 24000 21600
Total indirect costs 111525 167075
Profit/(loss) 115675 47125
Cost per unit 34.85 92.82
Activity Based Costing System
Calculation of the cost of Lawn Mowers

Findings of the analysis – difference in two system
 THE COST PER UNIT DECREASES DRASTICALLY FOR STANDARD MODEL
WHEN THE ACTIVITY BASED COSTING IS APPLIED.
 THE COST PER UNIT CHANGES FROM $47.55 TO $34.85 FOR STANDARD
MODEL AND FROM $70.25 TO $92.82 FOR DELUXE MODEL.
 THE OVERALL PROFIT INCREASES FOR STANDARD MODEL FROM $75050
TO $115675 AND THE SAME DECREASES FOR DELUXE MODEL FROM
$87750 TO $47125.
 IN SIMPLE COSTING, ALL THE INDIRECT COSTS ARE ALLOCATED USING
MACHINE HOUR AS THE BASE.

Findings of the analysis – difference in two system
 MARKETING COSTS HAS BEEN CONSIDERED TO BE 6% OF THE SALES
REVENUE.
 THERE WERE 6 ACTIVITIES FOR WHICH THE COST ALLOCATION WAS
BEING DONE USING DIFFERENT METHODS.
 THE ALLOCATION IS BEING DONE USING THE FOLLOWING ACTIVITY
BASES:Activity Activity
Cost
Activity Cost Driver
Production scheduling $95000 Production runs
Material handling $45000 Material moves
Machine set up $25000 Machine setups
Assembly $60000 Machine-hours
Inspection $8000 Number of inspections

Decision making – How ABC can improve market
share
 THE ACTIVITY BASED ALLOCATION IS A MORE REALISTIC METHOD OF ALLOCATION
WHICH THE COSTS ARE ALLOCATED BASED ON DIFFERENT ACTIVITY DRIVERS.
 IT IS DIFFERENT FROM CONVENTIONAL OR TRADITIONAL COSTING AND THUS COSTS
ARE ALLOCATED BASED ON THE EFFORTS FOR EACH ACTIVITY OR BASED ON THE
APPROPRIATE KEYS.
 DUE TO THIS THE STANDARD MODEL WILL BECOME CHEAPER CONSIDERING THE
OVERALL COST PER UNIT AND THEREBY IF THE COMPANY ADJUSTS THE SELLING PRICE,
THE SALES OF STANDARD MODEL CAN INCREASE.
 AS PER OLD COST MODEL, THE PROFIT PERCENTAGE OF STANDARD AND DELUXE MODEL
WERE 19% AND 24% RESPECTIVELY WHEREAS AS PER THE NEW COST MODEL, THE
MARGIN CHANGES TO 29% AND 13% AND THEREFORE THE SELLING PRICE ITSELF CAN
BE REDUCED FOR STANDARD MODEL TO INCREASE THE SALES AND MARKET SHARE.

Limitations of the case
 THE GIVEN CASE STUDY DOES NOT CONSIDERS THE COST OF
IMPLEMENTATION OF THE ABC SYSTEM WHICH CAN BE ON THE HIGHER SIDE.
 THE MANAGERS NEED TO ADJUST TO THE SYSTEM AS IT DIRECTLY MEASURES
THEIR PERFORMANCE AND THEREFORE THE ACCEPTANCE OF THE NEW COST
METHOD HAS NOT BEEN ASSESSED IN THE ANALYSIS.
 BEFORE MAKING DECISION BASED ON THE ABC METHOD, THE MANAGEMENT
SHOULD ALSO CONSIDER WHICH COST ARE RELEVANT AND WHICH ARE NOT
AND THEREFORE THE SAME NEEDS TO BE HANDLED WITH CARE.
 APPROPRIATE EXPERTISE SHOULD BE THERE TO ENABLE ABC COSTING WHICH
HAS NOT BEEN DISCUSSED ABOUT.

References
ALEXANDER, F. (2016). THE CHANGING FACE OF ACCOUNTABILITY. THE JOURNAL OF HIGHER EDUCATION,
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ALIEID, E. E. (2016). THE ROLE OF ACCOUNTING INFORMATION SYSTEMS IN MAKING INVESTMENT DECISIONS.
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BARNES, J. L. (2015). HOW TO TELL IF STANDARD COSTS ARE REALLY STANDARD. JOURNAL OF MANAGEMENT
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BROMWICH, M., & SCAPENS, R. (2016). MANAGEMENT ACCOUNTING RESEARCH: 25 YEARS ON. MANAGEMENT
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CHOY, Y. K. (2018). COST-BENEFIT ANALYSIS, VALUES, WELLBEING AND ETHICS: AN INDIGENOUS WORLDVIEW
ANALYSIS. ECOLOGICAL ECONOMICS, 3(1), 145. DOI:HTTPS://DOI.ORG/10.1016/J.ECOLECON.2017.08.005
GOLDMANN, K. (2016). FINANCIAL LIQUIDITY AND PROFITABILITY MANAGEMENT IN PRACTICE OF POLISH
BUSINESS. FINANCIAL ENVIRONMENT AND BUSINESS DEVELOPMENT, 4(3), 103-112.

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