ACC310 Management Accounting Report: ABC Costing Analysis, S1 2019

This report examines the application of Activity-Based Costing (ABC) within a manufacturing company, Sewing Machine Australia, which produces both basic and advanced sewing machine models. The company currently uses a job costing system, but faces challenges with accurately allocating overhead costs, leading to potential mispricing and losses on the advanced model. The report analyzes the limitations of the existing job costing system, particularly in overhead allocation, and proposes the adoption of ABC. The report provides a quantitative and qualitative analysis, comparing the financial outcomes under both systems, including detailed overhead allocation based on various activities like inspection, production scheduling, and assembly. It concludes that switching to ABC would enable better pricing strategies, improved profitability, and more effective cost control. The report also includes a literature review supporting the findings and recommendations.

MANAGEMENT ACCOUNTING
NAME OF THE STUDENT
NAME OF THE UNIVERSUITY
STUDENT ID

Sewing Machine Australia is engaged in
supplying the used as well as new sewing
machines for industrial use and the
associated parts for applications of
commercial sewing. Company’s range of
heavy duty sewing machines fulfils purposes
of commercial industries and it provides its
goods in Australia as well as some of the
overseas countries. The company mainly
manufacture and delivers 2 types of sewing
machines – basic models and the advance
model. Instead of high sales of advance model
the company is incurring loss on that model.
The company uses job costing system for
Introduction

Job costing is the system used for
accumulating and assigning the
manufacturing costs for an individual output
unit. This approach is used while more than
one item is produced by the company those
are different from each other in some aspects
(Weygandt, Kimmel and Kieso 2015). As there
is difference is product manufactured by the
company that is the basic model and advance
model, the system used by the company
requires separate record for job cost for each
of the model. Under this approach direct
labour and direct material actually used for
Problem statement

Major problems that the company as well as the world is
facing with the job costing system are as follows –
Base of overhead allocation – overhead allocation
under job order costing is made on the basis of a
specified allocation base. In other words, cost
accountants use the known cost as the proxy for
allocating unknown costs. For instance, the direct
labour hours is known to the manufacturer for each
product. However, if the manufacturer assumes that
overheads amount that will be spent by each product
will be proportional to labour hours, direct labour hours
will be used as the basis of allocation
Rate of allocation – once the basis for allocation is
determined overheads are segregated amongst various
cost objects on the basis of the consumption of
allocation base. For instance, Sewing Machine Australia
manufactures 2 types of machines, basis model
requires 10 labour hours and advanced model requires

Implications – while using the allocation rate
for segregating the cost of overheads, it is
assumed that direct relationship is there
among the amount incurred for overheads
and the basis of allocation. In other words, it
means that with increase in labour hours
overheads will also go up in approximately
same proportion. However, practically it is not
the case as overheads does not have direct
and proportional relationship with any other
costs
Controlling overhead costs – as the
estimates are for the purpose of quotation
only, it does not offer effective means to
control the overhead costs. Management are

Quantitative and quantitative analysis
As the company is in the view there is some issues in
their costing system which in turn misguide their pricing
systems it wants to adopt the activity based costing
system for the purpose allocating the overheads that will
enable it to establish better pricing for the products.
Information regarding the company’s business for the
year 2018 has been collected as follows –
Total overhead costs and the activities are detailed
below –
Inspection - $ 30,000
Production schedule - $ 200,000
Assembly - $ 80,000
Machine set-up - $ 40,000

Activities used by the models as follows –
In addition to that selling and administration expenses
for advance model = $ 300,200, office rent = $ 42,800
and interest expenses = $ 40,500
Other details –
The advanced model is sold under the existing system
at total price plus 30% and wants to maintain the price
system same as per the new system.

Under the existing job costing approach the
overhead allocation considering the labour cost as
the basis of allocation will be as follows –

verhead allocation as per activity based costing –

As the customers are interested in buying the advance
model, it seems that the selling price of the advance
model is cheap as compared to the competitors.
Profit and loss statement for advance model under
both the systems is as follows –

From the above interpretation it can be
identified that using the ABC costing system
in place of the existing job costing system it
can enhance its profits and establish better
pricing system. Further, it will help the
company to resolve the issues it is facing at
present regarding the loss from its advance
model. Hence, it is recommended that the
company shall switch to ABC costing
approach for allocating overheads that will
help to allocate the overheads in m ore
systematic way and establishing better
pricing system which in turn will improve its
profitability.
Conclusion and recommendation

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Heavy Duty Industrial Sewing Machine Australia.,
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https://www.sewingmachinesaustralia.com.au/
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Reference