Management Accounting Report: Costing, BREXIT & Activity-Based Costing

This report provides an analysis of management accounting principles, specifically focusing on cost analysis, overhead absorption, and Activity-Based Costing (ABC). The report begins by explaining the overhead absorption rate, calculated using the Direct Labour Hour Method, and highlights the importance of accurate cost allocation. It then details the product costing for W1, W2 and W3, providing the cost per unit. Furthermore, the report explores the application of ABC, emphasizing its relevance for Adeel Ltd. post-BREXIT. The report highlights the benefits of ABC, such as improved cost data, easier tracing of overhead costs, and the ability to identify unnecessary expenses. The suitability of ABC for Adeel Ltd. is discussed, emphasizing its role in cost reduction, accurate cost allocation, and improved decision-making. The report concludes by highlighting the benefits of ABC in terms of transparency and resource management.

Management Accounting
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Production Overhead Analysis Table

Overhead Absorption Rate
 The Overhead absorption rate has been calculated by using the Total overheads incurred by the
respective departments and this does not includes any direct cost.
 The overhead absorption rate has been calculated by using the Direct Labour Hour Method. This
method will provide accurate result as complete information has been provided to calculate
absorption rate

Cost of the Product
 The product cost has been calculated from the total cost after allocation of store and maintenance
expenses to the respective departments in the proportion of the units produced.
 The Product cost of one unit for W3 is £280.41.
 The Product cost of one unit for W1 & W2 is £385.86.

Activity Based Costing
It is the method of costing that identifies the activities in an organization and assigns the cost
of all the activities to each product and services according to the actual consumption. The
importance of ABC costing for Adeel Ltd., after BREXIT will be as follows:
 The ABC costing method will provide more reliable cost data to the company with respect
to its expenditure and hence will assist in setting of a selling price.
 With the ABC costing tracing data related to the overhead cost in the areas of process,
customer and departments becomes easier.
 This method of costing will assist the company to trace all the expenses within and
beyond the factory that is incurred in the production process.
 It helps in discovering the cost that are unnecessary or wasted cost.

Suitability of ABC Costing
 The analysis shows Activity-based Costing is suitable for Adeel Ltd., since it will help the
company in cost reduction which is crucial since the company may incur additional
indirect cost due to the BREXIT movement.
 Allocation of the cost will be accurate since the cost is allocated on the basis of the
consumption done by each activity
 The costing will eventually help the company in making better decisions as the traditional
method will not provide which products and services are profitable and which are at loss.
 Internal process are improved as the management can control activities and resources if
such activities and resources proves unproductive. The ABC costing will provide
transparency and managing resources will therefore becomes easier.