ACCT20076: Improving Cost Management at Sony Manufacturing Company

This report provides a comprehensive analysis of Sony Manufacturing's current traditional costing system and contrasts it with activity-based costing (ABC). The analysis includes computations of target prices using both methods, revealing discrepancies and inefficiencies in the traditional approach. Key findings indicate that the traditional system inadequately allocates overhead costs, leading to inaccurate product pricing. The report recommends adopting ABC to enhance cost control and improve pricing strategies. By identifying cost pools for each activity involved in production, Sony can gain better insights into its cost structure. The report concludes with actionable recommendations for implementing ABC, supported by relevant academic references. Desklib provides access to this and many other solved assignments to help students.

PRACTICAL AND WRITTEN ASSESSMENT

TABLE OF CONTENTS
• EXECUTIVE SUMMARY
• ANALYSIS
• FINDINGS
• RECOMMENDATIONS
• REFERENCES

EXECUTIVE SUMMARY
 Accuracy is an essential element to be ensured in accounting.
 Accurate accounting helps in creation of budgets for a business enterprise that further helps in controlling
the business activities.
 An acknowledgement of inflows and outflows of money is gained through accurate accounting practices.
 Cost accounting is that branch of accounting that helps the management of business to estimate the cost &
selling price of products which is important for the purpose of formulating business policies.

ANALYSIS
Computation of Target Prices for The Three Models Using Traditional, Volume-Based Product-Costing System
Traditional (Volume - Based Product -
Costing System)
Particul
ars
Total
Product
Cost
Target Price
Multiplier
Target
Selling Price
Simple
Model 105 110 % $ 115.50
Standar
d Model 215 110 % $ 236.50
Super
Model 232 110 % $ 255.20

CONTINUED...
Computation of new product costs for the three products using the data collected by controller
Particulars
(Cost Pool) Item (Cost Drivers) Amount Model
Number of
Units Calculation Amount
Machine Time
Machine
Depreciation $ 1,480,000.00 Simple Model 20000
(1600000 * 0.4) /
20000 $ 32.00
Machine
Maintenance $ 120,000.00 Standard Model 1000
(1600000 *
0.13) / 1000 $ 208.00
Total $ 1,600,000.00 Super Model 10000
(1600000 *
0.47) / 10000 $ 75.20
Engineering
Hours Engineering $ 350,000.00 Simple Model 20000
(725000 * 0.47) /
20000 $ 17.04
Inspection and
Repairs of Defects $ 375,000.00 Standard Model 1000
(725000 * 0.06) /
1000 $ 43.50
Total $ 725,000.00 Super Model 10000
(725000 * 0.47) /
10000 $ 34.08

CONTINUED...
Number of
Material
Orders
Purchasing,
Receiving and
Shipping $ 250000.00 Simple Model 20000
(650000 *
0.47) / 20000 $ 15.275
Material
Handling $ 400000.00 Standard Model 1000
(650000 *
0.08) / 1000 $ 52.00
Total $ 650000.00 Super Model 10000
(650000 *
0.45 / 10000 $ 29.25
Factory
Space Usage
Depreciation,
taxes, and
insurance for
factory $ 300000.00 Simple Model 20000
(595000 *
0.42) / 20000 $ 12.495
Miscellaneous
manufacturing
overhead costs $ 295000.00 Standard Model 1000
(595000 *
0.15) / 1000 $ 89.25
Total $ 595000.00 Super Model 10000
(595000 *
0.43) / 10000 $ 25.585

CONTINUED...
New Product Cost
Simple Standard Super
Annual Sales (In Units) 20000 1000 10000
Product Costs:
Raw Material $ 10 $ 25 $ 42
Direct Labor $ 10 (0.5 hrs. @ $20)
$ 20 ( 1 hr. @
$20)
$ 20 (1 hr. @
$20)
Manufacturing Overhead $ 76.81 $ 392.75 $ 164.11
Total Product Cost $ 96.81 $ 437.75 $ 226.11
Rounded to Nearest Dollar $ 97 $ 438 $ 226

CONTINUED...
Calculation of New Target Price for The Three Products Based On The ABC System
Particulars
Total Product
Cost
Target Price
Multiplier Target Selling Price
Simple Model $ 97 110 % $ 106.70
Standard
Model $ 438 110 % $ 481.80
Super Model $ 226 110 % $ 248.60
Comparing the new target price for the simple model lawnmower with its current actual selling price
Comparing Prices
New Target Price $ 106.70
Current Actual
Selling Price $ 110.00
Difference $ 3.30

FINDINGS
• On the basis of the above workings it has been found that the traditional costing system that Sony
Manufacturing is using currently is using is not good for the company.
• Under the traditional costing system, the company is identifying its overhead costs, then making estimates
for such costs for specific time durations.
• Cost drivers are chosen by the company for using them into its calculations regarding estimated of cost
driver. Finally using these estimated the predetermined overhead rates are calculated by the company.
• It is also found that for allocation of costs as per the activity based costing method all the activities that are
involved in creating a product are identified.
• Further these activities are divided into cost pools that is inclusive of all the individual costs that are related
to the particular cost pool.

RECOMMENDATIONS
• Sony Manufacturing Company is having a strategic opportunity to adopt activity based costing system.
• It is recommended for the company as using this system it will be able to have better hold over its costs and
it will enable the company to make its pricing strategy more appropriately.
• The company can enhance its process of costing in three ways.
• To begin with the cost pools of the company will expand in number which can be effectively used in
assembling of overhead costs.
• The current method of company accumulates all its costs into a single pool with the help of new costing
system it can be changed into having a cost pool for each of its activities.

REFERENCES
• Altawati, N. O. M. T. and Elmabrok, A. A., 2018. A review of traditional cost system versus activity based
costing approaches. Advanced science letters. 24(6). pp.4688-4694.
• Alami, D. and ElMaraghy, W., 2020. Traditional and activity based aggregate job costing model. Procedia
Cirp. 93. pp.610-615.
• Mahesha, V., 2022. A comparative study of activity based costing and traditional costing as a fragment of
pricing. SAARJ Journal on Banking & Insurance Research. 11(2). pp.1-9.
• Duran, O. and Afonso, P. S. L. P., 2020. An activity based costing decision model for life cycle economic
assessment in spare parts logistic management. International Journal of Production Economics. 222.
p.107499.
• Joseph, C. S., Kumar, F. P. and Kumar, R. M., 2019. Implementing activity based costing among automotive
engineering industries in small and medium enterprises sector of Tamil Nadu. Int. J. Mech. Eng. Technol.
10(1). pp.550-563.

THANK YOU !!!