Comparative Analysis: ABC and Absorption Costing at Golden Casket

This report analyzes activity-based costing (ABC) and absorption costing methods for Golden Casket, focusing on the products Min Choc and Diet Choc. The analysis involves calculating costs using both methods, evaluating their applicability, and providing recommendations. ABC costing identifies cost drivers for each activity, while absorption costing uses an overhead recovery rate. The report finds that ABC results in higher costs per unit compared to absorption costing. The recommendation is to continue using the traditional absorption costing method to maintain acceptable product costs and sales volume. Appendices provide detailed calculations for both costing methods, including overhead recovery rates, material and labor costs, and markup calculations. The conclusion emphasizes that sticking with traditional costing is more viable for Golden Casket's financial health and consumer acceptance.

MANAGEMENT
ACCOUNTING

Contents
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
1.Calculation of ABC Costing and absorption costing for both the methods:.......................3
2.Evaluation of Absorption cost technique and ABC technique for the golden basket:........4
3.Advice of whether ABC is viable for the golden casket:....................................................5
CONCLUTION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Management accounting is concerned with calculation of the cost for the department the business
runs during the financial year. This report is connected with activity based costing and traditional
costing approach that has been applied for the business and for both the methods cost has been
calculated for the product min choc and diet choc and after analysing the cost from both the
methods interpretation and recommendation has been made to the golden casket that whether
they continue their existing costing method or should go for activity based costing method.
TASK
1.Calculation of ABC Costing and absorption costing for both the methods:
 ABC Costing:
Determination of cost drivers of each activity and the absorption rate: -
Cost Pool / Activity Cost driver
Overheads Activity Absorption
rate
£ units £
Setup cost No of Setup 20000 370 54.05
Inspection Cost No of Inspection Setup 20000 700 28.57
Material handling Cost No of Material handling 60000 1000 60.00
Calculation of Cost of each statement: -
Min Choc Diet choc
Units
Price/cost
(£)
£
Units
Price/
cost (£) £
Direct material 1000 35 35000 6000 55 330000
Direct labour 1000 42 42000 6000 136 816000
Store costs 200 54.05 10810 170 54.05 9188.50
Production set up
costs
350 28.57 9999.50 350 28.57 9999.50
Quality control Cost 200 60.00 12000 800 60.00 48000
Units produced 1000 109809.5
0
6000 121318
8
Cost per unit 109.81 202.20

Mark up @ 25% on
Cost
27.45 50.55
Selling price of the
product
137.26
per box
252.75
per box
 Absorption Costing:
Calculation of recovery rate along with statement showing cost per unit:
Production overhead = £100000 / 50000 = £ 2 per machine hour
Particular Min choc Diet Choc
Direct Material 35000 330000
Direct Labour 21000 102000
Prime Cost 56000 432000
Add: Recovered Overhead 4000 96000
Total Cost 60000 528000
Total Units 1000 6000
Cost per unit 60 per box 88 per box
Mark up @ 25 % on cost 15 per box 22 per box
Selling per box £75 per box £ 110 per box
2.Evaluation of Absorption cost technique and ABC technique for the golden basket:
The activity based costing is the new technique which mainly focuses on calculating the cost on
the basis of cost drivers or we can say that cost should be allocated according to process or
department wise and to calculate the same the cost drivers needs to be allocated. However,
whereas traditional system is concerned, it that method recovery rate has to be calculated of the
overheads and then allocation has to be made according to such rate and over and under recovery
will be charged or transferred to profit and loss statement.
On the basis of the above calculation the conclusion that has been made that when the cost of the
overheads is divided into drivers using ABC costing the overall cost that has been arrived for the
product Min choc and Diet choc has been arrived £ 109.81 and £ 202.20 respectively which is

way higher when the cost has been calculated using absorption costing method £60 and £ 88 per
box respectively.
If the organisation will consider the product cost and their related drivers, then in that case
traditional costing method has been suggested as it will reduce the final price of the product and
will be cost effective to the consumer. The higher may include higher margins but the sale of
Min choc and Diet choc will be suffered if activity based costing has been adopted as the method
for calculation of cost.
3.Advice of whether ABC is viable for the golden casket:
On the basis of the above cost statement regarding the product min choc and diet choc, the
suggestion is to continue with the traditional costing method as they are following in the past
because this method will maintain the cost of the product to an acceptable level for Golden
casket and if they follow new technique then product cost will increase automatically that will
not be accepted by the consumer at all and sales volume has been affected drastically.

CONCLUTION
The above report shall be based on the method of costing the entity should adopt to implement in
their organisation. The cost has been calculated in the above statement using activity based
costing and traditional costing and suggestion has been made to them that which method golden
casket should adopt in their business.

REFERENCES
Books and Journals
Laela, S.F., Rossieta, H., and Ismal, R., 2018. Management accounting-strategy coalignment in
Islamic banking. International Journal of Islamic and Middle Eastern Finance and
Management.
Samuel, S., 2018. A conceptual framework for teaching management accounting. Journal of
Accounting Education. 44. pp.25-34.
Tan, H.C., 2019. Using a structured collaborative learning approach in a case-based management
accounting course. Journal of Accounting education. 49. p.100638.
Wang, S., Wang, H. and Wang, J., 2019. Exploring the effects of institutional pressures on the
implementation of environmental management accounting: Do top management support
and perceived benefit work? Business Strategy and the Environment. 28(1). pp.233-243.

APPENDIX
Absorption Costing Workings:
 Calculation of recovery rate in case of absorption costing:
Production overhead = (£100000 / 50000) = £ 2 per machine hour
 Direct material cost:
Min Choc = (35 * 1000) = 35000
Diet Choc = (55 * 6000) = 330000
 Direct labour cost:
Min Choc = (21 * 1000) = 21000
Diet Choc = (17 * 6000) = 102000
 Recovered Overhead:
Min Choc = (2 * 2 * 1000) = 4000
Diet Choc = (2 * 8 * 6000) = 96000
 Mark up on cost @ 25 % on cost:
Min Choc = (60 * 25 / 100) = 15 per box
Diet Choc = (88 * 25 / 100) = 22 per box