Comparative Cost Analysis of Jackson Ltd. Products: Fred & Martha

This report examines the cost accounting practices of Jackson Ltd., focusing on the production of two products, Fred and Martha. It compares and contrasts conventional costing methods with activity-based costing (ABC) techniques to determine product costs and pricing strategies. The report includes detailed calculations of per-unit costs using both approaches, highlighting the differences in overhead allocation and the potential for mispricing under conventional methods. It also details the cost per activity for each activity cost pool in ABC, and calculates the selling price using the ABC method. Further, the report outlines the benefits and disadvantages of using ABC, emphasizing its ability to provide more accurate cost information for decision-making. The conclusion suggests that Jackson Ltd. can optimize its business operations by adopting ABC for improved profitability and competitive advantage.

Information to
management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
a). Per unit cost by using conventional approach:.......................................................................1
b). Cost per activity for each activity cost pool:.........................................................................1
c).Product cost per unit as per Activity-based-costing technique: .............................................2
d). Calculate the price:................................................................................................................3
e). How conventional value approach leads to misprice the product:.........................................3
f). Benefits of activity based Costing..........................................................................................4
g). Disadvantages of using ABC costing...................................................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Management accounting helps the managers and other key members to take an
independent decisions so that they could able to frame decisions in terms of analysing the cost. If
there is any wastage of cost, then with the help of this, the cost can be eliminate. Normally, this
is occurred under the manufacturing entities (Islam, and Hu, 2012). Under this project, the
Jackson limited produces two product Fred and Martha and the cost accountant emphasis to
calculate the cost by using conventional approach and activity based costing methods. In this
project, the company opt activity based accounting approach so that the price of the product can
be reduced by way of eliminating the extra cost. Under this project, the cited company needs to
make their business operations effectively so that the business can get their objectives.
a). Per unit cost by using conventional approach:
Particular
Martha cost per
unit
Fred cost per
unit
Direct Material 60 40
Direct Labour 45 30
Manufacturing overheads 816000/6000 136 136
Total per unit cost 241 206
Under this calculation, the costs as per the conventional costing, are calculated and this is
the method which was used earlier while calculating cost. All direct costs are the same as earlier
but the manufacturing overheads cost changed under this method. However, there are so many
advance techniques emerged in the market under which the costs are optimum used. Under this
technique, the manufacturing overheads are calculated by sum up of all entire manufacturing cost
and then divide it by total number of units.
b). Cost per activity for each activity cost pool:
An activity cost pool is a pre-set costs group which arises at the time of specified
operations are performed in a firm (Activity based costing, 2017). By accounting for entire costs
are incurred under a particular activity with a pool, this is an easy process to allot those costs to
products and covered an accurate forecasting of production costs. Activity cost pool is the entire
cost required to execute production.
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For using ABC method, company need to assess the activities which are helpful for
making the procedures to company's cost object. This is an essential task to record that this
costing method can be implemented in any type of business. Although, service firm can have the
benefits from ABC, more particularly in competitive markets. It is the foremost need to
determine the activities by the company, then assess the estimated costs connected with each
activity. Afterwards, choose an activity which better acts as a driver for every activity cost pool.
If machine fix is one of the company's cost pools, the allocation base can be the number of set
ups which is required to be done over the years. For example, this makes sense to implement the
number of investigations which are done.
Particulars
Machine related
cost Setup and inspection Engineering
Plant related
cost
Cost Driver Machine hours No. of production run
No of order
change Sq. foot of space
Total cost 450000 180000 90000 96000
Cost driver
activities 9000 hours 40 runs 100 change 1920 Sq. ft
cost per activity 50 4500 900 50
As per above mentioned calculation, the cost per activity is different as per machine
connected cost, set-up inspection, engineering and plant related cost are 50, 4500, 900 and 50
respectively.
c).Product cost per unit as per Activity-based-costing technique:
Particulars FREDs MARTHAs
Direct material 60 40
Direct labour 45 30
Machine related
cost 200 50
Set up and
inspection 90 18
Engineering 12.5 2.5
Plant related cost 76.8 3.84
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Total cost (per
unit) 484.3 144.34
By using activity based costing, Fred and Martha's cost per unit is calculated as 484.3 and 144.34
respectively (Nielsen, Mitchell and Nørreklit, 2015). This costing technique is used in order to
make the price of the company effective so that the company can able to have the competitive
advantage in a better manner. This will also help out to make their business sustainable and
prosperous. After considering these prices, the company is able to grow their sale in an effective
manner.
d). Calculate the price:
Particulars FREDs MARTHAs
Direct material 60 40
Direct labour 45 30
Machine related
cost 200 50
Set up and
inspection 90 18
Engineering 12.5 2.5
Plant related cost 76.8 3.84
Total cost 484.3 144.34
selling price (per
unit) 581.16 173.208
The selling price of the product under the activity based costing of the are 581.16 and
173.21. which is better than the conventional methods of costing.
e). How conventional value approach leads to misprice the product:
Under the conventional approach, a common pre- decided overheads rate is implemented.
Entire manufacturing overhead costs are merged into single cost pool, and they are used to goods
on the basis of single cost driver which is connected to production volume. Direct labour hour,
machine-hours and total units of production are the main drivers under conventional costing
which are more frequently implemented. While, on the other hand, ABC categorises costs into
two main stages. Under one stage, the establishment of the activity cost pools are done. In other
stage, for each activity cost pool, cost driver is determined. Henceforth, the costs under each pool
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are allotted to each product line under proportion to the amount of the cost driver used by the
each product line.
Under the activity based costing technique, Fred and Martha product cost per unit is
calculated as 581.16 and, martha's per unit price is calculated 173.21. On the other hand, as per
the conventional approach, the per unit cost of product fred and martha are 206 and 241
respectively. Henceforth, product Martha cost is optimum by using conventional value approach
(Harris and Durden, 2012). But product fred cost is at an optimum level when the cited company
use the activity based costing method. Henceforth, the cited company can make their product
accordingly.
Illustration 1: ABC vs. Treditional Methods, 2017
f). Benefits of activity based Costing
Activity based costing are defined as managerial accounts process that are useful in analysing
the final cost of the goods and services offered by delivering the overhead cost to the direct
costing process (Activity based costing, 2017.). This is useful in assigning cost factors to the
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activity which are operating at business organisations according to the actual process in which
the resources are to be consumed. This is useful in sharing their overheads cost in order to know
the actual prices of the products.
Advantages
The major benefits of ABC activities are related with finding out individual cost of the
products and the services which have been offered to there potential customers. If the overhead
cost are being transferred in finding out single cost of goods. This in turn is beneficial for
business in order to evaluate the non profitability factors that are entering into effective product
lines.
The major benefits are described as:
 There should be scientific and equitable prices adopted by making reduction in the prices
of products that are utilising less resources and the prices of those products should be
increased which are mostly demanded by the customers (Bobryshev and et. al., 2014).
 It is useful in giving services with added values or making innovations in the existing
goods on the basis of the cost which have been incorporated actually.
 All those should be removed from the product lines which are non profitable. The
outcome of this will be that profitability will be increase without making changes in the
pricing policy.
 The cost which have been made on the maintenance and running of the non remunerative
acts which helps in increasing the overall profitability factors of firms.
 The resources should be implemented effectively in profitable ways so that they can
easily recover all the cost factors (Islam and Hu, 2012).
 The tools which are used for performance management systems should be compatible.
This can be achieved by analysing the contribution factors of each persons in determining
the cost and thereby profit ratios.
 The waste should be exposed and the inefficient factors that are valuable in boosting
productivity ratios.
 Identification of all those activities which are not adding any values or the task which are
not having any contribution towards the final values of the process involved in
manufacturing products (Yigitbasioglu and Velcu, 2012). Example: The activities which
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are not adding any values to products include duplication process and inspections which
are not needed.
 For effective planning of all the strategies there should be appropriate figures provided in
order to find out there values.
However, there are certain questions which are need to consider while implementing the ABC
technique in their operations. These are:
 Do the cost accountant entirely know the resource implications of using, running and
managing ABC technique (Lambert and Sponem, 2012).
 Do the company have resources to use ABC.
 Will the costs outweigh the profit.
 Do the company have enough stakeholder buy-in.
g). Disadvantages of using ABC costing
There are various disadvantage which are analysed in using ABC costing methods which
are described as:
These activities cannot be implemented those companies which are having there business
operations at very small small scales as they are not able to find out the single cost of each
product.
If the overheads cost are very less or are at smaller scales than there is no use of
implementing activity based Costing techniques.
Many of the companies are not focusing on expanding there product lines and they are
only dealing in producing single products. Thus in this situations activity costing cannot be
applied at the work place (DRURY, 2013).
The ABC methods are not useful in preparing the statements which reflect the monthly
profit ratios which have been achieved by firms.
There is difficulty faced in identification of the total activities or task which influences
the costing factors.
By this methods we cannot select the best and the most appropriate cost driving factors.
The activities which have been conducted at business organisations are not helpful in
analysing the cost factors which have been used in manufacturing them.
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CONCLUSION
From the above report, this is analysed that the Jackson company can make their business
operations in a optimum manner by using the advanced costing technique. Under this report, this
is observed that the company uses conventional approach and activity based costing approach for
ascertaining the price in an effective manner. The activity based costing approach used to assess
the cost of the product Martha and Fred, and then the pricing strategy is made in order to have
the maximum sales. So that the management of the company is able to make their business
effective and this will also make the business operations in a more smooth way so that the firm
can earn profits in an effective manner.
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