Management Accounting Project: Comparing Jackson Ltd Costing Methods

This project focuses on a management accounting analysis of Jackson Ltd, a firm producing two products, Fred and Martha. The assignment compares the traditional costing method with Activity-Based Costing (ABC) to determine unit costs and overhead allocation. The analysis highlights the inefficiencies of the traditional method, which leads to under-costing of one product and over-costing of the other, potentially impacting pricing decisions and market competitiveness. The project calculates overhead costs using both methods, demonstrating how ABC provides a more accurate product cost determination, which influences pricing, product mix decisions, and cost management. The project also discusses the advantages of ABC, such as improved decision-making and competitive advantage, while acknowledging its disadvantages, including implementation costs and potential resistance. References are provided to support the analysis.

MANAGEMENT ACCOUNTING
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MANAGEMENT ACCOUNTING
The given situation pertains to a firm named Jackson Ltd which manufactures two products
named Fred and Martha. The various details about the cost involved has been given and
effect of overhead allocation according to traditional method and the Activity Based Costing
(ABC) approach needs to be highlighted. This is being performed on account of a competitor
pricing Martha at a lower price in comparison to Jackson Ltd which raises suspicion on the
incorrect costing of the two products primarily on account of improper manufacturing
overhead allocation. The various aspects are as highlighted below.
a) In order to determine the unit cost for the given products, the main issue is with regards to
the allocation of manufacturing overheads for the two products.
Cumulative overhead costs related to manufacturing = $ 816,000
Annual quantity produced of Fred = 1000
Annual quantity produced of Martha = 5000
Per unit direct labour hour consumption for Fred = 2 hours
Per unit direct labour hour consumption for Martha = 3 hours
Hence, cumulative annual direct labour hours = 2*1000 + 3*5000 = 17,000
Manufacturing overhead per labour hour = 816000/17000 = $ 48
Considering the direct labour consumption for Fred, overhead manufacturing cost allocated to
each unit of Fred as per the above rate = 48*2= $ 96
Considering the direct labour consumption for Martha, overhead manufacturing cost
allocated to each unit of Martha as per the above rate = 48*3= $ 144
Considering the above computation, the cost per unit for the two products is highlighted
below (Emmauel and Otley, 2010)

MANAGEMENT ACCOUNTING
The above table suggests that per unit for Martha is $249 while that for Fred is $ 166.
b) For allocation of the overhead costs in accordance with the ABC technique, the primary
step is to compute the per activity cost when subsequently would be applied to the given
products.
This has been illustrated in the following table based on the data provided in relation to the
various sub-activities and their respective cost driver (Drury, 2006).
c) Using the information presented in the above table, the manufacturing cost allocation for
the two products can be proceeded in the following manner (Heisinger, 2009).
Machine Related Costs
Unit machine hour cost = $ 50
Total machine hours consumed by each unit of Fred = 4
Unit overhead (Machine Related) cost for Fred = 4*50 = $ 200
Total machine hours consumed by each unit of Martha = 1
Unit overhead (Machine Related) cost for Martha= 1*50 = $ 50
Setup and Inspection
Setup costs incurred on in 1 run = $ 4,500
Fred production during 1 run = 50 units

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Martha production during 1 run = 250 units
Per unit inspection cost for Fred = (4500/50) = $ 90
Per unit inspection cost for Martha = (4500/250) = $ 18
Engineering Costs
Engineering cost involved in every order change = $ 900
Since 75% of the engineering costs are on account of Fred, hence share of Fred in
engineering cost = (75/100)*90000 = $ 67500
Per unit engineering cost for Fred = 67500/1000 = $67.5
Since 25% of the engineering costs are on account of Martha, hence share of Fred in
engineering cost = (25/100)*90000 = $ 22,500
Per unit engineering cost for Fred = 22500/5000 = $4.5
Plant related Costs
It is known that 80% of the factory area is used for production of Fred while the remaining
20% is used for Martha production.
Total plant related costs spent on Fred = (80/100)*96000 = $ 76,800
Plant related costs per unit (Fred) = 76800/1000 = $ 76.8
Total plant related costs spent on Martha= (20/100)*96000 = $ 19,200
Plant related costs per unit (Martha) = 19200/5000 = $ 3.84
Overhead cost allocation
Cumulative overhead cost attributable to production of Fred on a unit basis = 200 + 90 + 67.5
+ 76.8 = $434.3

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Cumulative overhead cost attributable to production of Martha on a unit basis = 50 + 18 + 4.5
+ 3.84 = $76.34
Thus, the costing of Fred and Martha in accordance with ABC technique is reflected in the
table highlighted below.
d) Considering the 120% pricing approach, unit price of Fred taking into consideration the
cost of Fred determined by ABC = 504.3*1.2 = $ 605.16
Unit price of Martha taking into consideration the cost of Martha determined by ABC =
181.34*1.2 = $ 217.6
e) It is apparent from the above that the traditional approach of allocating the overhead cost
is highly inefficient as in this case in accordance with the traditional approach, there is an
under-costing of Fred and over costing of Martha (Heisinger, 2008). As a result, the
market price of Fred is significantly lower than the actual price determined by ABC
technique.
Thus, traditional costing approach has led to incorrect pricing of the product which
potentially would impact the market share and reputation of the company adversely. This is
the reason why the competitor was able to price Martha lower than the price offered by the
company. Sticking to such traditional approaches in the long run can potentially lead to
incorrect decision making with regards to the most profitable product mix. For instance, in
the given case, in actuality higher price charged on Martha is subsidising the lower price
charged on Fred (Drury, 2006).
f) The benefits of introduction of ABC costing are highlighted below (Weyganth, Kimmel
and Kieso, 2009).
 It helps in accurate determination of product cost.
 It helps in determination of pricing decisions as price is invariably linked to cost.

MANAGEMENT ACCOUNTING
 It leads to improved decision making regarding product mix.
 It provides key information about the cost behaviour critical in cost management and
management decision making.
 Since, the overhead activities can be traced to exact activities, hence, the management
can take prudent measures to reduce the cost by business process reengineering
besides enhancing the efficiency of the existing processes through the use of scientific
management
 Owing to better cost and pricing decisions, it improves the competitive advantage of
the firm in the market.
 It enables the company to take better decisions in relation to capacity expansion and
also continuation and discontinuation of particular product or service line.
g) The various disadvantages associated with ABC technique are listed below (Kinney and
Rainborn, 2012).
 Considering that various activity pools need to be identified and also the cost driver,
hence implementation of ABC costing is expensive and needs special expertise for the
implementation of the same.
 This technique is difficult to be implemented by small firms due to expertise and
resource allocation which is required.
 There may be resistance from the managers in relation to adoption of ABC costing
which needs to be dealt with.
 Additional expense needs to be incurred on training of managers involved in decision
making so that they can use the information generated by ABC costing.
 There are issues with regards to implementation in the sense that activities need to be
broken down into smaller activities and the cost driver needs to be identified
meticulously.
 Further, there are instances when the sub-division of activities is carried too far and
hence the underlying costs tend to overweigh the benefits in this case (Heisinger,
2008).
References

MANAGEMENT ACCOUNTING
Drury, C. (2006) Cost and Management Accounting: An Introduction. 6th ed. New York:
Cengage Learning.
Emmauel, R.C. and Otley, T.D. (2010) Accounting for Management Control. 8th ed. London:
Cengage Learning.
Heisinger, K. (2009) Essentials of Managerial Accounting. 4th ed. London: Cengage
Learning.
Kinney, R. M. and Rainborn , A. C. (2012) Cost Accounting: Foundations and Evolutions.
9th ed. New York: Cengage Learning.
Weyganth, J.J., Kimmel, D. P. and Kieso, E. D. (2009) Managerial Accounting: Tools for
Business Decision Making. 5th ed. Sydney: John Wiley & Sons.