Management Accounting: Cost Accounting Systems and ABC Report

This report delves into the intricacies of cost accounting systems and techniques, focusing on Activity Based Costing (ABC). It begins with an executive summary outlining the core concepts and the application of various managerial tools for decision-making. The report then presents a detailed analysis of cost accounting data, including quantitative and qualitative aspects, with graphical presentations to illustrate the cost components. The problem statement highlights the importance of job costing for organizations producing tailor-made or customized products. The report then explores the advantages and disadvantages of the job costing system, followed by a detailed analysis of the Activity Based Costing system. The report includes the application of cost data and the computation of overhead allocation rates, and the per-unit costs, culminating in a projected income statement to ascertain the profitability of the products. The conclusion emphasizes the importance of cost accounting for effective management and recommends the adoption of cost accounting methods that align with the nature of the business. References and bibliography are provided at the end of the report.

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student:
Name of the University:
Author’s Note:

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Executive Summary:
This report is prepared to analyze and understand various concepts and issues of cost accounting
systems and techniques. There are various managerial tools and techniques, which can be applied
in the business to help in various managerial decisions making. There are various traditional
tools and techniques of the cost accounting system but hose have some limitations. To eliminate
those limitations, various cost and management accounting tools and techniques have been
developed. In this report such an advanced cost accounting system the Activity based costing
system has been analyzed and illustrated with a hypothetically selected cost accounting data.
Lastly, the report concludes with a recommendation for business organizations for adoption of an
effective cost and management accounting system in their business practice.

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Table of Contents
Introduction:....................................................................................................................................3
Statement of the problem:................................................................................................................3
Quantitative and qualitative data presentation and analysis:...........................................................4
Graphical presentation of the cost data:.......................................................................................5
Analysis of the model:.................................................................................................................8
Conclusion:......................................................................................................................................9
References and bibliography:........................................................................................................10
Appendix:......................................................................................................................................12
Activity Based Costing Application:.........................................................................................12

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Introduction:
Cost accounting is the process of ascertainment of cost and process of cost related
information generation for helping in managerial decision-making. There are various cost
accounting tools and techniques, which can be applied in business practice to achieve the
objective of the cost and management accounting. Before the revolution in the business world,
the application of cost and management accounting tools was very rare and there were no such
developed and improved cost accounting tools and techniques. With the revolution in the
business and complexities in the business management, various cost accounting tools and
techniques have been developed which can be applied to the business for efficient cost
management and managerial decision-making. In the following parts of this report some of such
advanced cost and management accounting tools have been applied and illustrated with the help
of a practical cost accounting data (Fullerton, Kennedy and Widener 2013).
Statement of the problem:
There are various cost accounting tools and techniques, which are applied to various
business organization based on their nature of business and business activities. For example,
Process costing for organization manufacturing goods using more than one process, batch
costing for manufacturing units manufacturing goods in a huge quantity and lastly, the batch
costing system for some organization who are producing and supplying goods, on a tailor made
basis or manufacturing customized goods. Therefore, job costing is applicable for those
organizations that are producing goods different from each unit, which means goods are
produced as per the customers’ requirement and specification. Each order differs from the other

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and needs different materials and different types of processing (Fullerton, Kennedy and Widener
2013).
Therefore, organizations serving orders with tailor made products or customized products
need to apply the job costing system for their cost and management purpose. There are various
advantages and disadvantages of the job costing system, and it is industry specific only, it cannot
be applied to any other type of industries efficiently.
Quantitative and qualitative data presentation and analysis:
Cost accounting is the method of ascertainment of costs of production of any product or
rendering of any services. The cost accounting method can be applied using various cost
accounting data and information (Fullerton, Kennedy and Widener 2013). If proper information
are not there and the proper cost accounting data is not there then the effective and efficient
application of cost accounting tools and techniques could not be possible. In the following parts
of this report, some of such cost accounting data has been presented and the qualitative and
quantitative aspects of the cost accounting data has been analyzed and illustrated using the
activity based costing system. In the first part of the cost data the basic information have been
provided and in the last part of the cost data the additional information have been provided for
efficient allocation and absorption of the overhead.
Cost Data for the month of May 2019
Opening stock of inventory 40,000
Cost of Materials Purchased 140,000
Closing Stock of Materials 20,000
Direct Labor Costs 70,000
Indirect Material Costs 4,000
Indirect Labor Costs 5,300

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Materials handling costs 4,500
Setup costs 5,000
Selling and distribution expenses 4,000
Profit margin on costs 20%
Product Details:
Product A Product B
Units Produced 400 200
Materials 70,000 90,000
Direct labor 30,000 40,000
Number of Materials Movement 10 6
Number of Machine Setups 11 5
Additional Information:
1. Indirect materials are to be allocated on the basis of
consumption of direct materials
2. Indirect labor costs are to be allocated as a percentage of
direct labor costs
3. Rest of the overhead costs needs to be allocated using
suitable basis
Graphical presentation of the cost data:
It can be observed from the problem statement that, there are various cost data and
information relating to two products, Products A and Product B. Cost components of Product A
and Product B can be shown comparatively using the following pie charts .

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Product A
67%
Product B
33%
Units Produced
In the above pie chart the number of units producced has been compared and presented. It
can be observed that, 33% of the total production is generated from product B and 67% of the
total production is generated by product A. It implies, two third of the total produciton is of
product A and the remaining production is of product B (Fullerton, Kennedy and Widener 2013).
Product A
63%
Product B
38%
Number of Materials Movement

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Some of the activity causing an increase in the overhead costs can also be compared and
presented using the graph as above. It can be observed from the problem that, there is total 16
materials movement in the month, of which 62% materials movements are for product A and
38% of the materials movement is for product B, and in the same way the number of machine
setups can be presented (Kaplan and Atkinson 2015).
Product A
69%
Product B
31%
Number of Machine Setups
Cost accounting data and information is the collection of facts and figures related to the
costs of manufacturing products and rendering services. It is the base of cost accounting costs of
products and services can be computed from the cost accounting information and cost data. Cost
data includes the information related to cost of materials, cost of labor and details of overhead
expenses and various other information related to the use of various activities and consumptions
of facilities by different products and product lines in a manufacturing unit (Goetsch and Davis
2014).

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The ultimate result of the cost accounting system and process is the price determination
or the profitability analysis of the products. in the following parts of this report various cot
accounting tools have been applied and effectiveness of the system can be observed from there.
Various cost accounting data has been taken for this report on a hypothetical basis, for
better presentation and illustration of the system it has been presented above in both numerical
figures and in graphical presentation.
Qualitative information or the qualitative aspect of the cost data includes the
effectiveness and integrity of the cost data. It gives an insight of the effectiveness of the
information and its impact of the total costs of the products. it emphasizes on the net impact on
the total cost of the product and its usefulness for managerial decision making. The cost
information, which can help better in managerial decision-making, are considered more suitable
and effective for cost accounting and cost management perspective (Kaplan and Atkinson 2015).
Analysis of the model:
With the advancement of the business and increase in need of cost and management for
various important business decisions making, the tools and techniques in cost and management
accounting have been developed. Some of such advanced cost and management accounting tools
are, budget and budgetary control, standard costing, marginal costing and activity based costing
systems. Overhead costs are the collective costs of indirect materials, indirect labor and other
indirect expenses. Overhead costs are general in nature and could not be linked or associated
with the product units. Therefore, there is a need of some basis of overhead allocation to the
different products or cost units. Traditionally, for such overhead allocation, the machine hour
rate or the labor hour rate can be used for overhead allocation. It is the traditional method and

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less scientific in nature and not that much rational. There are some disadvantages of such a
overhead allocation system (Kaplan and Atkinson 2015).
To eliminate the limitations of the traditional costing system and disadvantages of
traditional overhead allocation system, the Activity Based Costing System has been developed.
The main concept of the system is the allocate and absorb the overhead costs to the products
based on various activities which causes an increase in the overhead costs (Goetsch and Davis
2014). In this system the activities are identified which cause an increase in the overhead costs
and various overhead allocation rates are computed based on that. Then the overhead is allocated
to the products based on those overhead allocation rates. The main advantage of this system is
the efficient and effective allocation of the overhead costs to the products and the rationality
behind such allocation of overhead costs (Goetsch and Davis 2014).
In this report, such an Activity Based costing Model have been developed and illustrated
in details as attached in the annexure to this report. In the first table, various cost driver rates
have been computed taking the best assumption and applying the best cost accounting practices.
In the second table, the overhead costs have been allocated to the products A and B and in the
third table, per unit costs have been computed. Lastly, for better understanding of the result of
the activity based costing system, a projected income statement has been prepared for
ascertaining the profit or loss for the projected period and products (Crawford 2014).
Conclusion:
From the above analysis and dissuasion, it can be concluded that, cost accounting is the
system cost ascertainment and price determination and it helps in various management and
business decision making. Various modern as well as traditional cost accounting tools and

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techniques are there which can be applied in real-time situation for an effective cost accounting
and management. Activity Based Costing System is an advanced and superior overhead
allocation system, which can allocate and absorb the overhead costs to various products based on
the respective activities. Lastly, it can be recommended for business organizations to adopt and
apply such cost accounting methods, tools and techniques which best matches with the nature of
business of the organization and can help them with better management accounting information.

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References and bibliography:
Brewer, P.C., Garrison, R.H. and Noreen, E.W., 2015. Introduction to managerial accounting.
McGraw-Hill Education.
Cooper, R., 2017. Supply chain development for the lean enterprise: interorganizational cost
management. Routledge.
Cooper, R., 2017. Supply chain development for the lean enterprise: interorganizational cost
management. Routledge.
Crawford, J.K., 2014. Project management maturity model. Auerbach Publications.
Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2013. Management accounting and control
practices in a lean manufacturing environment. Accounting, Organizations and Society, 38(1),
pp.50-71.
Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2014. Lean manufacturing and firm
performance: The incremental contribution of lean management accounting practices. Journal of
Operations Management, 32(7-8), pp.414-428.
Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2014. Lean manufacturing and firm
performance: The incremental contribution of lean management accounting practices. Journal of
Operations Management, 32(7-8), pp.414-428.
Goetsch, D.L. and Davis, S.B., 2014. Quality management for organizational excellence. Upper
Saddle River, NJ: pearson.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.