Assessment of Activity-Based Costing and Budgeting Practices in Amcor

Desklib provides past papers and solved assignments for students. This report analyzes Amcor's cost allocation and budgeting.

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FNSACC507 PROVIDE MANAGEMENT ACCOUNTING INFORMATION
STUDENT NAME:
STUDENT ID:
ASSIGNMENT CODE:

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Task 1
Executive Summary
Cost allocation is one of the major tasks that are performed by the managers by adopting some
suitable cost allocation system. The current report discusses the electricity cost allocation within
the Amcor organization and explains the benefit of choosing activity based costing method for
allocation of electricity cost incurred for the particular period.

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Table of Contents
Task 1..........................................................................................................................................................2
Executive Summary.................................................................................................................................2
Introduction.............................................................................................................................................4
Allocation of total cost of electricity........................................................................................................5
Basis for the allocation of total cost of electricity incurred for a specific period.....................................5
Calculations of the percentage and the cost of the total cost for each of the allocations:.........................7
Recommendations...................................................................................................................................9
Conclusion.............................................................................................................................................11
Task -2.......................................................................................................................................................12
Introduction...........................................................................................................................................12
Budget...................................................................................................................................................13
Conclusion.............................................................................................................................................26
References.................................................................................................................................................27

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Introduction
Management accounting is identified as one of the most essential branches of accounting that
enables the managers to gain necessary knowledge and skills for making effective routine
decisions. For the current report, Amcor limited will be chosen which is an Australia based
packaging organization that providing worldwide packaging solutions. In the current report, the
investigation and analysis will be made regarding the method of allocation of electricity costs of
the company.

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Allocation of total cost of electricity
Cost allocation is identified as the process of identification, aggregation, and assignment of the
cost to the specific cost objects. The cost object can be considered as any activity or the
particular item for which the organization want to separately measure the cost. According to the
Generally Accepted Accounting Principles (GAAP), the cost incurred over the electricity
expenses in the business are considered to be indirect expenses in nature (Vanderbeck, 2012).
The major reason behind this is electricity is not a direct expense that is directly related to the
business activity such as wages is the major expenses that are directly incurred over labor.
The cost incurred over electricity is recognized as indirect product cost that is used for operating
machine to support production and manufacturing activities. The Amcor organization allocates
the total cost of electricity that is incurred over different packaging products produced by the
company (Wood, 2012). The allocation of total cost of electricity to different units manufactured
are made by the company so that the Amcor is able to know which of its packaging products are
generating more money in comparison to the loss generating organizations.
Basis for the allocation of total cost of electricity incurred for a specific period
The basis of the total cost allocation for the electricity incurred over the specific period in the
Amcor organization is made on the basis of the activity based costing method. The typical cost
allocation mechanism within the activity based costing system basically includes the steps such
as:
 Identification of the object to which the electricity costs have to be assigned
 Accumulation of the cost in different cost pools

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 Identifying the most suitable basis for the cost allocation regarding electricity
The activity based costing is identified as the cost allocation method which helps in the
assignment of manufacturing overhead expenses and cost to the different products in a much
better and logical manner as compared to the tradition costing approach that simply allocates the
cost such as electricity charges on the basis of the machine hours. Thus, in case of activity based
costing, the costs are primarily assigned to those activities that are the true cause for the
generation of the overhead (Kaplan, et. al., 2014). Thereafter, the assignment of cost is made to
the specific activities specifically to those products that are actually demanding the activities.
The cost object under activity based costing is identified as the item for which the
organizations like Amcor wishes to estimate on a separate basis. The different examples for cost
objects are the product line, customers, brand, branch, project etc. The term cost pool under
activity based costing is recognized as the account head wherein the accumulation of cost is
made for future assignment to separate cost objects (Cooper, 2017). The major examples of cost
pool can be identified as the factory rent, electricity, machine maintenance cost etc. The basis for
cost allocation is directly affects the cost pool because if there is only a single allocation base
used, the broad cost pool can be used in such a case but when multiple cost allocation bases are
used for example, machine hour or the labor hour, it might lead to decrease in the cost pools used
for cost allocation.
The cost allocation basis for the allocation of total electricity costs within the Amcor
organization is directly dependent on the cost driver that is identified as the ‘variable’ that drives
the cost of electricity. The cost driver that is mainly used by the Amcor for the allocation of
total electricity costs can be expressed in number of electricity units consumed by each of the

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different machines that are engaged in the manufacturing of different types of packaging
products (Dale and Plunkett, 2017). The various other examples of cost driver can be identified
in the form of number of payments processed that is relatively a better cost driver for the
determination of the salaries of the accounts payable section of the accounts department.
Calculations of the percentage and the cost of the total cost for each of the allocations:
Amcor limited is the packaging company and is operating in many countries of the world like in
Australia, Western Europe, New Zealand and other western European countries. The company is
operating its operations through the various other segments (Dale and Plunkett, 2017). So the
cost of the different segments will be different. Cost allocation in the Amcor limited can be
conducted by the following means.
Allocation of the total cost of the company can be conducted by the following mean of indirect
costing. The financial and the cost accountants of the company can make of the different
approaches for making the distribution of the cost to each segment of the company. The cost
allocation can be done by the following mean:
Cost Allocation Cost Apportionment Direct costs
Indirect cost Traditional costing Activity based costing
Production Volume Cost Base Cost Pool

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Some of the charges and the cost of the company are easy in calculation for the specific duration,
production runs and for the particular batches. For the allocation of the cost consideration of the
various factors need to be considered:
Setup charges of the equipment: Company need to consider the setup charges for the production
run not for the each of the production unit in the company.
Machine testing and the other calibration costs: This cost also need to be considered for the
calculation of the total electricity expenses incurred in the whole organization.
As per the traditional costing method the allocation of the indirect and the electricity expenses of
the company will be distributed according to the usage of the particular machinery in the
organization and the production output take place in the organization (Frazier, 2014). Here are
some of the factors which need to be considered for the allocation of the cost among the various
departments of the company.
 Direct or the specific labor time for the individual production unit.
 Production time of the machine for the production of the particular units
 Labor space used for the manufacturing of the individual product.
Another method for the apportionment of the electricity expenses in the various departments of
the company can be done on the basis of the light equipments used in individual department. The
Kilowatt hours can also be used as the one of the drivers for allocating the electricity expense in
the various departments of the company.
Efficiency method can also be used by the companies for making the allocation of the electricity
expense in the individual departments of the organization (Schmidt and Nakajima, 2013). The

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electricity expenses can also be apportioned on the basis of the number of employees and the
other overhead expenses of the companies which are engaged in the production process of the
companies.
Number of machine hours used in the production process can also be considered as the one of the
source for making the allocation of the electricity expenses between the various departments of
the organization.
Generally the total cost of the company is allocated by accumulating the total cost of the
company and makes the distribution of the cost on the basis of the number of the machines used
in the particular department of the company.
Recommendations
It is recommended to the management of the Amcor limited that it should ensure a better
implementation of the activity based costing for appropriate allocation of cost on some suitable
basis. The activity based costing has become popularized in the past year due to the multiple
reasons. The major reasons are as follows:
 There is significant rise in the overhead costs of the organization.
 The manufacturing overhead costs are no longer related with the direct labor hours or the
productive machine hours.
 There is difference in the production i.e. some of the products are manufactured in small
quantities and batches while other products are manufactured in large quantities and
batches (Vanderbeck, 2012).
 There is potential increase in the diversity of customer’s demand and the diversity of
products in the recent years.

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 Thus, a better implementation will enable proper allocation of indirect costs such as
electricity costs.

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Conclusion
From the above report, it can be concluded allocation of indirect expenses of the business is one
of the most difficult task for the managers working in the organization. The case of Amcor
Company has been discussed in the report and explanation has been provided regarding how the
company has been able to allocate its electricity costs within different departments and activities.

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Task -2
Introduction
In the modern business world, the organizations are working on their toes to achieve the
objectives and goals of the organization. The budget mainly refers with a tool which helps the
management to estimate the expenses and revenues for the future time period. The budgets are
mainly prepared by the companies to overcome the financial problems of the organization as
well as to sustain their operations. The report will demonstrate the study of ten budgets including
production, sales, flexible and fixed, operational, cash flow, personnel, direct labor, financial,
master, and overhead budget. Following this, the report will also discuss the primary function of
each budget. Apart from this, the report will also provide reflect the different users of these
budgets besides management. In last, the report will also provide a sample for each budget along
with its application on different departments of the company.