Analysis of Costing Methods and Selling Price Determination

This assignment delves into the principles of management accounting, focusing on cost ascertainment and pricing strategies. It begins by introducing activity-based costing (ABC) as a superior method compared to traditional costing, detailing the steps involved, including identifying activities, cost drivers, and calculating cost per driver. The assignment then calculates product costs for Kona and Malaysian coffee using ABC. A comparison is made between traditional costing and ABC, highlighting the deviations in product costs and the reasons behind them. The assignment concludes by determining the selling price for each coffee type, incorporating a 30% profit margin, and emphasizing the importance of ABC for informed management decisions. References to relevant academic sources are also provided.

1
Introduction to management
accounting

2
Table of Contents
2.................................................................................................................................................3
3.................................................................................................................................................4
a)............................................................................................................................................4
b)............................................................................................................................................5
References...............................................................................................................................7

3
2.
The approaches which can be used for the ascertainment of cost are many and one
of the most important is activity-based costing. In this method, there are various
elements that need to be considered. In comparison to traditional costing, this
approach is better as there is the involvement of various activities in making
calculations under this (Govindan, Khodaverdi and Jafarian, 2013). All of the
activities which are taken into production are incorporated and then the calculation is
made accordingly. There is the determination of the activities and then the cost
drivers which are there in relation to them are identified. They are important as on
that basis only the allocation will be made, for this the total activity cost will be taken
and the per driver rate will be calculated. By this, the product cost will be calculated
as the same will be used in making the cost calculation. In this there are various
factors that are considered and the calculation in relation to the determination of the
cost driver rate is presented as follows.
Activity Purchasi
ng
Material
handling
Quality
control
Roastin
g
Blendin
g
Packagin
g
Activity
driver
Purchase
orders
Setups Batches Roasting
hours
Blending
hours
Packaging
hours
Quantity
of driver
1919 2420 1210 155400 77700 51800
Budgeted
cost
959500 2178000 211750 1554000 777000 1036000
Cost per
driver
500 900 175 10 10 20
The cost which is incurred on each driver is calculated above and with the help of
that further calculations will be made. It can be noted that there are in total six
activities which are performed and the calculation is made for all of them. There is
the budgeted cost which has been involved in relation to them (Rajabi and Dabiri,
2012). The same is divided with the quantity that is provided for the drivers and by
that, the cost which is involved in relation to each driver is ascertained. This rate
which has been calculated will be used to ascertain the product cost and selling price
in further processes.
The cost which totals the expenses made on any product is identified as the product
cost and the same will be calculated. In this, there will be the inclusion of all the

4
costs and overheads which are made. The product cost will be calculated and details
of the same are provided hereunder.
Particulars Kona Malaysian
Budgeted sales 3000 150000
Direct material 7200 390000
Direct labour 2100 120000
Purchasing 2000 2000
Material handling 32400 90000
Quality control 700 1750
Roasting 450 22500
Blending 225 11250
Packaging 120 6000
Total product cost 45195 643500
Product cost per
Kg
15.07 4.29
The product cost which has been derived is for $15.07 in relation to Kona and for
$4.29 in respect of Malaysian. This is the final cost and will be the total expenditure
made on producing each kg of coffee.
3.
a)
Traditional costing and activity-based costing are highly different from each other
and so the results which are derived from them are also different. It is necessary to
ascertain the deviation and also the cause for the same (Uskonen and Tenhiälä,
2012). There is the need to develop proper understanding in respect to them as then
only the complete process will be considered for the purpose of decision making.
There are various calculations that are made and in that product cost by both the
methods have been identified.
It can be noted that the product cost of Kona as per the traditional and activity-based
approach is $6.6 and $15.07 respectively. In the case of Malaysian, the product cost
is $7.4 with the traditional approach and $4.29 with the activity-based approach. It
can be seen that there is a wide difference among both the results which have been
identified and this is because of the deviation in the process which is followed under
both the approaches. In the traditional approach, there is the consideration of labour

5
cost as the base for the overhead allocation and that single rate is applied for all the
products (Coskun and Yılmaz, 2013). This is not the case with activity-based costing
as in that single rate is not used and there are different rates for all the activities
which are involved. By that, the allocation is made in a different manner and that
affects the final result which is obtained. Due to the deviation in the method of
allocation the product cost which is calculated is also fluctuating.
The reason for the deviation is identified and that will be used to make the best
decision as there is the clarity which is obtained in relation to both the approaches
which are available (Tsai et al., 2012). There is the proper understanding which is
gained in this respect that will be helping in undertaking further processes. All of the
calculations are made in such a manner that most reliable and accurate results are
obtained and they are very important to make further decisions that will be in the
interest of the company.
b)
Selling price is the rate at which there will be sales in the market and all of the
consumers will be required to make the payment according to that. In this price,
there is the involvement of two elements and they consist of cost and the profit which
the company is intending to make (Abbey et al., 2017). For this, it is required that the
profit factor shall be added to the calculated cost. This is done in various manners
and in the given case a fixed rate of 30% will be added to the cost which will be
provide with the final selling price. The manner in which this will be undertaken is as
provided below.
Particulars Kona Malaysian
Product cost per Kg 15.0
7
4.29
Profit @ 30% 4.52 1.29
Selling price 19.5
8
5.58
The calculation of the selling price is made and in that there is a consideration of
30% profit. The cost which has been ascertained in the above section is used and on
that three is the profit which is added and by that final price is derived. This will be
used by the company and the sales will be made. It can be noted that the profits

6
which are made in case of the activity-based costing are higher and so the
management will be using this method to make the proper decision. This is more
relevant as in this all the details of the production are considered and the price which
is calculated is after making of the proper allocation in respect of the production
overheads which have been made (Abbey, Blackburn and Guide Jr, 2015). This is
the rate at which the company is earning suitable returns and will be able to carry the
operations and survive in the long run in the market.

7
References
Abbey, J.D., Blackburn, J.D. and Guide Jr, V.D.R. (2015) Optimal pricing for new
and remanufactured products. Journal of Operations Management, 36, pp.130-146.
Abbey, J.D., Kleber, R., Souza, G.C. and Voigt, G. (2017) The role of perceived
quality risk in pricing remanufactured products. Production and Operations
Management, 26(1), pp.100-115.
Coskun, A. and Yılmaz, M. (2013) Pricing decisions in educational institutions: An
activity-based approach. Procedia-Social and Behavioral Sciences, 106, pp.2112-
2118.
Govindan, K., Khodaverdi, R. and Jafarian, A. (2013) A fuzzy multi criteria approach
for measuring sustainability performance of a supplier based on triple bottom line
approach. Journal of Cleaner production, 47, pp.345-354.
Rajabi, A. and Dabiri, A. (2012) Applying activity based costing (ABC) method to
calculate cost price in hospital and remedy services. Iranian journal of public
health, 41(4), p.100.
Tsai, W.H., Shen, Y.S., Lee, P.L., Chen, H.C., Kuo, L. and Huang, C.C. (2012)
Integrating information about the cost of carbon through activity-based
costing. Journal of Cleaner Production, 36, pp.102-111.
Uskonen, J. and Tenhiälä, A. (2012) The price of responsiveness: Cost analysis of
change orders in make-to-order manufacturing. International Journal of Production
Economics, 135(1), pp.420-429.

8
Appendix