Management Accounting Homework: Costing Analysis and Interpretation

This document presents a comprehensive solution to a management accounting homework assignment, focusing on the calculation and interpretation of absorption and activity-based costing methods. The solution includes detailed calculations for both Lightweight and Megarange stoves, comparing absorption rates and activity-based costs across various activities such as purchasing, material handling, training, and setup. It also provides an interpretation of the results, discussing the advantages and disadvantages of each costing method, particularly highlighting the benefits of activity-based budgeting and its role in cost management. Furthermore, the document explains the differences between absorption costing and activity-based costing, emphasizing how ABC provides a more realistic picture of cost behavior by utilizing activities instead of functional departments. The solution also references relevant literature to support the analysis and findings.

Management Accounting

Contents
Contents...........................................................................................................................................2
TASK 1............................................................................................................................................3
Calculation of the absorption cost for each type of stove...........................................................3
Calculation of the activity-based cost for Lightweight of stove..................................................3
Calculation of the activity-based cost for Megarange of stove...................................................3
TASK B...........................................................................................................................................4
Interpretation................................................................................................................................4
Activity based budgeting.............................................................................................................4

TASK 1
Calculation of the absorption cost for each type of stove.
Particular Lightweight Megarange
Purchasing 18000 12000
Training 400 600
Set up 1500 750
Running 12825 1425
Total 32725 4775
Number of units 4500 500
Absorption rate 7.27 9.55
Calculation of the activity-based cost for Lightweight of stove.
Activity Cost driver Overhead cost Estimate units Rate
Purchasing Purchase order 20,000 360 55.55
Material Material 13500 4500 3
Training Training hour 1,000 20 50
Setting up
machines
No. of set-ups 2,250 60 37.5
Running
machines M
Machine hours 1 14,250 67,500 .0211
Calculation of the activity-based cost for Megarange of stove.
Activity Cost driver Overhead cost Estimate units Rate
Purchasing Purchase order 20,000 40 500
Material Material 5000 500 10
Training Training hour 1,000 30 33.33

No. of set-ups 2,250 30 75
TASK B
Interpretation
Activity based budgeting
It is an accounting methodology that assigns cost to activities rather than products or services.
This enables resource and overheads cost to compare accurate assigned to products. ABC is a
system that focus on activities as fundamental cost objective and untaxed cost to objective as
building blocks or compiling the costly of the other cost objective. Activity cost budgeting
facilities cost management.ABC not only shows how activities consume resource and how
products or customers trigger activities but also assigns costs to product or customers according
to the resources they consume.ABC describe a firm as a series of activites of whose
performance is designed to satisfy customers’ needs. It provides information for managers to
manage activities to improved competitiveness and achieve strategic goal. ABC costing ng are
useful for improve accuracy of product costs by carefully changing the types and number of
factors used to assign costs (Kloviene and Gimzauskiene, 2014). It will help in identifying value
added activities, to calk to ways to eliminate non value in transactions.
Following are the weaknesses of activity based costing:
1) It is essentially not the panacea for all ills.
2) It absorbs a lot of resources.,
3) Too much emphasis on customer viability can lead to problems such as cheaper products and,
therefore, potentially lower sales.
4) It may lead to weaker customs segmentation.
5) It takes no account of opportunity cost
Absorption costing: It is a traditional method of identifying cost of business organizations units.
It is also known as traditional costing method. In this method all the direct as well as indirect
elements of the factors has been consider. This method is used for directly calcite the cost of
overall process of business organization.

In this case study from the above calculation it has been identified that by using method of
absorption costing the business organizations of Lightweight and Megarange rate of their entire
work procedure will be 7.27 and 9.25. on the other side when they use absorption costing method
they will be able to calculate each cost evaluate and identifying fact factor rate incurred in
manufacturing process of products. By apply Activity Based Budgeting method organization will
be able to change expend on purchase offer by 55.50 rate and Megarange charge purchase order
rate at 500as they have produce less product compare to the organization thus their rate o activity
is high . Lightweight rate of this organization of material purchase will be 3 and on the order side
it will be 10 for Megarange. The rate chard on training set up cost and machine hours of
Lightweight is low as compare to the other company. This case has been define the best use of
tradition and ABC costing method in business organization (Asmara and Rudiawarni, 2019).
Difference between Absorption and ABC is following:
In traditional costing overheads are first related to cost centres (Production and Service Centres)
and then to cost objects, i.e., products. In ABC, overheads are related to activities or grouped into
cost pools (depending on the terminology preferred). Then they are related to the cost objects, for
example, products. The two processes are, therefore, very similar, but the first stage is different
as ABC uses activities instead of functional departments (cost centres). The problem with
functional departments is that they tend to include a series of different activities, which incur a
number of different costs that behave in different ways. Activities also tend to run across
functions; for instance, procurement of materials often includes raising a requisition note in a
manufacturing department or stores. It is not raised in the purchasing department where most
procurement costs are incurred. Activity costs tend to behave in a similar way to each other, i.e.,
they have the same cost driver. Therefore, ABC gives a more realistic picture of the way in
which costs behave. As with traditional absorption costing ABC rates are calculated in advance,
normally for a year ahead, and so the same rates are used for a year at a time. The advantage of
this is that any seasonal variations will be spread giving an average cost. If this was not done and
actual rates were used the absorption rates would vary monthly. This would mean that when
output was high the overhead rate would be low and vice versa; if pricing were based on cost the
prices quoted would be higher when the business was slack.

REFRENCES
Books and journal
Asmara, I. Y. and Rudiawarni, F .A., 2019. Pengaruh Earnings Management terhadap Future
Profitability terkait dengan Ownership Structure, Firm Size dan Corporate Governance
Practices. JURNAL INFORMASI, PERPAJAKAN, AKUNTANSI, DAN KEUANGAN
PUBLIK, 9(1), pp.71-88.
Wei, C. and Naqiong, T., 2015. Investment Efficiency, Corporate Governance and CEO
Turnover. Review of Investment Studies, (7), p.4.
Kloviene, L. and Gimzauskiene, E., 2014. Development of accounting system according to an
information technology.Review of economic studies and research Virgil Madgearu,7(2),
p.59.
Sunarni, C. W., 2015. Management accounting practices at hospitality business in Yogyakarta,
Indonesia. Review of Integrative Business and Economics Research, 4(1), p.380.

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