Analysis of Costing Methods: A Management Accounting Report

This report delves into the realm of management accounting, contrasting traditional and activity-based costing methods. It begins by outlining the traditional costing approach, including the determination of overhead rates and product costing, followed by the calculation of selling prices using cost-plus pricing. The report then transitions to activity-based costing (ABC), detailing the allocation of costs based on various activities and cost drivers. It provides a comprehensive calculation of per-driver overhead rates and product costs under the ABC system. A comparative analysis of product costs under both methods highlights the differences and reasons for variances, emphasizing the impact of overhead allocation. Finally, the report calculates selling prices using the ABC approach, concluding with a discussion of the benefits of activity-based costing for informed business decisions and improved profitability. The report provides all the calculations and results that are obtained with the help of the two costing methods.

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Introduction to management
accounting

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Table of Contents
Introduction................................................................................................................................3
1..................................................................................................................................................3
a) Determination of overhead rate..........................................................................................3
b) Determination of product cost and selling price................................................................4
2..................................................................................................................................................4
3..................................................................................................................................................6
a) Comparison of the product cost.........................................................................................6
b) Calculation of prices..........................................................................................................7
Conclusion..................................................................................................................................8
References..................................................................................................................................9

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Introduction
Costing is an important aspect of the business as with the help of this various decisions will
be made. This can be done with the help of various available approaches. The main methods
which are used involve traditional costing and the same has been replaced in the current
position with activity-based costing. There are differences among them and all of them will
be discussed in the report that is presented below. There will be understanding which will be
obtained with the help of the practical solutions. The various calculations will be made and
with that, the proper decisions will be made.
1.
a) Determination of overhead rate
In the business, various production overheads are incurred and in that it is required that there
shall be proper allocation of the same. Under the traditional costing system, there is the
distribution of the overhead based on certain specific elements. In the traditional system, all
of the cost is allocated by the help of the same factor (Price, Wrigley and Straker, 2015). In
the given case it is provided that there is the inclusion of the labor cost and the allocation of
the cost is based on the labour cost. The calculation for the same is made and all the steps for
the same are represented below:
Particulars Amount
Total manufacturing overheads 3000000
Total labour cost 600000
Manufacturing cost per
labour$
5
The calculation is made and it can be seen that the total overheads amount to $3000000 and
the labour cost is for $600000. They are considered and by dividing them with one another
the overhead rate is ascertained. It is identified that the overhead rate is $5 for each dollar of
labour cost. This is the rate that will be used to calculate the total cost that is incurred in
respect of the production which has been made (Vezzoli et al., 2015). This will be the total
amount of the overhead which has been incurred and the other elements which are the part of
the same will not be taken into account.

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b) Determination of product cost and selling price
The product that is manufactured is produced in order to be provided in the market and with
that, there will be a certain rate that will be earned and is identified as profits. Various
methods can be used to ascertain the amount of the profit which is made and one of them is
cost-plus pricing (Boons et al., 2013). This is the approach in which there is a mark-up which
is added to the cost and that is the amount of profit which will be made. By considering the
same in the process the total amount which is identified as selling price and will be charged
from the customers is identified. The first step will be to determine the total cost which has
been incurred and then on the same there will be the addition of the profits by which the total
selling price will be determined. The calculation is made and is shown below for better
understanding and results.
Particulars Kona Malaysian
Direct material 2.3 3.6
Direct labour 0.2 0.3
Manufacturing
overhead
1 1.5
Total cost 3.5 5.4
Profit @ 30% 1.05 1.62
Selling price 4.55 7.02
It can be seen the calculation which has been made that the total cost which is ascertained
comprises of the direct material, direct labour, and the manufacturing overheads. The
material and labour are the direct costs and will be taken into account on a direct basis. After
this, there is the addition of the manufacturing overhead based on the rate which has been
determined in the above section (Abrate, Fraquelli and Viglia, 2012). The rate was for $5 per
dollar of labor and on that basis, the consideration of overhead is made. This has provided a
total cost of $3.5 and $5.4 for the Kona and Malaysian respectively. After this there is the
consideration of the profit which is added at the rate of 30% and by the inclusion of the same,
there is the selling price which is ascertained. This will be the rate that is to be charged in the
market and is calculated with the help of traditional costing.
2.
The new approach which can be used is activity-based costing for the ascertainment of the
cost that has been made for any product which has been manufactured. In that, there will be

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consideration of the direct costs and the overheads which are involved. Unlike traditional
costing, there will be consideration of all the activities which are involved (Mahama and
Cheng, 2012). The production process is the combination of various activities that are
performed under the task. The total cost under this method will be calculated by making use
of the information about all of the activities and also with the proper allocation of the cost
under them.
There are various activities and for that several costs, drivers are available which are used to
define each of the costs that shall be considered in the calculation. There is the total cost for
the activities and number of total drivers and with that per driver cost will be identified so
that the same can be allocated to the production which is made and also to identify the per-
unit cost (Rajabi and Dabiri, 2012). Per driver overhead rate is ascertained below and for the
understanding of the same, there is a proper calculation that is presented.
Calculation of Cost per cost driver
Activity Activity driver Quantity of
driver
Budgeted
cost
Cost per
driver
Purchasing Purchase orders 1113 278250 250
Material
handling
Setups 1610 483000 300
Quality control Batches 805 40250 50
Roasting Roasting hours 89300 893000 10
Blending Blending hours 44700 447000 10
Packaging Packaging
hours
29800 596000 20
The rate of the cost drivers has been ascertained and in that, all the activities are considered.
The total cost is given and also the volume of the drivers is provided by which there is the per
driver rate which is obtained. The total cost is divided by the driver volume and by that the
required result has been obtained (Oseifuah, 2014). This will be used in the further
calculations which will be made and by that total cost will be determined that will be of great
use for the business.
The calculation for the ascertainment of the product cost is shown below and in that, all the
direct cost together with various activities are considered. The total overheads are divided
into six activities which include material handling, purchasing, roasting, quality control,
packaging, and blending. The cost drivers are assigned to them and on that basis, the proper

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allocation will be made which is required to be incurred. The proper calculations are provided
hereunder by which the total product cost under activity-based costing will be ascertained.
Calculation of product cost
Particulars Kona Malaysian
Budgeted sales 2000 100000
Direct material 4600 360000
Direct labour 400 30000
Purchasing 1000 1000
Material handling 9600 27000
Quality control 200 500
Roasting 300 15000
Blending 150 7500
Packaging 80 4000
Total product cost 16330 445000
Product cost per Kg 8.165 4.45
The calculation is made and in that, all of the expenses which are involved have been
considered. The total cost is identified and that is determined to be $8.165 and $4.45
respectively for Kona and Malaysian. This is the amount that will be used to calculate the
selling price by adding profits to the same.
3.
a) Comparison of the product cost
The product cost which will be incurred in the process has been calculated under both the
traditional as well as activity-based budgeting approach. With the help of that, it is identified
that they are at different levels and the same is provided below by which comparison can be
made appropriately.
Particulars Kona Malaysian
Product cost as per traditional costing 3.5 5.4
Product cost as per the ABC approach 8.165 4.45
It can be seen that cost under both methods is different and is higher in the case of activity-
based budgeting for Kona and is lower for Malaysians in the same approach. There are
various reasons because of which the difference is arising and the main among them is the
method of allocating manufacturing overheads (Akhavan, Ward and Bozic, 2016). In the case

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of traditional costing, there is only one factor on which the allocation decision is made and as
the labour cost is low in Kona so the total cost for the same is determined to be less.
This is not the same case in activity-based budgeting and in that, all the factors are considered
with different activities that are performed. In this, all the bases have been used and the
calculation is not made on a single object. By the inclusion of all the elements and lower sales
value in Kona, there is a higher cost that is allocated to the same. The batch size which is
used to ascertain the cost is also different and for Malaysian, more products can be made in a
single batch and by that, the overall reduction in cost is made (Johansson et al., 2012 ). With
this, the setup cost is also affected as the same is also dependent on the number of batches
that are involved with the production process. Due to all of these differences, there is the
difference that is identified in the total product cost which is calculated.
b) Calculation of prices
Pricing is an important decision for the business as by that only the amount of profit which
will be made is ascertained and this is the rate at which the sale of the product will be made.
The cost has been determined under activity-based costing and now on that profit will be
added by which the total selling price for the product will be identified (Chen, Pang and Pan,
2014). The calculation is made and is shown below for further uses.
Particulars Kona Malaysian
Product cost per
Kg
8.165 4.45
Profit @ 30% 2.4495 1.335
Selling price 10.61 5.79
The product cost is higher for Kona and in that further addition of profit is made by which the
final price is calculated. The selling price for Kona is ascertained at $10.61 and for Malaysian
at $5.79. There is a large difference between them and the profits are affected by the same.
The pricing under the activity-based costing will be used as in that the allocation of the cost is
made in a more appropriate manner. There is a consideration of all the important aspects that
help in making the best and most appropriate decision for the benefit of the business.

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Conclusion
The manner in which cost can be calculated in considered and in that discussion of both the
available approaches is made. The traditional costing is undertaken and for that, all the
calculation from the determination of the overhead rate to the calculation of cost and selling
price has been made. With this, the activity costing is also involved and in that also the cost
and price are ascertained after undertaking the various activities which are involved. The
reason for deviations has been considered and with that, there is the identification of the best
suitable approach for the company.

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References
Abrate, G., Fraquelli, G. and Viglia, G. (2012) Dynamic pricing strategies: Evidence from
European hotels. International Journal of Hospitality Management, 31(1), pp.160-168.
Akhavan, S., Ward, L. and Bozic, K.J. (2016) Time-driven activity-based costing more
accurately reflects costs in arthroplasty surgery. Clinical Orthopaedics and Related
Research®, 474(1), pp.8-15.
Boons, F., Montalvo, C., Quist, J. and Wagner, M. (2013) Sustainable innovation, business
models and economic performance: an overview. Journal of Cleaner Production, 45, pp.1-8.
Chen, X., Pang, Z. and Pan, L. (2014) Coordinating inventory control and pricing strategies
for perishable products. Operations Research, 62(2), pp.284-300.
Johansson, M., Hallberg, N., Hinterhuber, A., Zbaracki, M. and Liozu, S. (2012) Pricing
strategies and pricing capabilities. Journal of Revenue and Pricing Management, 11(1), pp.4-
11.
Mahama, H. and Cheng, M.M. (2012) The effect of managers' enabling perceptions on
costing system use, psychological empowerment, and task performance. Behavioral Research
in Accounting, 25(1), pp.89-114.
Oseifuah, E.K. (2014) Activity-based costing (ABC) in the public sector: benefits and
challenges. Problems and Perspectives in Management, 12(4), pp.581-588.
Price, R.A., Wrigley, C. and Straker, K. (2015) Not just what they want, but why they want
it: Traditional market research to deep customer insights. Qualitative Market Research: An
International Journal, 18(2), pp.230-248.
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.
Vezzoli, C., Ceschin, F., Diehl, J.C. and Kohtala, C. (2015) New design challenges to widely
implement 'Sustainable Product-Service Systems'. Journal of Cleaner Production, 97, pp.1-
12.

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