Management Accounting Report: Comparison of Costing Methods

This report provides a detailed analysis of management accounting principles, focusing on cost allocation and the comparison between traditional costing and activity-based costing (ABC). The report begins by allocating overhead costs across different departments based on various cost drivers such as area occupied, number of employees, and machine hours. It then delves into the traditional costing method, calculating the production cost per unit for both simple and complex luggage. Subsequently, the report transitions to the ABC method, identifying activity drivers and calculating overhead costs per unit for different activities within the store and maintenance departments. Finally, it compares the results of the traditional costing and ABC methods, highlighting the differences in cost allocation and the impact on the valuation of simple and complex luggage. The report concludes with a discussion of the advantages and disadvantages of each method, along with relevant bibliographical references.

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

1MANAGEMENT ACCOUNTING
Table of Contents
Answer to Requirement 1:...............................................................................................................2
Answer to Requirement 2:...............................................................................................................4
Answer to Requirement 3:...............................................................................................................7
Bibliographies:.................................................................................................................................8

2MANAGEMENT ACCOUNTING
Answer to Requirement 1:
Allocation of overhead based on departments:-
Particulars Total
Machine
Centre A
Machine
Centre B Assembly Stores Maintenance
Area occupied (in
square metres)
52,00
0
9,00
0
8,00
0 12,000 15,000 8,000
Lighting and heating $550,000 $95,192 $84,615 $126,923 $158,654 $84,615
Insurance of buildings $300,000 $51,923 $46,154 $69,231 $86,538 $46,154
Property taxes $850,000 $147,115 $130,769 $196,154 $245,192 $130,769
Number of employees
1,10
0
34
0
21
0 350 100 100
Salaries of works
management $1,100,000 $340,000 $210,000 $350,000 $100,000 $100,000
Book value of
machinery
$15,200,00
0 $8,000,000 $5,500,000 $800,000 $400,000 $500,000
Insurance of machinery $250,000 $131,579 $90,461 $13,158 $6,579 $8,224
Depreciation of
machinery $1,600,000 $842,105 $578,947 $84,211 $42,105 $52,632
Total other overheads $4,650,000 $1,607,915 $1,140,946 $839,676 $639,069 $422,394
Indirect wages and
supervision $7,780,000 $1,200,000 $1,000,000 $1,600,000 $2,100,000 $1,880,000
Indirect materials $1,320,000 $500,000 $650,000 $150,000 $0 $20,000
Total manufacturing
expenses
$13,750,00
0 $3,307,915 $2,790,946 $2,589,676 $2,739,069 $2,322,394
Overhead allocation of service department:-
Particulars Total
Machine
Centre A
Machine
Centre B Assembly
Material procurement $8,000,000 $4,000,000 $3,000,000 $1,000,000

3MANAGEMENT ACCOUNTING
Overhead cost of stores
department $2,739,069 $1,369,534 $1,027,151 $342,384
Direct labour hours
3,900,00
0 900,000 1,000,000 2,000,000
Overhead cost of
maintenance department $2,322,394 $535,937 $595,486 $1,190,971
Overhead incurred for
service department $5,061,463 $1,905,471 $1,622,636 $1,533,355
Other manufacturing
overhead $8,688,537 $3,307,915 $2,790,946 $2,589,676
Total overhead of
production centre $13,750,000 $5,213,386 $4,413,583 $4,123,031
Cost driver
Machine
Hours
Machine
Hours
Direct
Labour
Hours
Machine labour hours 2,000,000 1,200,000 2,000,000
Overhead cost per
machine/labour hours $2.61 $3.68 $2.06
Production cost under traditional method:-
Particulars
Simple
Luggage
Complex
Luggage
Machine hour in machine
centre A 4 10
Overhead cost per machine
hour $2.61 $2.61
Overhead cost of machine
centre A per unit $10.43 $26.07
Machine hour in machine
centre B 10 20

4MANAGEMENT ACCOUNTING
Overhead cost per machine
hour $3.68 $3.68
Overhead cost of machine
centre A per unit $36.78 $73.56
Labour hours in Assembly
centre 10 20
Overhead cost per labour
hour $2.06 $2.06
Overhead cost of labour
centre A per unit $20.62 $41.23
Total overhead cost per unit $67.82 $140.86
Direct cost per unit $80.00 $200.00
Total production cost per
unit $147.82 $340.86
Answer to Requirement 2:
Overhead cost per activity driver:-
Particulars Cost Driver Amount
Units of
Cost driver
Cost per
Unit
Overhead of store department:
Purchasing material Purchase order
$1,095,62
8
9,60
0 $114.13
Receiving material Material receipts $540,123
5,00
0 $108.02
Disbursed material Production runs
$1,103,31
8
2,00
0 $551.66
Total
$2,739,06
9

5MANAGEMENT ACCOUNTING
Overhead of maintenance
department:
Production scheduling Production runs
$1,277,31
7
2,00
0 $638.66
Set-up machines Set-Up hours $620,300
12,00
0 $51.69
Quality inspection Inspections $424,777
1,00
0 $424.78
Total
$2,322,39
4
Overhead of Machine Centre A Machine hours
$3,307,91
5
2,000,00
0 $1.65
Overhead of Machine Centre B Machine hours
$2,790,94
6
1,200,00
0 $2.33
Overhead of Assembly Centre
Direct labour
hours
$2,589,67
6
2,000,00
0 $1.29
Production cost under ABC method:-
Particulars Cost Driver
Cost
Driver per
unit
Cost
Driver per
Batch
Units per
Batch
Cost per
Driver
Unit
Cost
per
Unit
Simple luggage:
Overhead Cost of Machine Centre
A
Machine
Hours 4 100 $1.65 $6.62
Overhead Cost of Machine Centre
B
Machine
Hours 10 100 $2.33 $23.26
Overhead Cost of Assemble
Centre
Direct Labor
Hours 10 100 $1.29 $12.95
Material Purchase Cost
Purchase
Order 1 100 $114.13 $1.14

6MANAGEMENT ACCOUNTING
Material Receipt Cost
Material
Receipts 1 100 $108.02 $1.08
Material Disbursement Cost
Production
Runs 5 100 $551.66 $27.58
Production Scheduling Cost
Production
Runs 5 100 $638.66 $31.93
Set-Up Cost Set-Up Hours 50 100 $51.69 $25.85
Quality Inspection Inspections 1 100 $424.78 $4.25
Total overhead expenses per
unit $134.65
Direct Costs $80.00
Production cost per unit $214.65
Complex Luggage:
Overhead Cost of Machine Centre
A
Machine
Hours 10 200 $1.65 $16.54
Overhead Cost of Machine Centre
B
Machine
Hours 20 200 $2.33 $46.52
Overhead Cost of Assemble
Centre
Direct Labor
Hours 20 200 $1.29 $25.90
Material Purchase Cost
Purchase
Order 1 200 $114.13 $0.57
Material Receipt Cost
Material
Receipts 1 200 $108.02 $0.54
Material Disbursement Cost
Production
Runs 1 100 $551.66 $5.52
Production Scheduling Cost
Production
Runs 1 100 $638.66 $6.39
Set-Up Cost Set-Up Hours 10 100 $51.69 $5.17
Quality Inspection Inspections 1 100 $424.78 $4.25

7MANAGEMENT ACCOUNTING
Total overhead expenses per
unit $111.38
Direct Costs $200.00
Production cost per unit $311.38
Answer to Requirement 3:
Difference between traditional costing and ABC method:-
Particulars
Simple
Luggage
Complex
Luggage
Traditional Costing Method $147.82 $340.86
Activity Base Costing Method $214.65 $311.38
Difference $ (66.83) $29.47
Comment Under-valued Over-valued