Management Accounting Report: Costing System Analysis, ACC310

This report addresses the costing issues faced by Sewing Machine Australia, examining the limitations of job costing in overhead allocation and its impact on pricing. The report proposes activity-based costing (ABC) as an alternative method to improve pricing accuracy and overhead allocation. The analysis includes a quantitative comparison of job costing and ABC, demonstrating how ABC can lead to more accurate product costs and improved profitability for the company. The report highlights the benefits of ABC, such as enhanced cost control and a better understanding of cost behavior. The conclusion recommends the adoption of ABC to enhance the costing system and improve pricing strategies.

Running head: MANAGEMENT ACCOUNTING
Management accounting
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Executive summary
The task will focus on the issues faced for job costing by the sewing machine Australia as
well as the world. It will suggest an alternative method like Activity based costing that will
help it to improve the pricing system and improve the basis of overhead allocation. The report
will further establish the model for ABC costing approach.

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Table of Contents
Introduction................................................................................................................................3
Problem statement......................................................................................................................3
Quantitative and quantitative analysis.......................................................................................5
Conclusion and recommendation...............................................................................................8
Reference..................................................................................................................................10

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Introduction
Sewing Machine Australia is engaged in supplying the used as well as new sewing
machines for industrial use and the associated parts for applications of commercial sewing.
Company’s range of heavy duty sewing machines fulfils purposes of commercial industries
and it provides its goods in Australia as well as some of the overseas countries. The company
mainly manufacture and delivers 2 types of sewing machines – basic models and the advance
model (Heavy Duty Industrial Sewing Machine Australia 2019). However, in recent times the
entity observed that its customers are interested in buying only the advanced model and not
interested to buy the basic model. Further, instead of high sales of advance model the
company is incurring loss on that model. Though it is not sure why the customer’s
preferences are like so, they are sure about one thing that some issues are there in pricing the
products (Goetsch and Davis 2014) The company uses job costing system for allocating the
costs and based on the same selling prices are determined.
Problem statement
Job costing is the system used for accumulating and assigning the manufacturing costs
for an individual output unit. This approach is used while more than one item is produced by
the company those are different from each other in some aspects (Weygandt, Kimmel and
Kieso 2015). As there is difference is product manufactured by the company that is the basic
model and advance model, the system used by the company requires separate record for job
cost for each of the model. Under this approach direct labour and direct material actually used
for each model is allocated to the manufacturing overhead (Costabile et al. 2017). However,
the major problems that the company as well as the world is facing with the job costing
system are as follows –

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 Base of overhead allocation – overhead allocation under job order costing is made on
the basis of a specified allocation base. In other words, cost accountants use the
known cost as the proxy for allocating unknown costs. For instance, the direct labour
hours is known to the manufacturer for each product. However, if the manufacturer
assumes that overheads amount that will be spent by each product will be proportional
to labour hours, direct labour hours will be used as the basis of allocation (Lakmal
2014)
 Rate of allocation – once the basis for allocation is determined overheads are
segregated amongst various cost objects on the basis of the consumption of allocation
base. For instance, Sewing Machine Australia manufactures 2 types of machines,
basis model requires 10 labour hours and advanced model requires 20 labour hours
and total overhead amount is $ 15,000. As the direct labours are in 1:2 ratio,
overheads will be allocated as - $ 15,000 * 1/3 = $ 5000 to basis model and $ 15,000
* 2/3 = $ 10,000 to advanced model (Plank 2018)
 Implications – while using the allocation rate for segregating the cost of overheads, it
is assumed that direct relationship is there among the amount incurred for overheads
and the basis of allocation. In other words, it means that with increase in labour hours
overheads will also go up in approximately same proportion. However, practically it
is not the case as overheads does not have direct and proportional relationship with
any other costs (Osadchy and Akhmetshin 2015)
 Controlling overhead costs – as the estimates are for the purpose of quotation only, it
does not offer effective means to control the overhead costs. Management are aware
of the fact that these quotations are rarely accurate and therefore cannot be utilised as
the basis for controlling the overheads. Other costing technique like activity based
costing provides better controls for the incurred costs (Mitra 2016)

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Owing to above mentioned issues all over the world as well as for Sewing Machine
Australia, the entity is planning for more practical basis of allocating the overhead like
activity based costing
Quantitative and quantitative analysis
As the company is in the view there is some issues in their costing system which in
turn misguide their pricing systems it wants to adopt the activity based costing system for the
purpose allocating the overheads that will enable it to establish better pricing for the products
(Keiser, Garner and Vandermar 2017) Information regarding the company’s business for the
year 2018 has been collected as follows –
Basic Model Advance model
Units manufactured and sold 1700 1600
Cost per unit for direct material $ 350 $ 580
Cost per unit for direct labour $ 175 $ 280
Total overhead costs and the activities are detailed below –
Inspection - $ 30,000
Production schedule - $ 200,000
Assembly - $ 80,000
Machine set-up - $ 40,000
Activities used by the models as follows –
Activity Basic model Advance model Allocation basis
Inspection 760 210 Inspection
Production schedule 60 510 Machine hours
Assembly 4700 3500 Runs
Machine set-up 120 270 Set-up

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In addition to that selling and administration expenses for advance model = $ 300,200, office
rent = $ 42,800 and interest expenses = $ 40,500
Other details –
The advanced model is sold under the existing system at total price plus 30% and
wants to maintain the price system same as per the new system.
Under the existing job costing approach the overhead allocation considering the
labour cost as the basis of allocation will be as follows –
Particulars Basic Model
Advance
Model Total
Units produced and sold 1700 1600
Direct material cost per unit $ 350.00 $ 580.00 $ 1,523,000.00
Direct labour cost per unit $ 175.00 $ 280.00 $ 745,500.00
Direct cost per unit $ 525.00 $ 860.00 $ 2,268,500.00
Indirect cost
Inspection cost $ 6.79 $ 11.54 $ 30,000.00
Assembly cost $ 45.25 $ 76.92 $ 200,000.00
Production Schedule $ 18.10 $ 30.77 $ 80,000.00
Machine set - up $ 9.05 $ 15.38 $ 40,000.00
Selling and administration
cost $ 187.63 $ 300,200.00
Interest expense $ 25.31 $ 40,500.00
Office rent $ 26.75 $ 42,800.00
Overhead cost per unit $ 79.19 $ 374.30 $ 733,500.00
Cost per unit $ 604.19 $ 1,234.30 $ 3,002,000.00
Overhead allocation as per activity based costing
Particulars Basic Model Advance Total

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Model
Units produced and sold 1700 1600
Direct material cost per unit $ 350.00 $ 580.00 $ 1,523,000.00
Direct labour cost per unit $ 175.00 $ 280.00 $ 745,500.00
Direct cost per unit $ 525.00 $ 860.00 $ 2,268,500.00
Indirect cost
Inspection cost $ 13.83 $ 4.06 $ 30,000.00
Assembly cost $ 67.43 $ 53.35 $ 200,000.00
Production Schedule $ 4.95 $ 44.74 $ 80,000.00
Machine set - up $ 7.24 $ 17.31 $ 40,000.00
Selling and administration
cost $ 187.63 $ 300,200.00
Interest expense $ 25.31 $ 40,500.00
Office rent $ 26.75 $ 42,800.00
Overhead cost per unit $ 93.45 $ 359.14
Cost per unit $ 618.45 $ 1,219.14 $ 3,002,000.00
As the customers are interested in buying the advance model, it seems that the selling
price of the advance model is cheap as compared to the competitors.
Profit and loss statement for advance model under both the systems is as follows –
Particulars Job costing ABC method
Units produced and sold 1600 1600
Selling price per unit $ 1,604.59 $ 1,604.59
Total sales revenue $ 2,567,350.00 $ 2,567,350.00
Direct material cost per unit $ 580.00 $ 580.00
Direct labour cost per unit $ 280.00 $ 280.00
Direct cost per unit $ 860.00 $ 860.00
Indirect cost
Inspection cost $ 11.54 $ 4.06
Assembly cost $ 76.92 $ 53.35
Production Schedule $ 30.77 $ 44.74
Machine set - up $ 15.38 $ 17.31
Selling and administration
cost $ 187.63 $ 187.63
Interest expense $ 25.31 $ 25.31
Office rent $ 26.75 $ 26.75
Cost per unit $ 1,234.30 $ 1,219.14
Profit per unit $ 370.29 $ 385.45
Total profit $ 592,465.38 $ 616,718.05

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From the above it can be observed that the cost of advance model is more under
existing system that leads to less profit per unit. However, if the company uses the ABC
system for allocating the overhead unit cost of advance model can be lowered from $ 1234.30
per unit to $ 1219 per unit that will increase the profit from $ 370.29 per unit to $ 385.45 per
unit. Further with the same production and sales level the profit from advance model will
increase from $ 592,465.38 to $ 616,718.05 (Haroun 2015). Other advantages of activity
based costing are as follows –
 Accurate cost of the product – ABC brings the reliability and accuracy in the
determination of product cost through focussing on the cause and effect relationship
in cost incurrence. It identifies the activities that causes the costs and not the products
and these are the products those consume the activities (Gurcanli, Bilir and Sevim
2015)
 Information regarding cost behaviour – ABC recognizes real nature of the cost
behaviour and assists in minimizing costs and recognising activities those do not add
the value to product. With the ABC approach, the managers may control various
fixed costs through exercising more control over activities that have caused the fixed
overhead costs (Dale and Plunkett 2017)
Conclusion and recommendation
From the above interpretation it can be identified that using the ABC costing system
in place of the existing job costing system it can enhance its profits and establish better
pricing system. Further, it will help the company to resolve the issues it is facing at present
regarding the loss from its advance model. Hence, it is recommended that the company shall
switch to ABC costing approach for allocating overheads that will help to allocate the

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overheads in m ore systematic way and establishing better pricing system which in turn will
improve its profitability.

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Reference
Costabile, G., Fera, M., Fruggiero, F., Lambiase, A. and Pham, D., 2017. Cost models of
additive manufacturing: A literature review. International Journal of Industrial Engineering
Computations, 8(2), pp.263-283.
Dale, B.G. and Plunkett, J.J., 2017. Quality costing. Routledge.
Goetsch, D.L. and Davis, S.B., 2014. Quality management for organizational excellence.
Upper Saddle River, NJ: pearson.
Gurcanli, G.E., Bilir, S. and Sevim, M., 2015. Activity based risk assessment and safety cost
estimation for residential building construction projects. Safety science, 80, pp.1-12.
Haroun, A.E., 2015. Maintenance cost estimation: application of activity-based costing as a
fair estimate method. Journal of Quality in Maintenance Engineering, 21(3), pp.258-270.
Heavy Duty Industrial Sewing Machine Australia., 2019. Sewingmachinesaustralia.com.au.
Retrieved 25 May 2019, from https://www.sewingmachinesaustralia.com.au/
Keiser, S., Garner, M.B. and Vandermar, D., 2017. Beyond design: The synergy of apparel
product development. Bloomsbury Publishing USA.
Lakmal, D., 2014. Cost Analysis for Decision Making and Control: Marginal Costing versus
Absorption Costing.
Mitra, A., 2016. Fundamentals of quality control and improvement. John Wiley & Sons.
Osadchy, E.A. and Akhmetshin, E.M., 2015. Accounting and control of indirect costs of
organization as a condition of optimizing its financial and economic activities. International
Business Management, 9(7), pp.1705-1709.

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Plank, P., 2018. Introduction. In Price and Product-Mix Decisions Under Different Cost
Systems (pp. 1-5). Springer Gabler, Wiesbaden.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting.
John Wiley & Sons.