Management Accounting for Planning and Control: ABC System Analysis

This report analyzes the implementation of activity-based costing (ABC) in comparison to traditional costing systems for the General Electrical Corporation. It begins by outlining the problems associated with traditional costing, such as inaccurate overhead allocation and its impact on pricing decisions. The report then presents detailed calculations of cost per unit and target prices using the ABC system for three product models. A comparative analysis is provided, highlighting the benefits of adopting ABC, including improved cost accuracy, better resource utilization, and enhanced decision-making capabilities. The report concludes with a discussion on the advantages and challenges of implementing ABC, supported by relevant references.

Management accounting for planning
and Control

Table of Contents
General problem related with the imple..........................mentation of traditional costing system
.....................................................................................................................................................3
Calculation of the Cost per Unit as per the Activity based costing system and target price.......3
Cost and benefits of the adoption of Activity based costing system for the General Electrical
Corporation..................................................................................................................................5
References........................................................................................................................................7

GENERAL PROBLEM RELATED WITH THE IMPLEMENTATION OF
TRADITIONAL COSTING SYSTEM
In the traditional costing system, the overhead is allocated on the basis of average overhead rate.
Generally, it is determined on the basis of direct labor hour relating to production of goods. It is
very simple to allocate the cost on the basis of traditional costing system, however it does not
provide reliable or the accurate result (Namazi, 2016). Further, manager of the company cannot
analyze the detail aspect of the cost through traditional costing. Along with, optimum utilization
of the resources in the division is not possible through the traditional costing system, since the
overhead are implemented on the basis of single rate, thus wastage of resources cannot be
ascertained, which assist in the inefficiency in the productivity.
In the given case, it has been stated that General Electrical Corporation produces the three
product and apply job costing system in which the manufacturing overhead cost is allocated on
the basis of direct labor hour. At present, according to the traditional costing system, Standard
model cost has total product cost $ 157.5. The pricing policy of the company is 110% over the
total product cost. Due to the enhanced competition, the price of the standard model should be
below the $110. It has been identified by the CEO of the company, those other companies selling
the same model for $ 160, which is just $ 2.5 more than the production cost of standard model. It
is the indication that, method of allocation of the product costing distorting the cost of the
product.

CALCULATION OF THE COST PER UNIT AS PER THE ACTIVITY
BASED COSTING SYSTEM AND TARGET PRICE
Table 1Statement Showing Computation of cost per unit and target price as per activity based
costing system
Standard
Model
Deluxe
Model
Heavy-Duty
Model
Number of units 30000 1500 15000
Raw Material 450000 56250 945000
Direct Labor 450000 45000 450000
Depreciation 888000 288600 1043400
Maintenance 72000 23400 84600
Engineering 246750 31500 246750
Inspection and Repair of defects 264375 33750 264375
Purchasing, receiving, and shipping 176250 30000 168750
Material Handling 282000 48000 270000
Depreciation, taxes and insurance for
factory 189000 67500 193500
Miscellaneousmanufacturing overhead 185850 66375 190275
Total Cost 3204225 690375 3856650
Per Unit Cost 106.8075 460.25 257.11
Target Price 117.48825 506.275 282.821
Working Notes
 It has been assumed that, manufacturing overhead given as per the traditional costing
system is included in the overhead given as per activity based costing system.
 Calculation of overhead as per the activity based costing system –
Table 2 Statement showing allocation of the overhead as per the activity based costing system
Activity Overhead Activity Driver
Standard
Model
Deluxe
Model
Heavy-
Duty
Model

Depreciation 2220000 Machine Time 888000 288600 1043400
Maintenance 180000 Machine Time 72000 23400 84600
Engineering 525000
Engineering
Hours 246750 31500 246750
Inspection and Repair of
defects 562500
Engineering
Hours 264375 33750 264375
Purchasing, receiving, and
shipping 375000
Number of
material orders 176250 30000 168750
Material Handling 600000
Number of
material orders 282000 48000 270000
Depreciation, taxes and
insurance for factory 450000
Factory Space
Usage 189000 67500 193500
Miscellaneous
manufacturing overhead 442500
Factory Space
Usage 185850 66375 190275
 Target price is computed on the basis of 110% of the total product cost.
COST AND BENEFITS OF THE ADOPTION OF ACTIVITY BASED
COSTING SYSTEM FOR THE GENERAL ELECTRICAL
CORPORATION
On the basis of the above computation it can be assessed that, total cost per unit as per activity
based system is $ 106.8075, which is less than $ 110. Therefore, it can be said that allocation of
the method of costing makes the significant impact on the pricing decision. In present case, due
to the implementation of the traditional costing system, company is not able to make the right
decision.
Activity based costing the good technique over the allocation of the cost as compared with the
traditional method of costing. It is process consist with the observation of activities, including
the consumption of the resources of the product and then analyze the final cost of product. In
other words, it can be said that, as per the activity based costing, cost is allocated on the basis of

activity of the product (Otley, 2016). It is considered as more accurate method of good or service
costing, by which the company can take more reliable decision of the pricing. It assist the
manager to improvisation in the understanding related with the manufacturing cost along with
the cost driver, by which they can identify the non-value added activities and costly activities in
a clear way. Further, activity based costing identify a specific overhead activities connected with
manufacturing of the every product (Baumers, Dickens, Tuck, &Hague, 2016).
Along with this, it has been identified that this method is the appropriate alternative to the
absorption system of costing, which permits the managers of the company to understand the
product in cost relating to product in better manner. Even organization will be able to take better
decision relating to cost of the product. The specified costing method provides more emphasis on
the cost drivers, those activities that are reason for the increment in the cost. It is used the cost
driver which are founded on the basis of transaction, instead of the volume (Newcomer, Hatry,
&Wholey, 2015). Apart from this, the implementation of the activity based costing is not an easy
task, it involves the analysis of cost pools and then cost driver, which is very comprehensive. It
requires the significant analysis; therefore the application of this system is costly. Further,
updation is also required regularly by the company (Chen,& et.al 2015).

REFERENCES
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