Detailed Analysis of Different Aspects of Management Costing Methods

This report provides a comprehensive analysis of various aspects of management costing. It begins with an executive summary and an introduction to the importance of cost management in manufacturing companies. The report delves into process costing, including physical flow analysis, equivalent units of production, unit cost calculations, and cost reconciliation. It also explores sustainability accounting, addressing financial, environmental, social, and economic issues faced by a company. Furthermore, the report examines cost behavior using scatter diagrams, the high-low method, and least squares regression to predict costs. Cost-volume-profit analysis, including contribution margin, break-even points, and operating income, is also discussed. The report compares absorption and variable costing methods, providing income statements and inventory cost calculations for each. Activity-based costing is introduced, along with calculations for budgeted prices and new product costs. The report concludes with a memo to the CEO, strategic options, recommendations, and conclusions, offering a holistic view of management costing techniques and their practical applications.

DIFFERENT ASPECTS OF MANAGEMENT COSTING
STUDENT NAME: STUDENT ID:
9/12/2017

EXECUTIVE SUMMARY
The title of the report is the different aspects of management costing. As per the title, the report
will detail as to what are the different types of costing method and how the management shall
perform the calculation of costing. Each method has been described and calculated throughout
the report. The second major aim that has been flowed in each and every question is the reporting
of the results to the management along with the reasoning as to why this has happened. With
these two major aims the report has been divided into separate headings and sections.

Contents
EXECUTIVE SUMMARY.................................................................................................................................2
INTRODUCTION...........................................................................................................................................2
PROCESS COSTING.......................................................................................................................................5
PHYSICAL FLOW ANALYSIS.......................................................................................................................5
EQUIVALENT UNITS OD PRODUCTION.....................................................................................................6
UNIT COST OF DEPARTMENT...................................................................................................................6
COST OF UNITS TRANSFERRED................................................................................................................7
VALUE OF CLOSING WIP INVENTORY.......................................................................................................7
COST RECONCILIATION............................................................................................................................7
SUSTAINABILITY ACCOUNTING....................................................................................................................8
ISSUES TAKEN CARE BY COMPANY..........................................................................................................8
FINANCIAL ISSUES................................................................................................................................9
ENVIRONMNETAL ISSUES....................................................................................................................9
SOCIAL ISSUES...................................................................................................................................10
ECONOMICAL ISSUES.........................................................................................................................10
OTHER INFORMATIONBEFORE RESOLVING THE ISSUES........................................................................10
COST BEHAVIOUR......................................................................................................................................11
SCATTER DIAGRAM................................................................................................................................11
COST BEHAVIOUR USING HIGH LOW METHOD.....................................................................................11
PREDICTION OF COST WITH EQUATION................................................................................................12
LEAST SQUARES REGRESSION ANALYSIS................................................................................................13
LEAST SQUARES REGRESSION EQUATION..............................................................................................14
PREDICTION OF COST WITH REGRESSION EQUATION...........................................................................14
DIFFERENT IN COST FROM DIFFERENT METHODS.................................................................................15
COST VOLUME PROFIT ANALYSIS..............................................................................................................15
CONTRIBUTION MARGIN AND BREAK EVEN..........................................................................................15
EFFECT ON OPERATING INCOME...........................................................................................................16

ESTIMATION OF PROFITS.......................................................................................................................17
MARGIN OF SAFETY...............................................................................................................................17
DEGREE OF OPERATING LEVERAGE.......................................................................................................17
ABSORPTION AND VARIABLE INCOME STATEMENT..................................................................................18
INVENTORY COST CALCULATION UNDER ABSORPTION COSTING.........................................................18
ABSORPTION INCOME STATEMENT.......................................................................................................18
INVENTORY COST CALCULATION UNDER VARIABLE COSTING...............................................................19
VARIABLE COSTING INCOME STATEMENT.............................................................................................20
CALCULATION OF OPERATING INCOME.................................................................................................20
ACTIVITY BASED COSTING.........................................................................................................................22
CALCULATION OF BUDGETED PRICE......................................................................................................22
CALCULATION OF NEW PRODUCT COST................................................................................................22
CALCULATION OF NEW BUDGETED PRICE.............................................................................................23
MEMO TO CEO......................................................................................................................................24
STRATEGIC OPTIONS..............................................................................................................................25
DISTROTION OF TRADITIONAL PRODUCT COST.....................................................................................25
RECOMMENDATION AND CONCLUSIONS..................................................................................................26
REFRENCES................................................................................................................................................27

INTRODUCTION
Cost management and accounting plays a very important role in the case of success of the
manufacturing companies. It is because each and every method of cost calculation and
management has its own value and informs the management as to how the company should take
care of each element of costing so as to deliver the better results. New concepts of costing like
Process costing, Activity based costing, etc has been discussed along with the decision analysis
techniques like cost volume profit analysis, contribution, etc. Along with the management
costing, concept of sustainability development has been discussed. It informs the management as
to how the company shall perform so as to maintain the balance between the social and
environmental impact of the activities of the company and the profits earned by the company. In
each of the questions, the calculation has been done along with the results detailing how the
company shall proceed with such results.
PROCESS COSTING
PHYSICAL FLOW ANALYSIS
Units to be Account For
Units in beginning WIP Inventory , August 1 600,000
Units started during August 1,200,000
Total Units to be Accounted For 1,800,000
Units Accounted For
Unit Completed and transferred out 1,500,000
Units in ending WIP Inventory 300,000
Total units accounted For 1,800,000

Units in Process as on August, 1 600,000
Add: Units started during August 1,200,000
Total Units taken into account 1,800,000
Less: Unit Completed during August and transfer out 1,500,000
Units in Process as on August, 31 300,000
Physical Units started
during August
= Physical units of Work in Process as on 31st August + Physical Units
transferred and Completed -Physical units of Work in Process as on 1st
August
=300000 units + 1500000 units – 600000 units
=1200000 units
(Horngren, Bhimani, Datar, Foster and Horngren,2002)
EQUIVALENT UNITS OD PRODUCTION
Guerreiro, Cornachione, and Catelli,2006)
Equivalent Units
Physical
Units
Perc
enta
ge
of
Co
mpl
etio
n Cabinets
Compone
nts
Conversi
on Costs
Units in Process as on August, 1 600,000 60%
Add: Units started during August 1,200,000
Total Units taken into account 1,800,000
Less: Unit Completed during August
and transfer out 1,500,000
100
% 1,500,000 1,500,000 1,500,000
Units in Process as on August, 31 300,000 20% 300,000 300,000 60,000
Total Equivalents units of the Assembly Department for
August month 1,800,000 1,800,000 1,560,000

UNIT COST OF DEPARTMENT
Total Costs Cabinets Components
Conversion
Costs
Cost Units in Process as on August,
1 $ 19,200,000 $ 1,200,000 $ 12,600,000 $ 5,400,000
Costs Added during August $ 36,240,000 $ 2,400,000 $ 25,200,000 $ 8,640,000
Total Costs $ 55,440,000 $ 3,600,000 $ 37,800,000 $ 14,040,000
÷Equivalents Units for August 1,800,000 1,800,000 1,560,000
Cost per units for Assembly
Department for August $ 2 $ 21 $ 9
COST OF UNITS TRANSFERRED
Cabinets Components Conversion Costs Total
Cost of Units to be
transferred out
Units transferred out in August 1,500,000 1,500,000 1,500,000
X Per unit cost for August $ 2 $ 21 $ 9
Total Costs of Units
transferred Out $ 3,000,000 $ 31,500,000 $ 13,500,000 $ 48,000,000
VALUE OF CLOSING WIP INVENTORY
Cabinets Components Conversion Costs Total
Cost of ending WIP Inventory as on
August 31
Equivalent Units as on August 31 300,000 300,000 60,000
X Per unit cost for August $ 2 $ 21 $ 9
Total Costs of Ending WIP
Inventory as on August 31 $ 600,000 $ 6,300,000 $ 540,000 $ 7,440,000

COST RECONCILIATION
Costs to be Account For
Total Costs Cabinets Components Conversion Costs
Cost of beginning WIP Inventory ,
August 1 19,200,000 $ 1,200,000 $ 12,600,000 $ 5,400,000
Cost added to Assembly Department 36,240,000 $ 2,400,000 $ 25,200,000 $ 8,640,000
Total Units to be Accounted For 55,440,000
Costs Accounted For
Cost of Units transferred during August 48,000,000 $ 3,000,000 $ 31,500,000 $ 13,500,000
Costs of ending WIP Inventory , August
31 7,440,000 $ 600,000 $ 6,300,000 $ 540,000
Total units accounted For 55,440,000
SUSTAINABILITY ACCOUNTING
One of the main features of the company is that it shall work for long term in future. In other
word, perpetuity is considered as the main feature on which the corporate world is operating. The
corporate is considered as the entity which is different from the owners and have the respective
assets and liabilities and which can be easily sued from the other persons or can sue any other
persons (Kemp, Schot and Hoogma, 2008). The law of the country has given the legal status to
the companies and has stated that the company will run for future but in actual many companies
end up with the closure like HIH Insurance, Lehman Brothers, etc.
ISSUES TAKEN CARE BY COMPANY
In the given case study, Hannah Pty Limited is engaged in the business of manufacturing of
spices and is facing three major problems. In each of the problem the company has been facing

the challenges in terms of financial, environmental, social and the economic. The chief executive
officer of the company wants to solve the challenges through the sustainability method. As per
the sustainability approach, the proper balance is established between the need of the economic
growth and the protection of the environment and equity in social terms (Muñoz, Rivera and
Moneva, 2008). Elkington has described the concept of the Triple Bottom Line which states that
the objectives of the business of the company cannot be separated from the society and the
environment within which the company is operating (Elkington, 2007; Dixon and Clifford,
2007). Therefore, in the sustainability approach three issues are considered people, planet and
profit. People refer to the society, planet refers to the environment and profit represents the
objective of the company that it meets after meeting out the social and environmental objectives
(Hacking and Guthrie, 2008). Following are the issues that the company shall take into in each of
the following problem are:
FINANCIAL ISSUES
First Problem - Belen Bilanco, the finance manager of the company advised the company to set
up the factory at East Asia for preliminary processing will be the better idea and the initial cost
of setting up the same is AUD$1.2 million and after that AUD$0.11 per kilogram will be
incurred. Currently the processing cost comes out at AUD$0.33 per kilogram. The main financial
issue involved is the set up cost of the factory plant. It is required to be considered whether the
company has enough funds to set up the factory plant and whether it is feasible to have the
investment in East Asia or not. Second financial issue that needs to be considered is whether the
company shall invest through their own funds or shall obtain loans from the financial institutions
or banks. Third financial issue that the company shall consider is the market conditions at the
time of setting up of the plant. If it is favorable then the company shall go for the proposal.
Second Problem – In the second problem as apprised by Matt Carlton, production
manager of the company, there is the need of having the new machinery for the filtering is
required. The financial issue involve in this is the cost of new system which is around AUD $290
thousand and the cost of running the system per year will be AUD$17500. The company is

required to consider the feasibility and the viability of the proposed investment in accordance
with the market condition and the liquidity of the company.
Third Problem – In the third problem, three financial issues are involved. One is recruitment of
the consultant at the cost of $43000 who can bring the cordial relations within the staff of
different functions. Second financial issue is to terminate the disturbing staff at the cost of
$285000.
ENVIRONMNETAL ISSUES
First Problem – Two issues have been observed. One issue is that on the plantation of the spices,
toxic chemicals are sprayed and second issue is that the workers are working by sacrificing their
lives as these toxic chemicals may harm their lungs and can cause serious diseases.
Second Problem – One issue that has been observed is that the operation of the Gold Coast has
been penalized for polluting the air in the past years. Second issue is that despite of the
statements made by the newspapers and magazines, company has not even declared that the
company is not performing any activity which has resulted in water pollution.
Third Problem – The major issue is that the company is facing the situation where the internal
environment of the company is not so good which is resulting in the bad rating of social and
environment impact.
SOCIAL ISSUES
First Problem – The major issue is related to the working conditions of the workers as they were
not hygienic and second is the less payment made to them on an hourly basis which is only
AUD$3.
Second Problem – The major issue is related to the enhancement of the reputation of the
company through the improvement of the building and the system.
Third Problem – The issue is related to the treatment that the production manager has done with
the workers of the company by having the dictatorship like ruling.

ECONOMICAL ISSUES
The basic economic issue which is relevant for all the problems is that whether the company will
be able to generate profits and that too with the balancing of social and environmental impact of
activities of the company (Willard, 2012).
OTHER INFORMATIONBEFORE RESOLVING THE ISSUES
Before resolving the issue through the sustainability approach, the company shall consider the
following information:
- The market conditions of the industry within which the company is operating.
- The feasibility report of the project for setting up the processing plant in East Asia
- The viability of the filtering system that may be installed in plant located at Gold Coast
- The reasons for the differences among the staff members of the different functions of the
department.
COST BEHAVIOUR
SCATTER DIAGRAM
0 2 4 6 8 10 12 14
0
5000
10000
15000
20000
25000
30000
Shipping Department Costs
Shipping Department Costs

COST BEHAVIOUR USING HIGH LOW METHOD
As per HIGH LOW Method, Variable cost can be derived as
Variable cost per unit = (Y2 – Y1) / (X2 – X1)
In this
Y1 = Shipping department costs at lowest kilogram level
Y2 = Shipping department costs at highest kilogram level
X2= Kilogram of supplies at highest level
X1= Kilogram of supplies at lowest level
In the given question,
Y2 = $ 26240
Y1 = $ 20400
X2= 5200 Kilogram
X1= 2000 Kilogram
Variable cost per unit = (Y2 – Y1) / (X2 – X1)
= ($ 26240 - $ 20400 ) / (5200 kg – 2000 kg)
= $ 1.825 per unit
Total Fixed Costs = Y2 – ( X2 x Variable cost per unit)
= $ 26240 – (5200 kg x $ 1.825)
= $ 16750
Total Fixed Costs = Y1 – ( X1 x Variable cost per unit)
= $ 20400 – (2000 kg x $ 1.825)
= $ 16750
From the above analysis, the Costing Equation has been drive as follows:

Yn = Fixed Cost + Variable Cost x Xn
In which
Y is the total Shipping Costs
X is the kilograms supplies unloaded and loaded
Costing Equation from the data given in
Question
Y = $ 16750 + $ 1.825 X
PREDICTION OF COST WITH EQUATION
When the load is 5500 kilograms
Costing Equation from the data given in
Question
At X =5500, Shipping Department’s Cost
Y = $ 16750 + $ 1.825 X
= $ 16750 + $ 1.825 x 5500 kilograms
= $ 26787.50
LEAST SQUARES REGRESSION ANALYSIS
As per Least Square Regression Analysis Method, Variable cost can be derived as
Variable cost per unit = (n x ƩXY) – (ƩX x ƩY) / (n x ƩX2) – (ƩX) 2
In this
n = No of months
ƩXY = Sum of product of Shipping department costs and kilogram level
ƩX = Sum of kilogram loads
ƩY = sum of all Shipping Department Costs
ƩX2= Sum of square of kilogram loads
In the given question,
Kilogram
s of
Supplies
Shipping
Departme
nt Costs

unloaded
or loaded
X Y X2 XY
3800 23400
1444000
0
8892000
0
3200 22600
1024000
0
7232000
0
2600 22500 6760000
5850000
0
2000 20400 4000000
4080000
0
4400 22200
1936000
0
9768000
0
4800 25100
2304000
0
1204800
00
4000 24000
1600000
0
9600000
0
3600 22800
1296000
0
8208000
0
5200 26240
2704000
0
1364480
00
2200 22100 4840000
4862000
0
2400 22700 5760000
5448000
0
2800 22700 7840000
6356000
0
41000 276740
1522800
00
9598880
00
Variable cost per
unit
=(n x ƩXY) – (ƩX x ƩY) / (n x ƩX2) – (ƩX) 2
= (12 x 959888000) – (41000 x 276740) / ( 12 x 152280000) – ( 41000 x 41000 )
= $ 1.1773435 per unit
Total Fixed Costs = [ (ƩY ) – (ƩX x Variable cost per unit) ]/ n
= [$ 276740 – (41000 x $ 1.1773435 per unit)] / 12
= $ 19039.08

LEAST SQUARES REGRESSION EQUATION
From the above analysis, the Costing Equation has been drive as follows:
Yn = Fixed Cost + Variable Cost x Xn
In which
Y is the total Shipping Costs
X is the kilograms supplies unloaded and loaded
Costing Equation from the data given in
Question
Y = $ 19039.08 + $ 1.1773435 X
PREDICTION OF COST WITH REGRESSION EQUATION
When the load is 5500 kilograms
Costing Equation from the data given in
Question
At X =5500, Shipping Department’s Cost
Y = $ 19039.08 + $ 1.1773435 X
= $ 19039.08 + $ 1.1773435 x 5500 kilograms
= $ 25514.47
DIFFERENT IN COST FROM DIFFERENT METHODS
The cost predictions as per two methods are different because of the different approaches used in
the both the methods. Under High Low Method, only two data variables which are highest and
lowest units has been used to estimate the variable and fixed costs whereas in Least Squares
Regression Analysis each values of data are used statistically to determine variable and cost.
Least Square Regression Analysis method is recommended to be used to analyze the cost
behavior and determined the cost equation as it uses more representative costs over the High
Low method which does not provide healthy relationship between costs and units given.

COST VOLUME PROFIT ANALYSIS
CONTRIBUTION MARGIN AND BREAK EVEN
Contribution Margin per unit = Sales Price Per Unit – Variable Cost per unit
= $ 70 - $ 40
= $ 30 per unit
Variable cost per unit = Total Variable Costs / No of Units
= $ 8120000 / 203000 units
= $ 40 per unit
Break Even Point in units = Total Fixed Costs/ Contribution Margin per unit
= $ 4945500 / $ 30 per unit
= 164850 units
Contribution Margin Ratio = ( Contribution Margin per unit / Sale Price per unit) X 100
= ($ 30 per unit / $ 70 per unit) X 100
= 42.8571429 %
Break Even Sales Revenue = Break Even units X Sale Price per unit
= 164850 units X $ 70 per unit
= $ 11539500
EFFECT ON OPERATING INCOME

Sales Units at increased
Sales Revenue
= (Old Sales Revenue + Increase in Sales Revenue) / Sales Price
per unit
= ($ 14210000 + $ 1000000) / $ 70 per unit
= 217286 units
Statement of Operating Profit
Sales Revenue ( $ 14210000 + $ 1000000) $ 15,210,000
Contribution Margin Ratio 42.8571429 %
Contribution Margin ($ 15210000 X 42.8571429 %) $ 6,518,571. 43
Total Fixed Costs ( $ 4945500 + $ 250000) $ 5,195,500
Operating Income $ 1,323,071.43
Increase in Operating
Income
= New Operating Income – Old Operating Income
= $ 1323071.43 - $1144500
= $ 178571.43
ESTIMATION OF PROFITS
Statement of Operating Profit
Sales Revenue ( $ 14210000 + $ 1500000) $ 15,710,000
Contribution Margin Ratio 42.8571429 %
Contribution Margin ($ 15710000 X 42.8571429 %) $ 6732857.14
Total Fixed Costs $ 4945500
Operating Income $ 1787357.14

Underestimated in
Operating Income
= New Operating Income – Old Operating Income
= $ 1787357.14 - $1144500
= $ 642857.14
MARGIN OF SAFETY
Margin of Safety = Actual Sales Revenue – Break Even Sales Revenue
= $ 14210000 - $ 11539500
= $ 2670500
DEGREE OF OPERATING LEVERAGE
Degree of Operating
Leverage Based on Original
Income Statement
= (Sales Revenue – Variable Cost) / (Sales Revenue – Variable Cost – Fixed
Costs)
= ($ 14210000 - $ 8120000) / ($ 14210000 - $ 8120000 - $ 4945500)
= 5.3211
Percentage Increase in
Operating Income
= Degree of Operating Leverage X percentage increase in Sales
= 5.3211 X 8%
= 42.5688 %
ABSORPTION AND VARIABLE INCOME STATEMENT
INVENTORY COST CALCULATION UNDER ABSORPTION COSTING

Per Unit Inventory
Cost that reported
by Billy Ltd at the
end of year
= Total Manufacturing Costs / Units Produced
= $ 1454000 / 200000 pallets
= $ 7.27 per pallet
Manufacturing costs
for the year
= Total Variable Manufacturing costs + Total Fixed Manufacturing Cost
= $ 1274000 +$ 180000
= $ 1454000
Total Variable
Manufacturing costs
for the year
= (Direct Materials per unit + Direct Labor per unit + Variable overhead
per unit ) X Units Produced
= ( $ 2.85 + $ 1.92 + $ 1.60 ) X 200000 pallets
= $ 1274000
Closing Inventory
Units at the end of
the year
= Opening Inventory + Units Produced - Units Sold during the year
= 8200 pallets + 200000 pallets - 204300 pallets
= 3900 pallets
Total Cost of
Inventory at the end
of the year
= Closing Inventory units X Per Unit Cost of Inventory at the end
= 3900 pallets X $ 7.27 per pallet
= $ 28353
ABSORPTION INCOME STATEMENT
BILLY LIMITED
INCOME STATEMENT ( ABSORPTION COSTING)
Sales ( 204300 pallets X $ 9 )
$
1,838,700
Less: Cost of Goods
Sold
Opening Inventory ( 8200 pallets X $ 7.27 )
$
59,614
Cost of Units Produced ( 200000 pallets X $ 7.27 )
$
1,454,000
Closing Inventory ( 3900 pallets X $ 7.27 ) $

(28,353)
$
1,485,261
Gross Profit
$
353,439
Less : Selling and Administrative Expenses
Variable Selling
Expenses
( $ 204300 pallets X $
0.90)
$
183,870
Fixed Selling and Administrative Expense
$
96,000
$
279,870
Net Operating Income
$
73,569
INVENTORY COST CALCULATION UNDER VARIABLE COSTING
Per Unit Inventory
Cost that reported
by Billy Ltd at the
end of year
= Direct Material per pallet + Direct Labor per pallet + Variable Overhead
per pallet
= $ 2.85 + $ 1.92 + $ 1.60
= $ 6.37 per pallet
Inventory Cost per unit under Absorption costing is $ 7.27 pallet which is different from per unit
cost under variable costing which is $ 6.37 per pallet. This difference occurs due to consideration
of fixed manufacturing expenses under Absorption costing in calculation of the unit cost of
inventory. Absorption costing assumes all the cost related to manufacturing whether fixed and
variable as a part of unit cost while variable costing only consider the variable manufacturing
costs as a part of unit cost (Horngren, 2009).
VARIABLE COSTING INCOME STATEMENT
BILLY LIMITED
INCOME STATEMENT ( VARIABLE COSTING)

Sales ( 204300 pallets X $ 9 )
$
1,838,700
Less: Cost of Goods Sold
Opening Inventory
( 8200 pallets X $ 6.
37 )
$
52,234
Cost of Units Produced
( 200000 pallets X $
6.37 )
$
1,274,000
Closing Inventory ( 3900 pallets X $ 6.37 )
$
(24,843)
$
1,301,391
Gross Contribution Margin
$
537,309
Less: Variable Selling
Expenses ( $ 204300 pallets X $ 0.90)
$
183,870
Contribution Margin
$
353,439
Less : Fixed Expenses
Fixed Overhead
$
180,000
Fixed Selling and Administrative Expense
$
96,000
$
276,000
Net Operating Income
$
77,439
CALCULATION OF OPERATING INCOME
When Billy Limited sold 196700 pallets, then
Closing Inventory
Units at the end of the
year
= Opening Inventory + Units Produced - Units Sold during the year
= 8200 pallets + 200000 pallets - 196700 pallets
= 11500 pallets
BILLY LIMITED
INCOME STATEMENT ( ABSORPTION COSTING)

Sales ( 196700 pallets X $ 9 ) $ 1,770,300
Less: Cost of Goods Sold
Opening Inventory ( 8200 pallets X $ 7.27 ) $ 59,614
Cost of Units Produced ( 200000 pallets X $ 7.27 ) $ 1,454,000
Closing Inventory ( 11500 pallets X $ 7.27 ) $ (83,605)
$ 1,430,009
Gross Profit $ 340,291
Less : Selling and Administrative Expenses
Variable Selling Expenses ( 196700 pallets X $ 0.90) $ 177,030
Fixed Selling and Administrative Expense $ 96,000
$ 273,030
Net Operating Income $ 67,261
BILLY LIMITED
INCOME STATEMENT ( VARIABLE COSTING)
Sales ( 196700 pallets X $ 9 ) $ 1,770,300
Less: Cost of Goods Sold
Opening Inventory ( 8200 pallets X $ 6. 37 ) $ 52,234
Cost of Units Produced ( 200000 pallets X $ 6.37 ) $ 1,274,000
Closing Inventory ( 11500 pallets X $ 6.37 ) $ (73,255)
$ 1,252,979
Gross Contribution Margin $ 517,321
Less: Variable Selling Expenses ( 196700 pallets X $ 0.90) $ 177,030
Contribution Margin $ 340,291
Less : Fixed Expenses
Fixed Overhead $ 180,000
Fixed Selling and Administrative Expense $ 96,000
$ 276,000
Net Operating Income $ 64,291

ACTIVITY BASED COSTING
CALCULATION OF BUDGETED PRICE
(Kaspina, R. G., Khapugina and Zakirov,2014)
Statement of Budgeted Prices as per Traditional Approach
Standard Model Deluxe Model Heavy Duty Model
Raw Material $ 10.00 $ 25.00 $ 42.00
Direct Labor $ 10.00 $ 25.00 $ 25.00
Manufacturing Overhead $ 85.00 $ 170.00 $ 170.00
Total Product Cost $ 105.00 $ 220.00 $ 237.00
Add : Profit $ 10.50 $ 22.00 $ 23.70
Budgeted Sales Price $ 115.50 $ 242.00 $ 260.70
( 110% of total costs)
CALCULATION OF NEW PRODUCT COST
Statement of Product Cost as New Data
Activity
Driver
Standard
Model
Deluxe
Model
Heavy Duty
Model
Raw
Material
( 20000 units
X $ 10)
$
200,000
( 1000
units X $
25) $ 25,000
( 10000
units X $
42) $ 420,000
Direct
Labor
( 20000 units
X $ 10)
$
200,000
( 1000
units X $
20) $ 20,000
( 10000
units X $
20) $ 200,000
Manufacturing Overhead
Depreciati
on
Machiner
Machin
e Hours
( $ 1480000 X
40% )
$
592,000
( $
1480000 X
13% )
$ 192,400 ( $
1480000
X 47% )
$ 695,600

y
Machiner
y
Maintena
nce
Machin
e Hours
( $ 120000 X
40% )
$
48,000
( $ 120000
X 13% ) $ 15,600
( $
120000 X
47% )
$
56,400
Depreciati
on, taxes
and
insurance
factory
Factory
space
usage
( $ 300000 X
42% )
$
126,000
( $ 300000
X 15% ) $ 45,000
( $
300000 X
43% ) $ 129,000
Engineeri
ng
Enginee
ring
Hours
( $ 350000 X
47% )
$
164,500
( $ 350000
X 6% ) $ 21,000
( $
350000 X
47% ) $ 164,500
Purchasin
g,
receiving
and
shipping
No of
Materia
l Order
( $ 250000 X
47% )
$
117,500
( $ 250000
X 8% ) $ 20,000
( $
250000 X
45% ) $ 112,500
Inspectio
n and
repair of
defects
Enginee
ring
Hours
( $ 375000 X
47% )
$
176,250
( $ 375000
X 6% ) $ 22,500
( $
375000 X
47% ) $ 176,250
Material
handling
No of
Materia
l Order
( $ 400000 X
47% )
$
188,000
( $ 400000
X 8% ) $ 32,000
( $
400000 X
45% ) $ 180,000
Miscellan
eous
Manufact
uring
Overhead
Factory
space
usage
( $ 295000 X
42% )
$
123,900
( $ 295000
X 15% ) $ 44,250
( $
295000 X
43% ) $ 126,850
Total
Costs
$
1,936,150 $ 437,750 $ 2,261,100
÷ No
Units 20000 units 1000 units 10000 units
Product
Cost per
unit
$
96.81 $ 437.75
$
226.11
CALCULATION OF NEW BUDGETED PRICE

Statement of New Budgeted Price as New Data
Standard Model Deluxe Model Heavy Duty Model
Total Product Cost $ 96.81 $ 437.75 $ 226.11
Add : Profit $ 9.68 $ 43.78 $ 22.61
Budgeted Sales Price $ 106.49 $ 481.53 $ 248.72
( 110% of total costs)
Statement of Difference in New Budgeted Price and Old Sales Price
Standard Model Deluxe Model Heavy Duty Model
Old Sales Price $ 115.50 $ 242.00 $ 260.70
New Sales Price $ 106.49 $ 481.53 $ 248.72
Decrease / ( Increase
in Sales Price) $ 9.01 ($ 239.53) $ 11.98
MEMO TO CEO
To: Chief Executive Officer of the Company
From: Finances Team
Date: 12/09/2017
Subject: Effects of Traditional Product Costing System
Company has three types of electric motors which are – Standard model, deluxe model and
heavy duty model. The company has been using method of allocating the manufacturing
overhead on the basis of the predetermined overhead rate which is calculated on the basis of the
direct labor hours. The following has happened by following the method of traditional method of
costing:

- Cost has not been properly allocated to the product. It is because direct labor in the
current scenario cannot be considered as the best driver for allocating the cost.
- In the today’s world all work is now carried out through the use of the computers and the
machineries and it cannot be said that all the work has been carried out by the labor
(Drury, 2013).
- By allocating the cost on the basis of the predetermined rate, the management may be
able to take the wrong decision as it specifically does not includes the manufacturing
costs relating to the certain product.
Apart from above negative factors, there is only one advantage of following old method is that
the method is very easy.
Therefore, it is suggested to have the Activity based costing system.
Best Regards,
Finance Team
STRATEGIC OPTIONS
The company has the following strategic options:
- The company shall discontinue the traditional costing system.
- The company shall adopt the Activity Based Costing System so as to compete with the
competitors in the market.
- The company shall revise its pricing strategy to survive in the market.
It is recommended because if the same is not followed then the company will have to close the
production of standard model (Vanderbeck, 2012).
DISTROTION OF TRADITIONAL PRODUCT COST
Statement Showing Difference in Product Costs under Two Methods

Standard Model Deluxe Model Heavy Duty Model
Traditional Method $ 105.00 $ 215.00 $ 232.00
ABC Method $ 96.81 $ 437.75 $ 226.11
(Decrease) /
Increase in Product
Cost $ (8.19) $ 222.75 $ (6.11)
The above table shows that the traditional method of costing has been distorting the true view of
the costing of the different products being sold by the company. In the case of standard model,
the company has been charging $8.19 more than the normal cost and the same case is present in
the case of heavy duty model where the company has been charging more by $6.11.
Majorly in case of the deluxe model the company has been charging less by $222.75.
Thus, from the above analysis, the traditional costing system has distorted the costing system of
the company.
RECOMMENDATION AND CONCLUSIONS
It is recommended that the company shall follow the updated system of costing and shall
discontinue the old system of costing.
To conclude the study, the report has given the various costing system and the management
accounting system through which the company can make very useful decision without any
mistakes. Secondly the report has provided the analysis of various calculations through which the
company can modify the procedures and work accordingly.

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