Management Accounting Assignment: Traditional vs. ABC Costing Analysis

This assignment presents a comparative analysis of traditional and Activity-Based Costing (ABC) methods within the context of management accounting. The solution begins by calculating the cost per unit of product using traditional costing, detailing direct materials, direct labor, and various manufacturing overhead costs, such as set up, engineering, machine-related, and plant-related costs. The solution then interprets the results, explaining how the traditional costing system determines per-unit costs by considering normal values and separate overhead rates. The assignment then transitions to ABC costing, where costs are analyzed based on specific activities and cost drivers, again calculating the cost per unit for both basic and advanced products. The assignment includes calculations for set up costs, engineering costs, machine-related costs, and plant-related costs. The final step involves comparing the total costs with the selling price to determine the profit or loss incurred by the entity under both costing methods, thereby illustrating the differences and implications of each approach.

Introduction to Management Accounting

Table of Contents
A) Cost per unit of product under traditional costing..................................................................3
B) Cost of product per unit under ABC costing..........................................................................4
2

A) Cost per unit of product under traditional costing
Particulars
Total
costs Basic
Advan
ced
Basic cost per
unit
Advanced cost
per unit
Units 2000 10000
Direct material
12000
0 80000 40 60
Direct labour hours 4000 30000 2 3
Manufacturing overhead
Total labour hours 4000 30000
overhead rate for set up
costs 10.58 377.77 2833.33
Set up costs
36000
0
Overhead rate for
engineering costs 5.29
Enginering cost
18000
0 755.55 5666.66
Overhead rate for
machine related costs 26.47
Machine related costs
90000
0 151.11 1133.33
Overhead rate for plant
related costs 5.64
Plant related costs
19200
0 708.33 5312.5
3

Total cost per units 2034.77 15008.83
Loss 1055.57 14812.99
Selling price 979.2 195.84
Interpretations
The traditional costing system is that approach in which the existing per unit are taken
into consideration by an entity by taking the normal values. The manufacturing overhead has
determined by calculating the overhead rate separately for single manufactured overhead costs.
The current system will undertake all kinds of manufacturing costs in order to know the actual
cost incurred by an entity for both the products such as basic and advanced products produces by
an enterprise. The selling price of this entity is based on 120% of the manufacturing costs which
is used as one of the measure to compare the total cost incurred by an entity in producing these
kinds of products to reflect the ability of deficiency of the business.
B) Cost of product per unit under ABC costing
Particulars
Total
costs Volume of basic Volume of advance Basic
Advance
d
Set up costs 360000 4000 20000 90 18
Engineering cost 180000 150 50 1200 3
Machine related costs 900000 14400 3600 62.5 250
Plant related costs 192000 3072 768 62.5 250
Total cost 1415 521
Loss 435.8 325.16
Selling price 979.2 195.84
Interpretations
The Activity based costing is that approach in which separate costs has analyzed by an
enterprise by considering each and every activities and different cost which are allocated on the
basis of cost drivers determined by an entity. The total cost has compared with the selling price
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