Management Accounting: Traditional Costing System and Activity Based Costing System

  • Words: 2526
  • |
  • Pages: 6
  • This essay sample was donated by a student to help the academic community. Papers provided by EduBirdie writers usually outdo students' samples.
Download PDF

Introduction

Accounting is basic of the business and without the accounting; it is not possible to run the business in the effective manner. Accounting determines the rules and regulations that determine the ways to record the financial transaction. In this way, the main aim of this report is to enhance the knowledge and understanding on accounting. This report is also significant in the context of developing an understanding the on the traditional costing system and activity-based costing system. This report also helps to identify the main deference in activity-based costing and traditional costing.

Schedule 1:

Resource Cost Categories and Resource Drivers

Cost category Cost (All Calculations to 4 decimal places)

Wages 74,81,250

Building costs 7,000

Depreciation 13,200

Consumables 590

Energy 10,04,000

Other 129

Total 1,07,96,800

From the overall discussion, it can be determined that the wages 74,81,250 of the firm is and building cost of the firm is that shows that it is high as compared to the all. At the same time, consumable is 590 that are better also. As well as, there are other costs that are occurred due to the energy and some other internal expenses also. In like manner, the total cost of the firm is1,07,96,800 that is occurred after doing calculation of the overall cost and expenses.

Schedule 2:

Cost categories (resource drivers) Wages Building costs Depreciation Consumables Energy Other

Activity centres (employees) (m2) (machine hours) (orders) (kilowatt hours) (employees)

Product Development 30000 3000000 0 100000 200000000 30000

Sales and distribution 130000 7000000 0 100000 120000000 130000

Inspecting 20000 7000000 0 100000 120000000 20000

Blending 330000 1,4000000 53000000 2000000 2700000000 330000

Boiling 330000 1,4000000 66000000 1300000 4000000000 330000

Moulding and packaging 260000 1,4000000 13000000 2000000 2700000000 260000

Administration 130000 7000000 0 200000 100000000 130000

Corporate management 60000 4000000 0 100000 100000000 60000

Total quantity of resource drivers across all activity centres 1290000 7,0000000 132000000 5900000 10040000000 129

From the overall table, it can be determined that there are different categories such as wages, building cost, depreciation, consumables and the energy. At the same time, there are also some categories such as blending, moulding and packaging, product development, sales and distribution, corporate management and many more. The wages are also different from the other also. So, it can be determined that there is the variation in the cost and the difference also.

Schedule 3:

Activities and resource drivers used – Blending

Activity Percentage of labour time Percentage of floor space Percentage of machine hours labour time floor space machine hours

Set up blender 10% 5% 0% 1121855 56092750% 0

Weigh and sort ingredients 10% 5% 0% 1121855 56092750% 0

Load blender 40% 70% 100% 4487420 785298500% 11218550

Operate blender 20% 5% 0% 2243710 56092750% 0

Unload and Clean blender 10% 5% 0% 1121855 56092750% 0

Move to filling room 10% 10% 0% 1121855 112185500% 0

Total 100% 100% 100% 11218550 1121855000% 11218550

This graph is presents the various activities such as inspect filling ingredients, disposal of substandard filling, move to mixing room, and inspect finished products, disposal of substandard product, reports to health dept. At the same time, these activities are calculated in term of parentage of labour, percentage of floor space, percentage of machine hours, energy, consumable and others. From the above finding are it can be stated that the percentage of labour time is 557419.3548 however, floor of space is n 186268.6567. In regards to disposal of substandard filling activity disposal of substandard filling is 185806.4516 and consumables is 6400. The labour of percentage of percentage time is similar for Disposal of substandard filling, Move to mixing room, Disposal of substandard product and Reports to Health Dept. Also, Percentage of floor space is also similar for all of the activities apart from Inspect filling ingredients. In addition consumable are same for disposal of substandard filling and Disposal of substandard product that is 6400.However, estimated energy Disposal of substandard filling and Disposal of substandard product. The table shows that the percentage of machine is equal for Disposal of substandard filling and Disposal of substandard product and it varies for Reports to Health Dept. Also the Consumable estimation is zero (0) for inspect filling ingredients, Move to mixing room and Inspect finished products. Thus, it can be stated that some of the activities are similar for their resource driving indicators and some are varied. Also, the energy and labour time reflect the high number.

Schedule 4:

Activity Activity cost Activity driver Annual quantity of activity driver Cost per Driver

Corporate management $3,47,965 Assigned directly to products

Process receivables $3,86,065 No. of invoices 6,700 invoices $58

Process payables $3,65,837 No. of purchase orders 3,300 purchase orders $111

Production planning $2,13,261 No. of production schedules 1,330 production schedules $160

Reports to Health Dept $31,652 No. of reports 1,330 reports $24

Process sales order $6,16,652 No. of sales orders 5,320 sales orders $116

Dispatch sales order $3,44,601 No. of dispatches 3,300 dispatches $104

Product Development $1,73,983 Assigned directly to new products lines $0

Inspect ingredients $1,34,856 No. of batches 1,330 batches $101

Disposal of substandard ingredients $31,652 No. of batches 1,330 batches $24

Move to mixing room $31,652 No. of batches 1,330 batches $24

Set up blender $36,524 No. of batches 1,330 batches $27

Weigh and sort ingredients $25,468 No. of batches 1,330 batches $19

Load blender $21,556 No. of kilograms 2,66,000 kilograms $0

Operate blender $22,458 No. of batches 1,330 batches $17

Unload and Clean blender $22,42,211 No. of batches 1,330 batches $1,686

Move to filling room $35,455 No. of batches 1,330 batches $27

Set up scales $1,16,491 No. of batches 1,330 batches $88

Weigh ingredients $2,13,032 No. of batches 1,330 batches $160

Load boiling vats $4,26,064 No. of batches 1,330 batches $320

Coagulate, Drain and Scald $19,95,737 No. of kilograms 2,66,000 kilograms $8

Drain and clean vats $2,32,982 No. of batches 1,330 batches $175

Move to moulding room $1,36,441 No. of kilograms 2,66,000 kilograms $1

Load hopper $4,80,063 No. of products 10,64,000 products $0

Set up moulds and packaging $1,72,075 No. of trays 21,280 trays $8

Move to moulder $96,013 No. of trays 21,280 trays $5

Mould products and package $11,88,764 No. of trays 21,280 trays $56

Unload moulder $96,013 No. of trays 21,280 trays $5

Inspect finished products $55,056 No. of trays 21,280 trays $3

Disposal of substandard product $31,652 No. of trays 21,280 trays $1

Move to truck $1,15,963 No. of trays 20,220 Finished trays $6

* All Calculations to 4 decimal places “??” indicates that these figures must be calculated.

The findings of the schedule 4 shows that the activity cost if the corporate management is $3,47,965. Moreover, it is also found that process receivable cost per driver is 58 per unit. The cost of the process payable is calculated is 111 and production planning cost per unit is calculated 16. Report to health depth 24 and process sales order value is calculated 104. Inspect ingredients cost per unit is also calculated by 101 per unit. The value of the Disposal of substandard ingredients is found 31,652 and the number of the annual quantity 1330. At the same time, it is also found that Move to mixing room is recorded by 31652 and the quantity value is 1330 and per unit price 24. Set up blender value is found 36,524 and per unit cost is calculated by 27. Load blender and Operate blender are calculated by 22,458 and 22,42,211 and per unit cost are following 17 and 1,686. In the additional of this, it is also determined that Move to filling room per unit cost is $27 and Set up scales cost is 88.

Schedule 5:

Activities consumed Annual quantity of activity driver

Corporate management $93,882 Assigned directly to products

Process receivables 700 invoices

Process payables 300 purchase orders

Production planning 170 production schedules

Reports to Health Dept 170 reports

Process sales order 670 sales orders

Dispatch sales order 500 dispatches

Product Development $0 Assigned directly to new products lines

Inspect ingredients 170 batches

Disposal of substandard ingredients 170 batches

Save your time!
We can take care of your essay
  • Proper editing and formatting
  • Free revision, title page, and bibliography
  • Flexible prices and money-back guarantee
Place Order

Move to mixing room 170 batches

Set up blender 170 batches

Weigh and sort ingredients 170 batches

Load blender 53,250 kilograms

Operate blender 170 batches

Unload and Clean blender 170 batches

Move to filling room 170 batches

Set up scales 170 batches

Weigh ingredients 170 batches

Load boiling vats 170 batches

Coagulate, Drain and Scald 53,250 kilograms

Drain and clean vats 170 batches

Move to moulding room 53,250 kilograms

Load hopper 2,12,800 products

Set up moulds and packaging 2,130 trays

Move to moulder 2,130 trays

Mould products and package 2,130 trays

Unload moulder 2,130 trays

Inspect finished products – trays

Disposal of substandard product – trays

Move to truck 2,130 Finished trays

Direct Materials $3 per kilogram

Assigned directly to products

Current Market Selling Price $9 per unit of product

Batch size 1,300

Annual Volume 2,13,000

Schedule 6:

Activities consumed Annual quantity of activity driver

Corporate management $11,460 Assigned directly to products

Process receivables 200 invoices

Process payables 100 purchase orders

Production planning 70 production schedules

Reports to Health Dept 70 reports

Process sales order 200 sales orders

Dispatch sales order 100 dispatches

Product Development $88,348 Assigned directly to new products lines

Inspect ingredients 60 batches

Disposal of substandard ingredients 60 batches

Move to mixing room 60 batches

Set up blender 60 batches

Weigh and sort ingredients 60 batches

Load blender 13,000 kilograms

Operate blender 60 batches

Unload and Clean blender 60 batches

Move to filling room 60 batches

Set up scales 60 batches

Weigh ingredients 60 batches

Load boiling vats 60 batches

Coagulate, Drain and Scald 13,000 kilograms

Drain and clean vats 60 batches

Move to moulding room 13,000 kilograms

Load hopper 26,600 products

Set up moulds and packaging 540 trays

Move to moulder 540 trays

Mould products and package 540 trays

Unload moulder 540 trays

Inspect finished products 540 trays

Disposal of substandard product 540 trays

Move to truck 520 Finished trays

Direct Materials $4 per kilogram

Assigned directly to products

Current Market Selling Price $13 per unit of product

Batch size 500

Annual Volume 26,000

As per the given schedule 6, it is identified that it includes the different activities that were consumed by the firms and annual quantity of activity driver. In this table, it is identified that corporate management assigned $11,460 directly to products. This amount is competitively lower from schedule 5. In addition, product development assigned $88,348 directly to new products lines and direct materials assigned $4 per kilogram directly to products. Current market selling price is $13 per unit of product. In addition to this, it can also be said that process receivables include 200 invoices and process payables include 100 purchase orders in this schedule. The overall annual volume will be 26,000 for this schedule. The process sales order is 200 units in this schedule that are competitively higher than dispatch sales order because it has 100 dispatches. There are 60 batches in the inspect ingredients, disposal of substandard ingredients, set up the blender, move to mix room and weigh and sort ingredients in the consuming activity. In addition to this, there are some other things that also includes 60 batches such as operate a blender, unload and clean blender, move to fill room, set up scales, weigh ingredients and load boiling vats. Moreover, it is seen in schedule 6 that coagulate, drain and scald have 13,000 kilograms as well as a move to molding room also have 13,000 kilograms. The loading hopper includes 26,600 products in the schedule. However, it can be said that the activity based costing is effectively scheduled in the provided table.

Answer 5:

On the basis of the traditional and activity based costing, it is found that there is big difference in the allocation of the overhead cost. At the same time, it is also found that there is different base in the allocation of the cost.

Answer 6:

Computation of Traditional Cost

Particular Traditional Costing Activity Costing Difference

Total Indirect Cost 156000

Total Annual Units produced 26000

Per Unit Indirect Cost 6

Cost For Custard Tart 78000 112563 34563

Cost for Digitalgen 234000 265242 31242

Answer 7

Following are the reason of difference in cost

  • Increment in the salary leads to increase in the product cost
  • Inflection is also a reason of the increasing the production cost
  • Increase in the material cost also increase production cost
  • A increase in the electricity cost (Malmi, 2016)

Answer 8 and 9

Traditional costing system and Activity-based costing system

The traditional costing system and activity based costing system both are different. Traditional cost system is simple and activity cost system is complex. In this, it is also found that the traditional cost system is old method of accounting. According to this method, factory overhead are allocated as concerning of the products. In this, basically cost applied on the machine hours and labor hours. In this, it is also asked that overhead cost first related different departments then the products (Chenhall & Moers, 2015). Besides of this, activity cost method is new compared to traditional costing system. In this system, many activities and cost pools are centres are created to reflect difference activities. This cost method is helpful for the large manufacturing companies where it is easy to define the different activities cost separately (Otley, 2016).

The traditional cost system determines an additional part of overhead as compared to direct cost that help to measure the total cost the product. In this system, cost is only allocated for the production and non production cost only. Beside of this, activity cost system is known as the more accurate costing system as compared to traditional costing method (Cooper, 2017).

As increasing the theoretical knowledge and understanding on the traditional costing method and activity based costing system, it can be said that due to nature of the measuring the cost, there is big difference in the costing of given case study (Kaplan & Atkinson, 2015).

From the above points, it can be said that there is one rate for overhead allocation for the complete operations of the business in traditional costing approach. Thus, presence of one rate makes the traditional costing an easier approach for its implementation. On the other hand, there is multiple cost pool in costing in activity based approach which makes it a complex process and also increase its level of implementation. On the positive side, the Activity-based costing is useful to give detailed measures of costs as compared to the traditional costing method. At the same time, this costing method can be useful for the company in giving them a more precise product cost number to assist in forming correct decision with regards to pricing and also towards production for cost information of each activity. This would be effective for identification of cost-causing activities and management of production cost but it will require more effort in its record-keeping.

In addition to above, it is mentioned that traditional accounting includes the average of the several overhead rate in concern of the direct costs which is specifically for the manufacturing products. In this manner, it is also reflected that under this system, the overhead rates are applied on the behalf of the cost driver like the number of labour hours that are required for making the product at initial level. It is proved best for the company at the time of having low overheads of the company as compared to direct costs related to the production. With the help of the traditional cost system, the owner of the company gets the accurate facts and figures in concern of the costs while having the large production volume. At the same time, under the activity based costing system, all the specified overheads operations are connected with the manufacturer of each product.

References

  1. Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.
  2. Cooper, R. (2017). Supply chain development for the lean enterprise: inter-organizational cost management. Routledge.
  3. Otley, D. (2016). The contingency theory of management accounting and control: 1980–2014. Management accounting research, 31, 45-62.
  4. Chenhall, R. H., & Moers, F. (2015). The role of innovation in the evolution of management accounting and its integration into management control. Accounting, Organizations and Society, 47, 1-13.
  5. Malmi, T. (2016). Managerial studies in management accounting: 1990–2014. Management Accounting Research, 31, 31-44.

Make sure you submit a unique essay

Our writers will provide you with an essay sample written from scratch: any topic, any deadline, any instructions.

Cite this Page

Management Accounting: Traditional Costing System and Activity Based Costing System. (2022, March 17). Edubirdie. Retrieved May 23, 2022, from https://edubirdie.com/examples/management-accounting-traditional-costing-system-and-activity-based-costing-system/
“Management Accounting: Traditional Costing System and Activity Based Costing System.” Edubirdie, 17 Mar. 2022, edubirdie.com/examples/management-accounting-traditional-costing-system-and-activity-based-costing-system/
Management Accounting: Traditional Costing System and Activity Based Costing System. [online]. Available at: <https://edubirdie.com/examples/management-accounting-traditional-costing-system-and-activity-based-costing-system/> [Accessed 23 May 2022].
Management Accounting: Traditional Costing System and Activity Based Costing System [Internet]. Edubirdie. 2022 Mar 17 [cited 2022 May 23]. Available from: https://edubirdie.com/examples/management-accounting-traditional-costing-system-and-activity-based-costing-system/
copy
Join 100k satisfied students
  • Get original paper written according to your instructions
  • Save time for what matters most
hire writer

Fair Use Policy

EduBirdie considers academic integrity to be the essential part of the learning process and does not support any violation of the academic standards. Should you have any questions regarding our Fair Use Policy or become aware of any violations, please do not hesitate to contact us via support@edubirdie.com.

Check it out!