Case study question of management accounting the task is to do the nuremicals and explain the numericals in word as well and the referencing style must be harvard style the report report of numerical's and word explanation should be more than 2200 words

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Name

Durga pun Magar

Sylvia Shrestha

Birendra Chaulagain

MANAGEMENT ACCOUNTING

The given situation pertains to a firm named Jackson Ltd which manufactures two products

named Fred and Martha. The various details about the cost involved has been given and

effect of overhead allocation according to traditional method and the Activity Based Costing

(ABC) approach needs to be highlighted. This is being performed on account of a competitor

pricing Martha at a lower price in comparison to Jackson Ltd which raises suspicion on the

incorrect costing of the two products primarily on account of improper manufacturing

overhead allocation. The various aspects are as highlighted below.

a) In order to determine the unit cost for the given products, the main issue is with regards to

the allocation of manufacturing overheads for the two products.

Cumulative overhead costs related to manufacturing = $ 816,000

Annual quantity produced of Fred = 1000

Annual quantity produced of Martha = 5000

Per unit direct labour hour consumption for Fred = 2 hours

Per unit direct labour hour consumption for Martha = 3 hours

Hence, cumulative annual direct labour hours = 2*1000 + 3*5000 = 17,000

Manufacturing overhead per labour hour = 816000/17000 = $ 48

Considering the direct labour consumption for Fred, overhead manufacturing cost allocated to

each unit of Fred as per the above rate = 48*2= $ 96

Considering the direct labour consumption for Martha, overhead manufacturing cost

allocated to each unit of Martha as per the above rate = 48*3= $ 144

Considering the above computation, the cost per unit for the two products is highlighted

below (Emmauel and Otley, 2010)

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The above table suggests that per unit for Martha is $249 while that for Fred is $ 166.

b) For allocation of the overhead costs in accordance with the ABC technique, the primary

step is to compute the per activity cost when subsequently would be applied to the given

products.

This has been illustrated in the following table based on the data provided in relation to the

various sub-activities and their respective cost driver (Drury, 2006).

c) Using the information presented in the above table, the manufacturing cost allocation for the two products can be proceeded in the following manner (Heisinger, 2009).

Machine Related Costs

Unit machine hour cost = $ 50

Total machine hours consumed by each unit of Fred = 4

Unit overhead (Machine Related) cost for Fred = 4*50 = $ 200

Total machine hours consumed by each unit of Martha = 1

Unit overhead (Machine Related) cost for Martha= 1*50 = $ 50

Setup and Inspection

Setup costs incurred on in 1 run = $ 4,500

Fred production during 1 run = 50 units

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Martha production during 1 run = 250 units

Per unit inspection cost for Fred = (4500/50) = $ 90

Per unit inspection cost for Martha = (4500/250) = $ 18

Engineering Costs

Engineering cost involved in every order change = $ 900

Since 75% of the engineering costs are on account of Fred, hence share of Fred in

engineering cost = (75/100)*90000 = $ 67500

Per unit engineering cost for Fred = 67500/1000 = $67.5

Since 25% of the engineering costs are on account of Martha, hence share of Fred in

engineering cost = (25/100)*90000 = $ 22,500

Per unit engineering cost for Fred = 22500/5000 = $4.5

Plant related Costs

It is known that 80% of the factory area is used for production of Fred while the remaining

20% is used for Martha production.

Total plant related costs spent on Fred = (80/100)*96000 = $ 76,800

Plant related costs per unit (Fred) = 76800/1000 = $ 76.8

Total plant related costs spent on Martha= (20/100)*96000 = $ 19,200

Plant related costs per unit (Martha) = 19200/5000 = $ 3.84

Overhead cost allocation

Cumulative overhead cost attributable to production of Fred on a unit basis = 200 + 90 + 67.5

+ 76.8 = $434.3

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Cumulative overhead cost attributable to production of Martha on a unit basis = 50 + 18 + 4.5

+ 3.84 = $76.34

Thus, the costing of Fred and Martha in accordance with ABC technique is reflected in the

table highlighted below.

d) Considering the 120% pricing approach, unit price of Fred taking into consideration the cost of Fred determined by ABC = 504.3*1.2 = $ 605.16

Unit price of Martha taking into consideration the cost of Martha determined by ABC =

181.34*1.2 = $ 217.6

e) It is apparent from the above that the traditional approach of allocating the overhead cost

is highly inefficient as in this case in accordance with the traditional approach, there is an

under-costing of Fred and over costing of Martha (Heisinger, 2008). As a result, the

market price of Fred is significantly lower than the actual price determined by ABC

technique.

Thus, traditional costing approach has led to incorrect pricing of the product which

potentially would impact the market share and reputation of the company adversely. This is

the reason why the competitor was able to price Martha lower than the price offered by the

company. Sticking to such traditional approaches in the long run can potentially lead to

incorrect decision making with regards to the most profitable product mix. For instance, in

the given case, in actuality higher price charged on Martha is subsidising the lower price

charged on Fred (Drury, 2006).

f) The benefits of introduction of ABC costing are highlighted below (Weyganth, Kimmel

and Kieso, 2009).

• It helps in accurate determination of product cost.

• It helps in determination of pricing decisions as price is invariably linked to cost.

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• It leads to improved decision making regarding product mix.

• It provides key information about the cost behaviour critical in cost management and

management decision making.

• Since, the overhead activities can be traced to exact activities, hence, the management

can take prudent measures to reduce the cost by business process reengineering

besides enhancing the efficiency of the existing processes through the use of scientific

management

• Owing to better cost and pricing decisions, it improves the competitive advantage of

the firm in the market.

• It enables the company to take better decisions in relation to capacity expansion and also continuation and discontinuation of particular product or service line.

g) The various disadvantages associated with ABC technique are listed below (Kinney and

Rainborn, 2012).

• Considering that various activity pools need to be identified and also the cost driver,

hence implementation of ABC costing is expensive and needs special expertise for the

implementation of the same.

• This technique is difficult to be implemented by small firms due to expertise and

resource allocation which is required.

• There may be resistance from the managers in relation to adoption of ABC costing

which needs to be dealt with.

• Additional expense needs to be incurred on training of managers involved in decision

making so that they can use the information generated by ABC costing.

• There are issues with regards to implementation in the sense that activities need to be

broken down into smaller activities and the cost driver needs to be identified

meticulously.

• Further, there are instances when the sub-division of activities is carried too far and

hence the underlying costs tend to overweigh the benefits in this case (Heisinger,

2008).

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References

Drury, C. (2006) Cost and Management Accounting: An Introduction. 6th ed. New York: Cengage Learning.

Emmauel, R.C. and Otley, T.D. (2010) Accounting for Management Control. 8th ed. London: Cengage Learning.

Heisinger, K. (2009) Essentials of Managerial Accounting. 4th ed. London: Cengage Learning.

Kinney, R. M. and Rainborn , A. C. (2012) Cost Accounting: Foundations and Evolutions. 9th ed. New York: Cengage Learning.

Weyganth, J.J., Kimmel, D. P. and Kieso, E. D. (2009) Managerial Accounting: Tools for Business Decision Making. 5th ed. Sydney: John Wiley & Sons.