MA620 Advanced Management Accounting

Read the above scenario and write a report to the managing director discussing key reasons as to which costing system produces the most useful information for management. Also state your recommendations in respect of product strategy (product mix) as a result of the information produced.

In your report:

1. Explain the general problems associated with CMI’s t?aditio?al ?osti?g syste? a?d highlight a?y indicators that the current costing system is outdated and flawed.
2. Calculate the rate per activity driver to be used in the desired activity-based costing system and produce a revised income statement by product group tracing process and support costs to product groups using activity-based costing methodology.
3. Analyse and explain the differences in product costs and net profit margins between the two alternative costing systems.

Answer:

to Traditional costing system which is also known as volume based costing system is the allocation of the factory overhead, which is the cost valued during manufacturing process of an item omitting the costs of the direct labor and the direct material costs ; to the products based on the volume of products consumed (Ax & Greve, 2017). Here the factory overhead is applied on the basis of labor hours or the machine hours. The factory overhead includes the salaries of the laborers, salaries of the managerial post’s people, the factory rent and so on. Traditional costing system was initially used but a major drawback has been noticed  as the factory overhead may change and the allocation can become higher , following with a change in the volume of resources will trigger the amount of overhead applied. The factory environment where there are much more number of machines and thus the overhead will be null and void. This method actually reallocated the indirect costs to the items manufactured depending on the volume. The Australian based Safe manufacturing company CMI safe co. In uses a typical traditional costing system and this is the reason of the un identification of costs and thus it leads to minimum profit although the number of sales is higher. It is found that the net margin of the company’s metal safes had fallen 20% below the target that it was not supposed to fall. Metal safes are high volume products and the sales fell down instead the plastic safes are less volume product in comparison to metal safe but the sales increased. After a research on the costs, net profit and other criteria it is discovered that traditional costing system can be the cause of this disruption on business (Bromwich & Scapens, 2016).

Activity-Based Costing System

Analyzing and explaining the differences in product costs and net profit margins between the two alternative costing systems

Now it can be seen in the income statement above that the results are different than that of the income statement which was made under traditional based costing system. It can be said that the products cost relating the safes rendered by the company has decreased constantly which means that previously the cost were overvalued (Weygandt, Kimmel & Kieso, 2015). The product costs after the calculation of income statement through activity based costing have decreased constantly. This is because the company has been using a traditional costing which was not able to efficiently identify the complexity of the activities which were performed by the company hence the cost were either power valued or undervalued affecting the calculation of overall cost which will incurred by the firm in there operational activities (White et al. 2016). It can be seen that as the products cost decreased in the calculation done through ABC costing the profit margin has increased considerably. This is positive sign for the company as now the profit margin shows near true and fair value of profit margin which is rendered by the company. It can be said through the calculation made above that the statement made by some of the managers regarding backdated traditional costing affecting the company’s accounting process was indeed correct. It can be said that traditional based costing interfered in the costing operations of the firm and created materiality within the costing process of the company. This directly affects the calculation of profitability within the company (Van der Stede, 2018). Hence, it can be said that the old traditional based costing system hampered cost calculation system of the company which resulted in over and under valuation of cost in respect to the operations and activities which the company conduct in the production of the products. It can be said that through the introduction of activity based costing the company will be able to identify the cost incurred by the firm in there operations. Thus it can be said that Activity based costing is evident costing system which the company should adapt in order to get proper valuation of cost in the operations of the firm. It can be seen in the calculations above that through the use of ABC costing the production cost decrease which increased the profit margin of the company and gave the real amount of profit which was incurred by the firm in there operational activities (Renz, 2016).

Now as discussed above there are various benefits of using ABC costing as the company modern costing system as it will increase the efficiency of the following in cost calculation of the firm operational activities (Langfield-Smith, Smith, Andon, Hilton & Thorne, 2017). Although there are some limitation in very costing method and ABC costing method is no different from other methods. Hence the limitations of Activity based costing are as follows:

1. As ABC costing provides accurate results and proper outputs it can also be said that process of costing under the ABC costing guidelines are very complex and expensive. It can be said that costing system becomes complex as there care identification of different activities that the company performs which then is converted in units and so on. This makes the process complex and expensive. The company has to incur Hugh expense to recruit experts in order to conduct ABC costing system within the firm which will increase overall expense of the company’s operational activities (Kumar & Reinartz, 2018).
2. It can be said that one of the biggest limitation and difficulties which arises in selection of ABC  costing as costing system within the firm is its process of selecting cost driver. It is very complex procedure that takes time to be conducted. In this case implementation of ABC  costing in continuously operating firm is difficult and challenging as it will lacks its essence of costing accurate results without identification of actual cost drivers which makes it hard for the company operate such costing system (Grande et al. 2015).
3. It can be said that the process is very time consuming, as the process requires various stages of operation before producing accurate cost that is incurred in operations of the firm. It can be said that these stages ignite the most out of every operations that is conducted within the operations of the firm. It can be said that in this case the process of ABC costing becomes very time consuming which can be a limitation of the following costing system (Fullerton, Kennedy & Widener, 2014).

It can be said that the above stated limitations are minor limitations and can be heard by CMI if they want to choose a better costing system which enables them to know there real cost and profit margin incurred in a period of time.

Conclusion

Reference list

Cooper, R. (2017). Target costing and value engineering. Routledge. London, UK

Dale, B. G., & Plunkett, J. J. (2017). Quality costing. Routledge. London, UK

Malmi, T. (2016). Managerialist studies in management accounting: 1990–2014. Management Accounting Research, 31, 31-44. Doi: 10.1016/j.mar.2016.02.002

Mossialos, E., Wenzl, M., Osborn, R., & Sarnak, D. (2016). 2015 international profiles of health care systems. Canadian Agency for Drugs and Technologies in Health. Retrieved from https://wwww.issuelab.org/resources/25100/25100.pdf

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. John Wiley & Sons. New Jersey, USA

White, M. P., Elliott, L. R., Taylor, T., Wheeler, B. W., Spencer, A., Bone, A., ... & Fleming, L. E. (2016). Recreational physical activity in natural environments and implications for health: a population based cross-sectional study in England. Preventive medicine, 91, 383-388. Doi: 10.1016/j.ypmed.2016.08.023