Costing And Activity Based Costing Accounting Essay

This assignment are knowing a batch of information about Traditional bing method and Activity based costing and besides alterations of direction accounting. The treatment will be divided into two portion, which are first portion calculated traditional costing method and activity based bing from the information that given.

After that pupil need give definition, advantages, disadvantages and differences. of both traditional costing method and activity- based costing, First discuss about of Scooter Driver based on the issues raised by each of the managers. The 2nd portion will be discourse the coursework pupil have to give the alterations of direction accounting over the past decennaries and besides the impact of the alterations in direction accounting.

Current Method

Production Cost Per Unit

Net income


Entire 4 180 000

2.0 Activity-Based Costing Method

2.1 Production Cost Per Unit


2.2 Net income

Entire 4 180 000

Traditional costing method

To: Director of ScooterDriver

From: Management Accountant

Rhenium: Measure the Absorption Costing and Activity- based costing

The traditional method refers to the allotment of fabricating overhead costs to the merchandises manufactured ( Hansen, Mowen, 2006 ) . The traditional method besides known as the conventional method assigns or allocates the mill ‘s indirect cost to the points manufactured on the footing of volume such as the figure of units produced, the direct labor hours, or the production of machine hours ( Huntzinger, 2007 ) .

The traditional costing system merely has one or a few indirect cost for each section or whole works nevertheless the application of cost in the traditional costing system is usually based on an indirect cost driver cost applications are frequently financially ( Drury, 2007 ) . The traditional attack to bing of merchandises basically utilities a system whereby the entire cost to bring forth a figure of merchandises are divided between the assorted merchandises by doing usage of the traditional costing system, it therefore means that all the cost incurred have to be allocated to one or other merchandises ( Coombs, Hobbs, Jenkins, 2005 ) .

Besides, traditional costing system tend to utilize a smaller figure of 2nd phase allotment bases, typically direct labor or machine hours and often the traditional system presume that direct labourhave a important influnces in the long term on the degree of overhead outgo ( Drury, 2004 ) . Traditional costing system besides use indirect cost to merchandises based on a predetermined operating expense rate, to boot the traditional costing is optimum when indirect cost are low compared to direct costs and there are several stairss in the traditional costing procedure ( Bhimani, 2006 ) .

The job with this attack is that for most overhead activities, the proportions of the activity really consumed by a specific merchandise, does non cosmopolitan correspond with a individual cost driver and this holds true for most modern companies where merchandises are produced by a combination of work force and engineering ( Horngren, 2007 ) . The traditional cost accounting theoretical account employs a volume-based driver, such as a direct labor hours or machine hours for the assignment of all fabricating overhead cost therefore the conventional cost accounting theoretical accounts ends up with a cost of goods sold based on soaking up costing and includes merely merchandises costs are defined in fiscal accounting ( Jiambalvo, 2009 ) .

Activity Based Costing

ABC ( Activity Based Costing ) is a system that attempts to accurately follow indirect costs to merchandises by apportioning indirect costs to activities and so to merchandises based on their use of the activities ( Drury 2004 ) . ABC is optimum when truth is really of import and when indirect costs comprise a big proportion of entire costs compared to direct costs and ABC is besides normally used in the fabrication sector ( Finkler, 2003 ) .

ABC is so utile for the fabrication sector is reasonably obvious, by apportioning indirect costs to merchandises based on use, a company can more accurately see where the resources and energy is traveling in their company. ( R. Hansen, M. Mowen, Guan, 2007 ) . It will calculating out where the money and energy is traveling, attempts can be focused upon those merchandises that are eating up the most clip and energy and this finally lead to a bead in cost, in theory, as attempts will be made to cut down the costs on the majority of the merchandises. ( Hansen, M.Mowen, Guan, 2007 ) .

Activity based costing system besides used to find merchandise costs for particular direction studies ( Weetman, 2006 ) . This system is normally used as a addendum to the company ‘s usual costing system. Most organisations that use ABC systems have two bing systems are known as the functionary bing system that is used for fixing external fiscal studies and the activity based bing system that is used for internal determination devising and for pull offing activities. ( Drury, 2004 ) .

ABC systems differ from traditional system by holding a greater figure of centres in the first phase and a greater figure, and assortment, of cost drivers or allotment bases in the 2nd phase ( Drury, 2004 ) . Activity based costing ( ABC ) was developed to get the better of the defects of the traditional method. Alternatively of merely one cost driver such as machine hours, ABC will utilize many cost drivers to apportion a maker ‘s indirect costs. ( Weerman, 2006 ) .

Differences between ABC and traditional costing method

Traditional cost accounting system and ABC have some similarities, for case both have two phases whereby resources costs are pooled before being assigned to be objects. The first phase pools indirect costs in production cost centres ( in convention system ) or in activity centres in ( ABC system ) ( Narayanaswamy, 2008 ) . The 2nd phase allocates operating expenses to be objects utilizing volume realated bases direct labor hours, direct labor cost or machine hours or a mixture of both volume and non-volume related bases in ABC system ( Narayanawamy, 2008 ) .

However, despite these similarities several characteristics differentiate the two system, foremost in traditional costing system merely fabricating operating expenses usually allocated to be objects, whereas fabrication and non-manufacturing operating expenses are assigned in ABC system ( Bierman Jr,2010 ) .

Another, an ABC system normally has well more cost pools ( based on activity centres ) than a traditional system ( based on production sections ) ( Banjerjee,2007 ) . Furthermore ABC uses more sophisticated and complex allotment bases, peculiarly during the 2nd phase of following costs to merchandises.

ABC advocates argue that these differences make ABC system superior as the provide directors with more dependable information about merchandise costs ( Bierman, Jr.,2010 ) . Traditional cost accounting pattern are accused of often overrating the cost of high volume merchandises and undervaluing those of low volume 1s, epically when operating expense are less related to volume ( innes and Mitchell, 1998 ) .

In contrast to traditional cost accounting system, ABC system are non inherently constrained by the dogmas of fiscal describing demand instead, ABC system have the built-in flexibleness to supply particular studies to ease direction determination sing the cost of activities undertaken to plan, bring forth, sell, and present a company ‘s merchandises or services ( Patra, 2006 ) . This flexibleness is the fact that ABC system focal point on roll uping costs via several cardinal activities, whereas traditional cost allotment focuses on roll uping costs via organisational units ( Needles, Powers, Crosson, 2006 ) . By concentrating on specific activities, ABC systems provide superior cost allotment information, non-volume-based cost drivers cause epically when cost. Even so, traditional cost accounting system will go on to be used to fulfill conventional fiscal coverage demand, ABC system will go on addendum, instead than replace, traditional cost accounting system ( Ramchandran 2007 ) .

Finally, traditional coasting and ABC can differences by costs associated with a merchandise can be categorized as a direct costs and indirect costs ( Drury,2007 ) . Direct cost, is the cost which can be identified with the merchandise, while indirect cost are non straight accountable to a cost object for illustration cost of stuffs, direct labor cost such as rewards and wages are illustration of direct cost ( Ryan,2004 ) . Administrative costs and depreciation are some of the illustrations of indirect cost the ground to placing entire cost of a merchandise are really of import to find the merchandising priceof that merchandise ( Stolowy, 2006 ) .

Deduction of activity-based costing for ScooterDriver

The remark by the finance manager is differing because Fireball is doing profitable with the bing system but unprofitable with the ABC system. The two systems can hold major impact on overall net incomes. The intent for the differences in merchandise net income is that Fireball has the lower volume but it makes the higher comparative demand on the three activities identified by the ABC system, because Fireball uses a lower proportion of direct labor hours than the other merchandises and the bing system allocates a lower portion of operating expenses to Fireball.

The selling manager argues that incremental costs are required for the pricing determination. Consequently disagree with this because, its of import to separate between short term and long-run incremental costs. ABC seeks to describe long-run incremental cost chances will be lost to cut down capacity and the long-run incremental costs will stay unchanged. ABC distinguishes that longer term incremental costs can be reduced by doing determination that guarantee that activities should be undertaken merely where incremental grosss exceed long term incremental costs. It is of import that facility-sustaining costs are omitted from the costs reported by the ABC system since they are neither short-run nor long-run incremental costs.

Agree with the pull offing manager determination that the cost per activity should non stay changeless over the long term. Attempts should be made to cut down the costs of activities and better the efficiency. Therefore ABC reported costs should be made evaluated and adjusted at periodic intervals. There are besides some costs such as installation sustaining costs do non alter with activity and are non variable with any activities step. For illustration it could be costs excluded from the reported individually as installation sustaining costs.

The president is true about the profitableness analysis based on keeping the same merchandise mix will give the same entire net incomes. However, different net incomes or loses are reported by merchandises and doing future determinations on the footing of ABC information compared with the bing system. Therefore have an impact on entire future net incomes such as, presuming that the costs reported by the ABC system are all based on cause and consequence relationship so a determination may be made to stop production of Fireball. This will non apparent in bing method but still, it is an of import that determination should non be based entirely on fiscal factors and non-financial factors should besides be taken into history.

Question 2

Changes and impact information engineering

There a batch alterations information engineering ( IT ) make in our day-to-day concern environments. Most of them can be filed under the wide header of engineering such as the alterations that occurred in industrial harnessing of electricity. Not merely did workss and mills running off the recent power develop, full town substructures were changed to suit. Furthermore the available hours besides makes alterations and some companies began runing all 24 hours each twenty-four hours with third-shift workers.

Besides, power lines became planetary throughout the state, as did telephone lines. Even today, these are considered indispensable pieces when equiping a proper office edifice and most concern inventions in the twentieth century involved plugging devices into walls electrical or telephone mercantile establishments but the twenty-first century has seen brooding accent on radio capablenesss.

During the past decennaries the usage of information engineering ( IT ) to back up concern activities has increased dramatically and development of electronic concern communicating engineerings known as e-business, e-commerce or Internet commercialism have had a major impact. For illustration, consumers who have entree to the Internet are able to compare the comparative virtues of different merchandise and are more spoting in their purchases. E-commerce such as saloon cryptography has allowed considerable cost salvaging made by streamlining concern procedure and has generated excess grosss from the expert usage of online gross revenues installations. The adept usage of e-commerce has given companies a competitory advantage.

Changing and impact of competitory environment

In order to pack in today competitory environment company have had to go more client driven and do client satisfaction and on over reading priory. Customers are demanding every bettering degree of service in cost, quality, dependability, bringing, and pick of advanced new merchandises. Identify cost efficiency, quality, clip and invention as the cardinal success factors. In add-on to concentrating on this factor organisation are following new direction attack in their quest to accomplish client satisfaction.

Excellence in fabrication can supply a competitory arm to vie in sophistic worldwide market. In order to vie effectual companies must be capable of fabricating advanced merchandise if high quality at low cost and besides supply a first category client services.

Organization as those operating in the air hose and fiscal services industry were either authorities owned monopolies or operated in extremely regulated protected and non-competitive environment. These organisations were non capable to any greater force per unit area to better the quality and efficiency of their operation or Tom improve profitableness by component services or merchandise that were doing losingss.

Compare to the increasing competition as besides made determination mistake due to hapless cost information more likely and more dearly-won. If the cost system resulted in destroy merchandise cost Begin reported, than the overhead cost merchandise willed to higher command monetary value in concern and concern loss to those rival to be able to cite lower monetary value ill because the cost system produce more accurate cost information. Alternatively there is a danger that under coasted merchandises will resulted in credences of unprofitableness concern.

The changing and impact of globalisation

In the globalisation, international corporations have to cover with trouble and hazard confronting the concern. There are many differences in political system, accounting system of external study, legal system and civilization and usage in different states ( Pettersen, 2001 ) . In order to run successful concern abroad, it is important for directors to understand these differences and the income revenue enhancements system difference is another cardinal factor.

Management comptrollers must give careful consideration to local revenue enhancement jurisprudence and revenue enhancement rate, which may be different from domestic legal. Last, for the different pecuniary system, directors of transnational companies must be supervising the foreign exchange fluctuation continuously. So the universe economic system is influenced by many factors, and exchange rates fluctuate often and widely. When the corporations go abroad to set up contracts, make trade good minutess and run concerns, there are much more similar job they have to face. For direction accounting, it has to get the better of important barriers and troubles in the globalisation.

The aim of direction accounting is altering. Before the globalisation, most corporations are little and chiefly relay on place operations. With the deepening of globalisation, endeavor graduated tables are increasing and travel abroad to serve their clients. The traditional accounting is ever concentrating on the domestic instead than the international market. These transnational corporations, confronting the tendency and demand of globalisation, have to redesign their accounting systems to fulfill the new planetary aims. The aims and ends of direction accounting are non merely domestic information, which is based on the historical information, but besides the planetary information, which help directors cut down complexness and hazard in concern. So the direction accounting should acquire the more exact and suited information of working capital and operation cost. Keeping a tight manus on this information, international concern can recover their competitory border.

Excellent direction accounting can supply utile information to assist a corporation accomplish its ends and aims. First of wholly, it can give the scorekeeping of the concern, which accumulates and classifies the information. Based on the scorecard, internal directors can measure the public presentation of the concern. Second, the director accounting supplies important job, which should be looked into the attending directing. Attention directing respects to giving the director item and direct information, which makes them recognize the job, chances and challenges of the company. To work out jobs, direction accounting frequently make a survey to happen out the possible methods and the most appropriate option.

The changing and impact Organizational construction

In modern-day competitory scenes, organisations are progressively concentrating on factors that provide value to the client. This customer-focus is triping a flattening of organisational constructions. Harmonizing to the term “ horizontal organisation ” has evolved to reflect patterns applied in companies that integrate activities across the value-chain to back up a customer-focus scheme Chenhall ( 2008 ) .

Harmonizing to following new engineerings may necessitate alterations in organisational constructions and work procedures to better accommodate the capablenesss of improved engineering. Khandwalla ( 1974 ) , Thus, for better success, there is a demand for a alteration to organisational construction fostered by advanced engineering applications. Organizational design and construction represents the forms and relationships that exist among organisation or work unit elements in organisational construction ( Macy & A ; Arunachalam, 1995 ) . A alteration in construction can be in the signifier of new organisation structural, departmentalization, centralisation, decentalisation and accent that “ organisation constructions are the merchandise non merely of coordinating demands imposed by complex engineerings, but besides of rationalized norms legalizing acceptance of appropriate structural theoretical accounts.

The organisational construction variable draws to a great extent on the seminal plants of Bruns and Waterhouse ( 1975 ) , who identified several organisational features that were strongly related to the pick of accounting-control scheme. In drumhead, they found that as organisations and sections turn and go more complex, they tend to deconcentrate and implement a more administratively oriented control scheme, which involves a higher grade of behavior formalisation and an increasing usage of formal forms of communicating. In line with outlooks, they besides found that the MASs in these organisations ”matched ” the overall control scheme in so far as they tended to utilize ”a more extremely developed and formal budgeting system, with greater standardisation of information flows and greater operating director engagement in budgeting ” ( Merchant, 1984, p. 291 ) . In contrast, smaller, more homogenous and centralised houses tended to trust more extremely on informal, personally oriented control mechanisms such as direct supervising and face-to-face communicating. Consequently, houses were less reliant on formal usage of the budget when utilizing this interpersonal control scheme.

The impact and altering economic growing ( authorities )

The major economic environment backgrounds, such as great depression, authoritiess make accommodations through policy alterations that they hope will win in stabilising the economic system. Governments believe that the success of these accommodations is necessary to keep stableness and go on growing. This economic direction is achieved through two types of schemes. In a recession, authoritiess stimulate the economic system with shortage disbursement outgo exceeds gross. The gross revenue enhancement and disbursement policy designed to counter economic growing such as in orderaˆ?to achieve lower unemployment, achieve low or no rising prices, and achieve sustained but governable economic growing.

Therefore concern, now a twenty-four hours is vitally affected by the economic, societal, legal, technological and political factors. These factors jointly form concern environment. Business environment, as such, is the sum of all external forces, which affect the organisation and operations of concern. The environment of an organisation has got internal, operational and general lives directors must be cognizant of these three environmental degrees and their relationship and importance. The term ‘business environment implies those external forces, factors and establishments that are beyond the control ofA single concern organisations and their direction and impact the concern endeavor. It implies all external forces within which a concern endeavor operates.

Business environment influence the operation of the concern system. Therefore, concern environment may be defined as all those conditions and forces, which are external to the concern and are beyond the single concern unit, but it operates within it. These forces are client, creditors, rivals, authorities, socio-cultural organisations, political parties national and international organisations. Some of those forces affect the concern straight which some others have indirect consequence on the concern