The basic aim of this entire report is to discuss the rise and fall of the traditional costing system with a focus on the reason as to why the traditional costing system provided a vague picture of the product cost. The report also addresses all the issues and the comments passed upon by the senior management officials of JM Ltd while they were being interviewed. Finally the report elaborates the use and advantage of Activity Based Costing and provides an insight as to the suitability and usage of Activity Based Costing system for manufacturing organizations as compared to the traditional costing system.
Costing is defined as “The establishment of budgets, standard costs and actual costs of operations, processes, activities or products; and the analysis of variances, profitability, or the social use of funds” (Lucey, 1996). With an end to the barter system, money became an important consideration. The introduction of money as a medium to purchase and sell any product or service led to issue of costs. Initially, the manufacturing companies were concerned and affiliated with the with the traditional costing approach in order to ascertain the costs of the manufactured products but later this focus also shifted towards the service industry as well whereby many different service providing organizations used traditional costing principles in order to value their provided services (Kapil, 2011). Problems faced by JM Ltd The cost accounting system is an integral part of an organization which helps in understanding and reviewing the internal financial system. Jarmurph Ltd follows the traditional costing system. The company was founded in 1988 when the traditional costing system was at the peak of its usage and was very much popular amongst manufacturing companies. Manufacturing companies used to value and ascertain the cost of their products using traditional methods such as marginal or absorption costing. Marginal costing is the process through which the variable costs of any particular product are attributed to the cost unit s and the fixed costs are written off against the net contribution. Absorption costing on the other hand absorbs all the costs of a particular product without distinguishing between fixed and variable costs. Unlike marginal costing, absorption costing absorbs the entire costs of a product in the total production costs (Lucey, 1996; Dorf 1994). The issues and the problems existing within JM Ltd have been considered separately as follows: Chief Accountant’s Issue The concepts underlying within JM Ltd are old school and they need proper up gradation in order to understand the complex environment in which the company operates. The chief accountant for JM Ltd believes that there fixed costs do not change; hence there is no use of trying to reduce such costs as they would not get reduced. This concept is not true as fixed costs vary in the long run and they do not remain constant. This can be easily illustrated by the fact when analysing the fixed cost with respect to the number of units produced. If for e.g. the fixed costs of producing 4000 units of any particular are $8000 (Fixed cost per unit would be $2) than these would definitely vary if 5000 units are produced, leading to a reduction in the fixed cost per unit (i.e. $1.6). This is a common misconception that lies within the traditional costing system, people tend to consider that if the proceed generated from an incremental sale is
The report focuses on the different costing systems such as absorption costing, standard costing and the variable costing system, illustrating both the strengths and the flaws of these costing systems…
This research dwells on activity based costing and traditional costing. Cost allocation in companies can provide inaccurate information about the profitability of their goods and services. Traditional cost allocation methods allocate overhead cost outlays with the aid of one driver like direct labour hours, direct labour dollars, or machine hours.
Management accounting systems ideally provide information regarding all aspects of an organisation’s transactions; by covering all spectrums of the organisation they represent an important source of information for decision making.
Due to shift in cost structures and factory automation the process of standard costing has been criticised due its declined relevance and contradiction with the modern manufacturing philosophy of JIT and continuous improvement. Critical Analysis of Standard Costing & Variance Analysis According to CIMA, standard costing is a technique to control costs by comparing the actual costs to the pre-set standards to obtain variances which facilitates in performance measurement (Walker, 2009, p.119).
ABC is a system of accounting that focuses on activities as the fundamental cost objects and uses the costs of these activities as building blocks for compiling the costs of other cost objects (Such as product or department).ABC seeks not only to allocate over heads to product costs on more realistic basis, than simply production volume, but also attempts to show relationship between overheads costs and activities that cause them It is also called activity-bases costing or activity accounting.
But then something terrible happened. One night off of Rodeo Drive, he found his wife with another man. He allegedly killed them both.
After a long-lasting and widely televised trial O.J. Simpson was acquitted of the murders of both his
The functions of the management include planning, organising, controlling and monitoring. Management accounting provides the required information to the management to carry out the business operations in an arranged manner. The
This project involves a critical analysis of the standard costing system and variance analysis in modern management. Due to shift in cost structures and factory automation the process of standard costing has been criticised due its declined relevance and contradiction with the modern manufacturing philosophy of JIT and continuous improvement.
These are volume related bases’ or cost drivers and this means that some products are being charged for resources that they do not use. The ABC approach requires the identification of specific activities involved in manufacturing each of products XYI, YZT and
Conversely, the traditional method of costing allocates cost at an average rate to all product-based products. The traditional method brings together any price that are indirect in the production and equally implements the costs across the board through employing one applicable cost driver, for instance, the machine hours.
1 pages (250 words)Essay
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