Management accounting assessment - Assignment Example

Activity based coating recovers these additional costs far much better than the traditional methods. Activity based costing (ABC) is an alternative method that allows overheads that cause analysis in groups that are influence the same activity. The group is cost pool while the activity is the cost driver. ABC produces a more accurate cost assignment. Doing this special job because the recovery methods used by the traditional overhead absorption method are volume based which is erroneous since a majority of the overhead costs is fixed and they are not affected by volume.

A change in volume in the traditional method results to a change in activity level meaning that there is presence of under and over developed overheads due to the change in volume. Most companies use the variable costing method and they achieve their set objectives. It is offers the management with the options of providing better decisions for the company. In the absorption method, the cost of the product consists of all the variable cost plus the fixed manufacturing costs. Fixed costs are not included in the costing of the product. 2(b) I agree that Cost Volume Profit analysis is simple as takes the assumption that output is the only cost and revenue driver, which have a linear relationship.

The assumptions in this case are simplistic in finding the decision to problems relating to fixed costs and variable costs. The assumptions can be used to facilitate the CVP analysis to give insight that is useful. Cost is relevant when, it is future oriented. It means the cash flows must arise in the future, be incremental, and have to be cash flows. In the context of capital investment appraisal, a relevant cost is a cost incurred because of the appraisal process and it may include new costs such as the cost of hiring machinery to construct a factory or additional costs in acquiring new material.

Irrelevant costs are