The information is used to analyse the influence of the company’s undertakings on key accounts such as costs and profits. Therefore, it is fair to mention that the costing systems facilitate decision-making by providing critical information suitable for operation analysis. The common types of costing systems are the activity based costing and the absorption costing system. The paper will provide a profit and loss statement prepared using both the ABC and absorption costing system. In addition, a discussion will be included to explain to Riptide Plc’s manager that the ABC system provides extra information suitable for decision-making.
Let us determine the absorption rate for the two departments (machine and assembly department). The absorption rate for machine department = (overhead allocated to machine department/ machine hours) = (504,000/420,000) = $ 1.2/ machine hour. Therefore, the overhead cost per product is as below.
The absorption rate for the assembly department = (overhead allocated to assembly department/ direct labour hours) = (437,000/530,000) = $ 0.8245/ labour hour. Therefore, the overhead cost per product is below.
Profit statements have been prepared using the ABC system and the absorption costing system. In the process of making the profit statements, the costs incurred by Riptide plc when producing the three products have also been identified based on the two costing systems. Based Table F below, the cost per unit under the ABC system for product XYI, YZT and ABW are £ 39.25, £ 92.025 and £ 73.583. Under absorption costing, product XYI and YTZ cost more than the same products’ costs under the ABC system. However, product ABW cost more under the ABC than it costs under absorption system. Therefore, the differences in the cost of the products under the two costing systems are summarized in Table F below.
Based on Table G below,