Several approaches can be used in costing to allocate costs to various units of production. The two methods used in this exercise are the traditional methods of costing and the activity based method. There are many similarities as well as contrast between these two costing approaches. Activity based costing classifies costs in to various generic categories such as direct materials, overheads and labor and associate them with different tasks in the manufacturing process (Needles, Powers, & Crosson, 2011). This approach allows the management to easily identify tasks that cost the most in relation with tasks that bring in more additional value.it has also helped to improve the accuracy of costing because it ensures all costs are appropriately allocated to their tasks. Management can make appropriate decisions for instance if the company is spending more on less valuable tasks. On the other hand, the traditional method of costing is based on the assumption that volume metric is the main underlying driver for the manufacturing overhead costs (Needles, Powers, & Crosson, 2011). As such, overheads are only allocated to the units produced. Therefore, this method fails to allocate other nonmanufacturing costs that may be associated with a specific unit of production. The traditional method is also easier to implement for most companies in different industries.
The two methods discussed above have a wide range of impact on the profits of an organization. For instance, company can benefit a great deal by implementing the activity based or overhead approach in allocating cost for the products, for instance, through reduction of tax burdens and increased profits (Vanderbeck, 2013). On the other hand, the traditional method of costing makes it quite difficult for the management to make appropriate decisions based on the profits resulting from this method as it may not accurately represent all the costs involved in the manufacturing process. The data used in the exercise was derived from numerous sources in the companys records (Jackson, Sawyers, & Jenkins, 2009). These include the direct and indirect costs, the overheads and other related costs. The main source for this information would be from the companys financial records. Activity based budgeting takes in to consideration the needs of the customer in to the budgeting process. By analyzing the various business activities, the top executives are more likely to mainly focus on those that meet the customers needs. This helps to ensure improved service delivery and efficiency of operations. Operating budgets on the other hand are mainly built on past financial records and do not therefore consider the end product to the customer (Mancino, J. 2007).
The data used for this exercise is relevant and appropriate in terms of understanding the costs associated with the production processes based on both the ABC methods and the traditional costing technique. This is because both sets of data only relates to the financial records under the two costing approaches. The manhood used in analyzing the data from the exercise is a qualitative technique of analysis that involved evaluating the data presented to determine its validity. Based on their approaches to budgeting the two methods differ significantly. Activity based budgeting takes a more holistic approach in budgeting which requires manager to look at all the processes involved in generation of profits of the company and critically analyze them and align them to the objectives of the company. Activity based budgeting also requires that managers consider only those activities that are likely to incur costs within the next financial period. The operating budget methodology takes a very different approach to budgeting. Here, a general financial objective for the company will be set by the top managers and each department given a threshold by which they need to deliver so as to enable the company achieve its main objective.
From my assessment of the data; based on their approaches to budgeting the two methods differ significantly. Activity based budgeting takes a more holistic approach in budgeting which requires manager to look at all the processes involved in generation of profits of the company and critically analyze them and align them to the objectives of the company. Activity based budgeting also requires that managers consider only those activities that are likely to incur costs within the next financial period (Edward and Collins, 2005). The operating budget methodology takes a very different approach to budgeting. Here, a general financial objective for the company will be set by the top managers and each department given a threshold by which they need to deliver so as to enable the company achieve its main objective.
direct materials cost 47,250 32300 40300 30800
direct labour13650 11050 10725 9075
set-up 5333.33 6666.67 4000.00 4000.00
machine activity 8784.86 9482.07 9063.75 7669.32
receiving 4000.00 5000.00 3000.00 3000.00
packing & dispatch 5080.65 4112.90 3145.16 2661.29
total cost 84098.84 68611.64 70233.91 57205.61
unit cost 8.01 8.07 10.81 10.40
Macroeconomic factors have a significant impact on how the organization approaches its direct costs and overheads. As such, it influences how people relate with the company and its brands in the market. More important however, the macroeconomic factors can affect the decision making process in the form. Direct costs are production costs that can be directly associated with the final products (Edward and Collins, 2005). Direct costs are often distinguished from overheads or indirect cost, which cannot be directly linked to the finished product. Overhead costs are the costs that a company incurs beyond material costs and wages in order to maintain day-to-day operations of the business. The overhead costs include expenses such as rent, insurance, utilities, and depreciation among others (Vanderbeck, 2013). Overhead costs are not directly related to the manufacturing tasks, but they help to create a conducive environment for production to take place. Therefore, it is important for companies to allocate overhead costs in costing their manufacturing tasks. Allocating overheads gives businesses an absorption costing advantage (Jackson, Sawyers & Jenkins, 2009). This implies that when the company allocates its manufacturing overheads, it is likely to get a huge profit for its products. Manufacturing overheads are deductible expenses in taxation. Companies will also benefit from these tax deductions as it will lower the companys tax burden within given period
Edward, J. Collins, M, (2005) Budget Making, Theory and Practice. Cambridge, MA: Cantabrigia, Inc.
Jackson, S., Sawyers, R., & Jenkins, J. G. (2009). Managerial accounting: A focus on ethical decision making. Mason, OH: South-Western.
Mancino, J. (2007). "The Auditor and Fraud." Journal of Accountancy April: 32-36.
Needles, B. E., Powers, M., & Crosson, S. V. (2011). Principles of accounting. Mason, Ohio: Cengage Learning.
Vanderbeck, E. J. (2013). Principles of cost accounting. Mason, OH: South-Western, Cengage Learning.
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