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Describe limitations of activity-based costing and factors
Course:- Managerial Accounting
Reference No.:- EM131985138




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Introductory Management Accounting Assignment

Unit Learning Outcomes covered in this assessment - The purpose of this assignment is to assess the following Learning Outcomes:

a. Describe and discuss the function and role of management accounting in the contemporary business environment.

b. Demonstrate broad knowledge of management accounting and explain appropriate approaches to generate cost information.

c. Produce business reports which present analyses of financial solutions to management issues.

d. Apply knowledge to generate adaptable and flexible approaches to problem solving and decision making.

e. Apply management accounting practices and theories to analyse and solve business and management problems.

Assignment Description - This assessment task is comprised of two parts.

In part 1, students review current literature relating to various product costing systems, approaches to applying overhead costs to each product, and write a report comparing costs and benefits of various approaches to applying overhead costs.

In part 2, students write a memo to the monthly management meeting comparing economic consequences of using different approaches to overhead cost allocations.

Part I: Costing Systems

The following quotes are based on Mowen, M., Hansen, D., Heitger, D., Sands, J., Winata, L. & Su, S., (2016). Managerial Accounting, 1st edition. South Melbourne: Cengage Learning.

Plant-wide and departmental rates based on direct labour hours, machine hours, or other volume-based measures have been used for decades to assign overhead costs to products and continue to be used successfully by many organisations. However, for many settings, this approach to costing is equivalent to an averaging approach and may produce distorted, or inaccurate, costs. Firms operating in competitive business environments in particular need accurate cost information in order to make informed decisions (Mowen 2016, p. 278).

The underlying assumption that is activities consume resources, and cost objects, in turn consume activities have lead up to the development of Activity Based Costing system in the contemporary manufacturing firms (Mowen 2016, p. 289).

Required - With reference to the above statement, write a report to discuss:

  • Problems associated with the traditional costing systems for product costing in a modern manufacturing environment.
  • Explain how contemporary manufacturing companies/businesses can benefit from adopting activity-based costing.
  • Describe the limitations of activity-based costing and factors that may impede the introduction of ABC.

Report should incorporate the following sections:

1. Cover page

2. Executive summary

3. Table of contents

4. Introduction

5. Body: this section should include topics such as

  • Various product costing systems
  • Traditional approaches to overhead cost allocation
  • Limitations/shortcomings of traditional approaches to overhead cost allocation
  • Contemporary approach to overhead cost allocation (Activity Based Costing)
  • Limitations and impediments of the Contemporary approach to overhead cost allocation

6. Conclusion and recommendations

8. Reference list (8-10 references must be cited)

To achieve this task, you are required to:

  • review literature from a range of sources, including books, and peer reviewed articles (cite at least 8-10 sources including 6-8 peer reviewed articles)
  • investigate and analyse articles written on various product costing systems
  • investigate and analyse articles written on traditional approaches to overhead cost allocation
  • investigate and analyse articles written on contemporary approach to overhead cost allocation (Activity Based Costing)

Part II: Calculation of costs

The telecommunication industry is one of the most price sensitive and consumer driven industries in Australia's business market. Singtel is a manufacturer of electronic products and assemblies for the telecommunications industry. The Singtel produces two different telephone systems for the corporate market, i.e. "Basic" and "Advanced" telephone systems. The cost estimates for the "Basic" and "Advanced" telephone systems for the current year are as follows.

Cost information of Basic and Advanced telephone models

 

Basic ($)

Advanced ($)

Direct material

800

1600

Direct labour (20 hrs @ $30 per hour)

600

600

Manufacturing overhead (Predetermined overhead rate is $40 per direct labour hour.)

800

800

Total

2200

3000

Each model of telephone system requires 20 hours of direct labour. The basic system requires 5 hours in Fixing Department and 15 hours in Testing Department. The advanced system requires 15 hours in Fixing Department and 5 hours in Testing Department. The budgeted overhead costs in these two production departments are as follows:

 

Fixing Department

Testing Department

Variable cost

$ 32 per direct labour hour

$8 per direct labour hour

Fixed cost

$400,000

$400,000

The Singtel's management expects to operate at level of 20000 direct labour hours in each production department during the current year.

The following table provides manufacturing overhead costs with the activity cost pools and activity driver data. Additionally, you are provided the information relating to various cost pools and activity drivers.

Activity

Activity cost ($)

Total

Activity drivers

Basic

Advanced

Machine setup

200000

200 setups

50 setups

150 setups

Material receiving

120000

80000 kilograms

30000 kilograms

50000 kilograms

Inspection

160000

1600 inspections

700 inspections

900 inspections

Machinery related

840000

60000 machine hours

20000 machine hours

40000 machine hours

Engineering

280000

7000 engineering hours

3000 engineering hours

4000 engineering hours

Total overhead

1600000

 

 

 

Singtel plans to produce 1000 units of each model.

Required -

1. Calculate cost per Basic telephone system and Advanced telephone system using departmental rates (traditional volume based approach).

2. Calculate cost per Basic telephone system and Advanced telephone system using Activity Based Costing approach.

3. Write a memo to the monthly management meeting comparing cost per Basic telephone system and Advanced telephone system if Singtel uses:

  • Departmental rates to allocate overhead costs to products
  • Activity Based Costing approach to allocate overhead costs to products.

4. Discuss implications of adopting traditional costing approaches and Activity Based Costing approach separately, and the impact on the firm's pricing policy.

Note: Include all calculations in the memo.




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  1. user image
    len1985138

    Submission Guidelines - Group size: This assignment should be completed in groups of four. All work must be submitted on Moodle by the due date along with a completed Assignment Cover Page. The assignment must be in MS Word format, 1.5 spacing, 11-pt Calibri (Body) font and 2 cm margins on all four sides of your page with appropriate section headings. Reference sources must be cited in the text of the report, and listed appropriately at the end in a reference list using APA or IEEE referencing style for School of Business and School of Information Technology and Engineering respectively.

  2. user image
    len1985138

    This assessment task is comprised of two parts. In part 1, students review current literature relating to various product costing systems, approaches to applying overhead costs to each product, and write a report comparing costs and benefits of various approaches to applying overhead costs. In part 2, students write a memo to the monthly management meeting comparing economic consequences of using different approaches to overhead cost allocations. Note: Include all calculations in the memo.

  3. user image
    len1985138

    Structure and Clarity of the Report/Assignment - executive summary, introductory paragraph, logical flow of clarity and structure of ideas and arguments, appropriate use of paragraph and headings to explain and discuss ideas, appropriate concluding paragraph and recommendations. Body/contents - discuss traditional approaches to overhead cost allocation, discuss limitations/shortcomings of traditional approaches to overhead cost allocation, discuss contemporary approach to overhead cost allocation (Activity Based Costing), discuss limitations and impediments of introducing Contemporary approach to overhead cost allocation. Investigation and Analysis (8-10 references must be cited - quality of information sources, completeness of investigation and analysis, accuracy and depth of analysis, appropriate use of in-text and end text referencing, appropriate number of references used.

  4. user image
    len1985138

    Note: Contribution in group work - Report any issues relating to group members immediately to your lecturer via email (e.g. unable to contact group member/s, not cooperating/contributing to group assignment etc.). Group members must complete a progress report in week 10 and email it to the unit lecturer. Report must explain contribution of each group member to the assignment. Use template to report on individual participant’s contribution to the group assignment.



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