Management Accounting 2 |
Coursework 2010 |
Report Traditional Costing via ABC Cost |
Wojciech Kardasz-Choinski |
An engineering company manufactures a range of out shelters for use as smoking enclosures, bus shelters, cycle shelters, pram shelters and ticket machine shelters. The manufacturing process involves construction of the steel frames specific to each type of shelter, the moulding of fibreglass panels of various size and finally assembly according to a design selected by the customer.
In this small company the production overheads are at present apportioned to products based on the direct labour hours but the Managing Director has heard about new method of dealing with his production overheads and also somebody been told him that this current method which he is using now may not actually fairly represent the true cost of how much overhead expense each of the products actually consumes. This situation slightly confused the Managing Director and he approached for advice.
This report will present for the Managing Director which way he should to choose of dealing his production overheads. The report briefly shown current way of dealing with his production overheads. Identify the potential benefit and drawbacks that different method, which is Activity Based Costing (ABC) system, may present as compared with his present system. Lastly, explain the conditions that would be needed to successfully implement an ABC system in a company of this type.
Shortcomings of traditional approach
Engineering company currently is dealing with traditional method of calculating the production overheads. This method appraising or valuing a firm's total inventory by including all the manufacturing costs incurred to produce those goods. These manufacturing costs include direct materials - these are the raw materials such as wood, metal, bricks, etc that are used in order to create a finished...