Drive Management Accounting Factors

Question: Describe about the Report for Drive Management Accounting Factors. Answer: Introduction The overhead costs have increased significantly because of use of machines and requirement of support activities for the purpose of improving quality of products. The accurate allocation of overhead is very necessary for correct costing of products and services. Generally, price of product and service is determined after considering its cost. This increases importance of accurate costing of products (Bragg, 2014). Findings The traditional costing system allocates overheads based on labour hours or machine hours. It does not consider resource used by the product. Labour hours and machine hours do not necessarily affect overhead of the company. Therefore, traditional costing system results in over / under allocation of resources which results in incorrect product costing and the management can make incorrect decisions on the basis of this incorrect costing data (Bragg, 2014). In activity based costing system, costs are apportioned between products after considering resource used by the product. The costs are pooled in meaningful categories and these costs are charged to products and services on the basis of resource used by them. This results in accurate costing of products and services. The advantages of activity based costing system are as under: Activity based costing system results in accurate costing of products and services as costs are allocated on the basis of activity causing overhead. ABC system results in correct pricing of products. The correct selling price is very necessary for multi product firm as if lower price is fixed for some products, sales of those products may increase causing loss to the company and if higher price is fixed for some products, it may result in reduction in market share of the company. The management can objectively control overhead costs as it has more data and analysis about the overheads. They know which factors increases overheads and which factors decreases overheads. The management can review performance of departmental managers by allocating overheads correctly. Thus, it can be seen from the above discussion that, there are various advantages of activity based costing system. However, it also suffers from following deficiencies: ABC system requires detailed record keeping. This increases costs for the company. It may not be possible to identify correct cost drivers in some cases. This system is not suitable for small companies. Recommendation On the basis of evaluation of benefits and limitations of ABC, we can conclude that the company should use this system as its benefits are more than its limitations. Conclusion Thus, it can be seen from the above discussion that there are various limitations of traditional method of allocating overheads. Although activity based costing also has some limitations, its benefits are numerous and it will benefit the company as it will result in correct allocation of overheads. References Boyd, C. (2013). Cost Accounting for Dummies. Kindle Edition accessed August 8, 2016 from Amazon.com Bragg, S. (2014). Cost Accounting Fundamentals: Essential Concepts and Examples. New York: Accounting Tools. Davis, C.E., and Davis, E. (2011). Managerial Accounting. New Jersey: John Wiley Sons. Drury, C. (2007). Management Cost Accounting. Stamford: Thomson Learning.