Management accounting

  1. Prepare and present budgeted profit statements using:

Conventional absorption costing

TAC YZT ABW XYI
Revenue 3,800,000 2,190,000 2,250,000
Variable costs 3,360,000 1,950,000 1,600,000
Gross profit 440,000 240,000 650,000
Assembly overhead 98,943 49,472 288,585
Machine overhead 240,000 144,000 120,000
Total overhead 338,943 193,472 408,585
Operating profit 101,057 46,528 241,415

 

Activity based costing (ABC)

ABC YZT ABW XYI
Revenue 3,800,000 2,190,000 2,250,000
Variable costs 3,360,000 1,950,000 1,600,000
Gross profit 440,000 240,000 650,000
Assembly overhead 72,000 36,000 210,000
Machine overhead 170,000 102,000 85,000
Order processing overhead 39,000 78,000 39,000
Purchasing overhead 30,000 31,500 22,500
Set up cost overhead 10,000 10,000 6,000
Total overhead 321,000 257,500 362,500
Operating profit 119,000 -17,500 287,500

 

 

Comment on these results

Most importantly, one of the main significant that is evident from the results is the fact that the addition of the activity-based costing data is manifested differently in the three products’ operating profits. For example, ABW results shows that it incurred a set back since its operating profits goes from £46,528 to -£17,500; this may be due to some factors such as customer orders, supplier orders, and set ups. While relating the ABW results to the other figures, they show that when the ABW had the lowest production volumes, it required the joint highest number of supplier and customer orders and set ups. Consequently, even though ABW required a lower number of production hours, its higher order volumes, and set an up means that, under the activity-based costing, it reports a negative operating profit. Primarily, the ABW’s supplier and customer processing costs are double that of the other two products, meaning that it accounts for more than half the difference between the activity-based and traditional absorption costing figure (BRADTKE 2007, p. 6-8).

After full analysis on the ABW

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