Management accounting - Case Study Example

The table in Exhibit 1.5 provides this information. Exhibit 1.5 Calculation of the Profitability of Each Cost Object Description Cost Objects Accounting Economics Law Revenue 450,000 320,000 525,000 Expenses 205,132 149,704 192,164 Profit 244,868 170,296 332,836 Percentage 54.42% 53.22% 63.40% Exhibit 1.5 indicates that Law is the most profitable course with a percentage profit of 63.4% followed by Accounting with 54.42% and Economics the least profitable with 53.22%. The difference is profitability among the three courses can be attributed to the differences in the fees charged per EFTSL and the amount of government grant received per EFTSL.

The student fee per EFTSL is highest for the Law course and lowest for the economics course. In fact, the student fee for the Law course is $6,000 or 67% more than the economics course and $5,000 or 50% more than the Accounting course. The government grant per EFTSL for the Economics course is $1,000 or 40% higher than the Accounting course and $1,000 or 17% more than the Law course. In total the Revenue per EFTSL for the Law course is $6,000 or 40% more than that for Accounting and 31% more than that for Economics. . It is described as a complex and comprehensive process which requires careful and systematic analysis to determine different cost pools and activities that relate to them.

This makes the implementation of an ABC system a very costly and time consuming exercise (Estrin at al 1994). According to Horngren et al (2011) ABC is one of the best tools available for improving a costing system. Some of the reasons given include the following. i. ABC emphasises individual activities as main cost objects – each activity having a specific purpose while traditional costing systems do not (Horngren et al 2011) ii. ABC calculates the cost relating to each activity and assigns costs on the basis of the activity which led to the production of the service or product and this leads to higher levels of accuracy when compared to traditional methods like absorption costing (Horngren et al 2011) iii.

ABC systems facilitate more favourable pricing and product-mix decisions (Horngren et al 2011) iv. ABC enables decisions relating to cost control by providing information that facilitates process improvement and product design (Horngren et al 2011) v. Studies have found that some level of success is achieved when ABC is implemented which leads to improvements in both manufacturing and business performance (Fei and Isa 2011) vi. ABC provides results that are very different from those generated from less costly methods.

However, the information provided can lead to major decisions that impact profitability and other important aspects of the business on which it depends (Estrin et al 1994). Motivations for disagreement The motivations that the Accounting Professor has