Management Accounting & Activity Based Costing - Essay Example

Case Study: Internal Plastics Most organizations incur costs during production of goods and services. Essentially, costs result from activities that act as cost objectives. Various costs form the ultimate effects of the activities. Management must understand the relationship between the cost behaviour, and activities and consumption of resources (Kallunki & Hanna 2008, p. 62-79).In the case study presented, the activities for the division include manufacturing of the products using similar, expensive and complex molding machines, with each machine producing three product lines.

The production process encompasses various activities such as operation of machines, maintaining the machinery, as well as supervising the production process. Operators operate the machines; maintenance mechanics perform the machine set ups and maintain machines when molding and the supervisors provide supervision for the maintenance mechanics and machine operators. Other activities include building, administration and sales.The resources used include energy for the set-up and molding process by the molding machines.

Machines consume 6.3KW of energy on an hourly basis. Also, other consumable shop supplies like lubricants and hoses form the major resources within the company.A cost driver refers to characteristics of events or activities which results in business incurring costs. Activity based costing have the products consuming activities and the activities consume the resources (Kallunki& Hanna 2008, p. 62-79). In the case study above, the production process has the number of orders and number of set up machines as the cost drivers.

The Cost drivers for machine operation include the number of the operators and machines available. Machine maintenance cost drivers include the number of machines to be maintained and the number of technicians. The supervision cost drivers include the number of supervisors and number of people to supervise. Cost drivers for the building include insurance and rent costs. Number of machine hour in production may be used in calculating the rate of machine hour relating to repair, depreciation and maintenance processes.

Also, the production process will have the number of inspections as the cost drivers.In making of the product, inspection for quality evaluation requires the appointment of experts who consume money in terms of salary, travel, electricity, as well as the depreciation of the equipment. The overheads may be calculated based on the number of tests. Each batch requires 4 tests, and suppose the available batches are 200, then, 800 tests must be performed. If the inspection accounts for a total of £20,000, then rate per unit test can be calculated as20000/800 = £25 per unit test.

This amount accounts a combination of salary, electricity and travel. Therefore, the increased energy requirements result in high costs in evaluating the quality of the product.Resources enhance performance of activities, and they have their own costs. Variation in some costs like, energy, supplies and labour vary directly to the resources that support them. Some like supervisory salaries, rent and amortization vary indirectly to the supporting resources. Therefore, activities consume the resources and accountant and manager mush investigate for new cost drivers capable of establishing convincing relationship between the performed activity and the related costs based on consumption of resources.

This enhances reliable predictions on the effects of decisions made regarding the activities and the related costs (Kallunki& Hanna 2008, p. 62-79).References ListKallunki, J., & Hanna, S. (2008). The Effect of Organizational Life Cycle Stage on the Use of Activity-based Costing. Management Accounting Research 19(1), pp. 62-79.