Managment Accounting - Essay Example

ABW in order to determine the relevant cost drivers and in this case there are many more than that used in absorption costing, thus making ABC more reliable. Table 1 provides calculations for the profit for each product line. Table 1 indicates that there are huge differences in the profit of products XY, YZT and ABW. The use of absorption costing resulted in a reduction in profits by £46,250 and £18,000 for products XYI and YZT respectively and an increase of £64,000 from a loss position to a profit position for product ABW.

This scenario shows how appropriate ABC is for making more accurate decisions when compared to absorption costing. ABC allocates cost on the basis of the activities required to manufacture a product and this results in the use of multiple cost drivers – assembly, machining, set-up, order processing and purchasing in this case. Absorption costing only used two cost drivers – assembly and machining thus the large differences in profits. The figures in Table 2 indicate that the differences in cost per unit were lower for XYI and YZT –£ 0.

925 and £0.45 respectively. However, the difference in cost per unit between the two approaches for ABW was higher (£2.133) and this explains the loss versus profit scenario. Over-costing of each unit of products XYI and YZT under the absorption costing method by £0.925 and £0.450 respectively has led to under-costing of product ABW by £2.133 another product. In this case the assignment of costs by ABC to each product using more relevant activity based cost drivers has resulted in a more accurate costing of the products.

It is often said that modern developments such as ABC are sometimes implemented because they are fashionable and not because they provide additional information to management. However, while this statement may be true in a few instances it is not so in the majority of cases. Costing systems do not command high ratings in most organisations, but the information that they provide