Managerial Accounting - Case Study Example

(College) Part (a) Overhead Rate= Budgeted Overhead Labor Hours = 70,00025000 =2.8 per Labor hourResidential Commercial(2.8×16250)=45500 (2.8×8750) =24500 Profit statement for residential Profit statement for commercialRevenue = (16250×25) = (8750×21) = 406,250 =183,750 ExpensesWages = (162500) = (87500)Overheads = (45500) = (24500)Profit 198,250 71,750Part (b)Using ABCTransportation Overhead Rate 10,000 = 142.

857 per client 70Equipment Hours 20,000 = 2.469 per hour 8100Supplies 40,000 = 0.1568 per square yard 255,000Profit statement for residential Profit statement for commercialRevenue 406,250 183,750ExpensesWages (162500) (87500)Transport (7142.85) (2857.14)Equipment (6419.4) (13579.5)Supplies (14112) (25872)Profit 216,075.75 53,941.36Part (C)Since the traditional costing systems (part a) uses a single, volume-based cost driver. This is the reason why the traditional product costing system distorts the cost of products.

  This kind of costing system assigns the overhead costs to products on the basis of their relative usage of direct labor. For this reason traditional cost systems often report inaccurate product costs. With reference to Carl Warren, James Reeve, Jonathan Duchac(2011), traditional costing is more simplistic and less accurate than ABC, and typically assigns overhead costs to products based on an arbitrary average rate. ABC is more complex and more accurate than traditional costing. This method first assigns indirect costs to activities and then assigns the costs to products based on the products’ usage of the activities.

The management should therefore use ABC cost analysis method in calculating cost so as to capture true costs incurred.Works CitedCarl Warren, James Reeve, Jonathan Duchac, Managerial Accounting, Cengage Learning, 2011James Jiambalvo, Managerial Accounting, John Wiley & Sons, 2009