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Managerial Accounting - Case Study Example

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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…
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Case Study Managerial Accounting
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(College) Part (a) Overhead Rate= Budgeted Overhead Labor Hours = 70,00025000
=2.8 per Labor hour
Residential Commercial
(2.8×16250)=45500 (2.8×8750) =24500

Profit statement for residential Profit statement for commercial
Revenue = (16250×25) = (8750×21)
= 406,250 =183,750
Expenses
Wages = (162500) = (87500)
Overheads = (45500) = (24500)
Profit 198,250 71,750
Part (b)
Using ABC
Transportation Overhead Rate 10,000 = 142.857 per client
70
Equipment Hours 20,000 = 2.469 per hour
8100
Supplies 40,000 = 0.1568 per square yard
255,000
Profit statement for residential Profit statement for commercial
Revenue 406,250 183,750
Expenses
Wages (162500) (87500)
Transport (7142.85) (2857.14)
Equipment (6419.4) (13579.5)
Supplies (14112) (25872)
Profit 216,075.75 53,941.36
Part (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 Cited
Carl Warren, James Reeve, Jonathan Duchac, Managerial Accounting, Cengage Learning, 2011
James Jiambalvo, Managerial Accounting, John Wiley & Sons, 2009 Read More
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