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Question 1
There are two accounting system; Management accounting and financial
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Question 2
2.1
Question 2A)
Cost allocation is the process by which whole cost items are charged direct to a
cost unit or cost centre. In short, allocate the cost under a section. For example, direct
material and direct labour will be charged into the production cost, and office rent will be
charged into the administration cost.
Cost apportionment is distribution of overheads to more than one cost centre. For
example, use the electric usage of each department to allocate each department electric
bill. By this way, the company can allocate the cost more efficient and management
level will know which department is using more electric and what should they do to the
electric bill in the particular department.
Cost absorption is the process whereby overhead costs allocated and
apportioned to production cost centres are added to unit, job or batch costs. For
example, produce product A and B need 2kg and 4kg of material; total overhead is
RM100,000; total direct material is 10,000kg; how much the cost to produce product A
and B. Therefore, the cost of product A is RM20 and product B is RM40.
2.2
Question 2B)
Traditional product costing system is the allocation of manufacturing overhead to
product on the basis of a volume metric such as direct labour hour or production
machine hour (Awerkamp, Accounting Coach).
Activity based costing (ABC) assigns manufacturing overhead costs to products
in a more logical manner than the traditional approach of simply allocating costs on the
basis of machine hours (Awerkamp, Accounting Coach). This system will assign cost to
the actual activities that cause the overhead.
ABC system has develop to overcome the shortcomings of traditional product
costing system, which the main shortcomings is traditional product costing system cant
allocate overheads cost precisely.
The limitation of traditional product costing system is lack of flexibility in way to
allocate overheads cost on finished goods. In this system, it often allocates costs based
on single-volume measures such as direct-labour hours, direct-labour costs, or machine
hours. Although it provide convenient to comply with financial reporting requirement, but
by using single-volume measures as an overall cost driver, it seldom meet the activity
that are real cause of the overhead, whereas ABC system is using unit-level activities,
batch-level activities and facility-level costs which more real cause of the overhead to
allocate the cost.
Furthermore, the limitation of the system is out-dated. Nowadays, the way we do
business have changed, many manufacturing company are using computers and
machines for their production. This system often use direct labour hour to calculate
costs and it not appropriately assigned due to today business mainly are using
automated equipment to replace manpower. Therefore, this system cant allocate the
cost overheads precisely.
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Reference
Awerkamp, H. (n.d.). Accounting Coach. Retrieved JULY 10, 2014, from Financial
accounting and Management accounting:
http://www.accountingcoach.com/blog/financial-accounting-managementaccounting
Awerkamp, H. (n.d.). Accounting Coach. Retrieved JULY 10, 2014, from Activity Based
Costing: http://www.accountingcoach.com/activity-based-costing/explanation
Awerkamp, H. (n.d.). Accounting Coach. Retrieved JULY 10, 2014, from Ttraditional
Costing: http://www.accountingcoach.com/terms/T/traditional-costing
Bragg, S. (2013, JULY 1). Accounting Tools. Retrieved JULY 10, 2014, from Cost
Allocation: http://www.accountingtools.com/questions-and-answers/what-is-costallocation.html
Diffen, (n.d.). Diffen. Retrieved JULY 10, 2014, from Financial Accounting vs.
Management Accounting:
http://www.diffen.com/difference/Financial_Accounting_vs_Management_Accoun
ting
Steven Bragg (2012, March 22). Accounting Tools. Retrieved JULY 10, 2014, from What
is the difference between financial and managerial accounting?:
http://www.accountingtools.com/questions-and-answers/what-is-the-differencebetween-financial-and-managerial-acco.html
Micheal R.K & Cecily A. R. (2008). Cost Accounting: Foundations and Evolutions, 7th
Edition. Publisher: Cengage Learning
Jim Riley (2012, September 23). Tutor2. Retrieved JULY 10, 2014, from Accounting financial & management accounting compared:
http://www.tutor2u.net/business/accounts/financial_management_accounting_co
mparison.htm
Elliott Taylor. Small Business Retrieved JULY 10, 2014, from Activity-Based Costing vs.
Product Costing: http://smallbusiness.chron.com/activitybased-costing-vsproduct-costing-57891.html
Rose Johnson. Small Business Retrieved JULY 10, 2014, from Traditional Costing Vs.
Activity-Based Costing: http://smallbusiness.chron.com/traditional-costing-vsactivitybased-costing-33724.html