ACC 103 Managerial Accounting For Goods and Equipments
(a) Calculate the total cost of Summer and total cost of Winter (assuming that the expected no. of units are produced) using the traditional costing system.
(b) Calculate the total cost of Summer and total cost of Winter (assuming that the expected no. of units are produced) using the activity-based costing system.
Answers:
Non value added Activities
The activities that do not have any contribution towards the process or the product are referred to as the Non-value added activities. These types of activities should hence be eliminated and not taken into any consideration. The Non-value added activities have a generation of negative returns on the investments in the resources and therefore can be eliminated with no impairment of the process (Mahadevan 2016). However, it may have an increment in the time spent on the products and services but do not in any case, increase the value of the services or goods towards the consumers. The examples of the Non-value added activities include the reworking, maintenance and inspection of the goods and equipments. Additionally, five steps provide strategies towards elimination of the costs having no value to be added. The steps are as follows:
- Identification of the activities
- Identification of the Non-value added activities
- Understanding the linkage in the activities, root causes and the triggers
- Establishing a set of the performance measures
- Reporting of the Non-value added activities
The stages are an important requirement towards the elimination process of the non-value added activities. Identification of the activities and the Non-value added activities and thus looking for the linkages in the activities along with the integral causes and the triggers. After the identification of the above, the major step is the establishment of the set of accurate measures of the performance. Lastly, the main and the final step constitute the reporting of such Non-value added activities necessary for the accountants and auditors of the organization for the purpose of determination of such activities in occurrence within the company (Conger 2015).
Traditional Costing System
The manufacturing companies for the assignment of the overhead costs for the units produced, uses the traditional costing system. The system considers the assignment of the costs of manufacturing to the products by the accountant. The cost of non-manufacturing items fails to be allocated by the costing system (Weygandt et al. 2015).
For example, if a company A bids $120 and B bids $130, but the company B had included non value activities like rework or repair of the defective products, then automatically the margin lowers down. A had a margin of $20 whereas B had $10. Even though, the company B had a lower margin, A will win the bid, as the overall price is low. Hence, the company must stop the inclusion of the non-value added activities as discussed above to decrease the price and win the bid contract.
Activity Based costing system
ABC costing i.e. the Activity Based costing system is an accurate and much better method of the assignment of the overhead cost of the products. The activity based costing firstly assigns the costs to the processes and the activities that are the causes of the overheads (Öker and Ad?güzel 2016).
The level of satisfaction of the employees is associated with the implementation of the ABC system. As per the study, the human behaviors that affect the system positively and clearly include the degree of satisfaction and the degree of involvement in the implementation process by the employees.
References
Mahadevan, B., 2016. Non-value added activities in business.
Conger, S., 2015. Six sigma and business process management. In Handbook on Business Process Management 1 (pp. 127-146). Springer Berlin Heidelberg.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John Wiley & Sons.
Öker, F. and Ad?güzel, H., 2016. Time?driven activity?based costing: An implementation in a manufacturing company. Journal of Corporate Accounting & Finance, 27(3), pp.39-56.
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