TABLE OF CONTENT

1. INTRODUCTION
2. IDENTIFICATION OF ISSUES FACED BY GAUNA LIMITED
3. ISSUE 1 (A) No product costing policy
4. CONCLUSION
5. ISSUE 1 (B) - Reasons why financial accounting reports can never replace management
accounting information
6. CONCLUSION
7. ISSUE 2 (A) - Major differences between Traditional costing approach and Activity
Based Accounting (ABC) costing approach
8. ISSUE 2 (B) - (B) Some tell-tale signs indicating the need of Activity Based Costing
Approach
9. CONCLUSIONS AND RECOMMENDATIONS
10. REFERENCES

Report to Andreas Briquest by Anthony Joseph

1. INTRODUCTION
In order to be successful a company needs to earn profit and profit can be earned only when
price at which the goods are sold is more than the cost of production of goods. If a company
does not know the cost of goods they are producing then they will not be able to set up an
appropriate selling price leading to loss in business. This demonstrates the significance of
determination of actual cost of goods produced. The main problem Gauna limited is facing is
that they are unaware of the cost of goods they are producing. Moreover as they have shifted
from production of one good ie coffee to production of numerous goods they immensely need
to use product costing in order to know the cost of each product separately.

2. IDENTIFICATION OF ISSUES FACED BY GAUNA LIMITED

ISSUE 1
(A) No product costing policy
At present Gauna limited company does not have any product costing policy. Due to this they
are unaware of the cost of their products and are fixing the selling price by making an
estimate due to which they are suffering downfall in business. Product costing policy helps us
in determining the cost of a unit of product.
Cost of production per unit = Total manufacturing cost / Number of units produced
Arguments in support of undertaking an appropriate product costing policy
1. It is helpful in cost management and cost reduction.
2. It includes both raw material and labour.
3. It reduces the chances of undercosting and overcosting of products.
4. It helps in decision making.
5. It is very easy to find out cost of production per unit.

CONCLUSION - It is very important for Gauna limited company to use product costing
policy as it will give them cost per unit at each production unit. Moreover it will help Mr
Andreas Birkquest to keep a record of all activities of the manufacturing process and help
him take essential decisions which will improve the postion of Gauna limited company.

(B) Reasons why financial accounting reports can never replace management accounting
information
1. Financial accounting information includes balance sheet, income statement, cash flow
statement, statement of changes in net worth and management accounting reports includes
cost analysis, sales forecasting analysis, budget analysis, merger, consolidation reports.
2. Financial accounting information is used by investors and shareholders to perform
financial analysis, lenders to decide whether to lend money to the company or not, in a
nutshell it is used by external users. Management accounting information is for internal users
like managers, board of directors in order to make efficient decisions.
3. Financial accounting information lays emphasis on finding out the net profit or loss for a
particular period. Management accounting information is used for controlling, summarising,
budgeting, directing and planning to increase future profit of business.
4. Financial accounting information is based upon the activities happened in the past whereas
management accounting information is based upon future activities.
5. Financial accounting information provides collective data related to whole business
organisation and management accounting information provides separate data about different
departments, products or units.

CONCLUSION Companies need to earn profit for which they need to make future
decisions about activities which are yet to take place so they need management accounting
information. For example decisions about how much goods should be produced or labour to
be used so that there is no surplus labour, such decisions can only be made with the help of
management accounting information and not by financial accounting information. Our
balance sheet or income statement cannot tell us production per unit or do cost analysis.

ISSUE 2
(A) Major differences between Traditional costing approach and Activity Based Accounting
(ABC) costing approach -

SR
.
NO
1.

TRADITIONAL COSTING

ACTIVITY BASED ACCOUNTING

APPROACH

APPROACH

It is used where overhead cost is not

It is used where manufacturers produce

much and manufacturers produce

different variety of numerous products.

identical products.
2.

3.

4.

It focuses on structure rather than on

It is more on the activities than on the

processes.

structure.

It is composed of manufacturing costs

It includes both manufacturing and non-

only.

manufacturing costs.

In this overheads are related to cost

In this overheads are grouped into activity

centres or departments so they are not

cost pools.

realistic of cost behaviour.

5.

It is basically based on assumptions.

It maintains full accuracy.

6.

It includes only unit level or variable

It includes unit level, batch level, product

level and fixed level activities.

level, facility level activities.

It is flexible as compared to ABC

It is a rigid form of costing approach.

7.

costing approach.
8.

It is very easy to apply.

It is time consuming.

9.

For instance if Gauna limited

For instance as Gauna limited company

company produced only coffee and no

has now expanded their business and they

other product they would use traditional

have included multiple products for

method of costing.

production, now they should use activity

based costing method.

(B) Some tell-tale signs indicating the need of Activity Based Costing Approach1. The earlier success and expansion of business of Gauna limited company shows that it has
full efficiency to develop more and succeed again. It is only failing because it is producing
numerous variety or diversity of goods and is unaware of its product costs. Such companies
producing variety of goods require to use Activity based Costing to know production per unit
and to sign overheads to there relative product cost
2. If any company has very high indirect cost in relation to its direct cost then it should use
Activity Based Costing.
3. As Gauna limited company has expanded its business and performing various activities
such as poultry farming, coffee processing, coffee exporting, printing press, bulk fuel
distribution, mechanical workshop, paper packaging manufacturing etc these all products go
through a lot of stages like production, batch level, complexity etc so the manufacturing of
these require a lot of resources. So the company has to opt Activity Based Costing
Approach.
4. The companies which have large amount of non-manufacturing costs also need to use
Activity Based Costing Approach as Traditional Costing only comprises of manufacturing
costs.

CONCLUSIONS AND RECOMMENDATIONS

First of all Gauna limited company needs to adopt product costing policy so that they can
know the actual cost of their products. Financial accounting information cannot replace
management accounting information so it is advisable that Mr Andreas Birkquest should start
making management reports so that he can take better and essential decisions about future
activities of Gauna limited company for example if any product is making the company incur
losses then he can close down the production of that product. Moreover Gauna limited is an
export company it deliberately requires to start using management accounting information.
Mr Andreas Birkquest should also start using ABC approach so that costs can be assigned to
cost objects and he can know the accurate cost of all products and each process they go

through separately.

REFERNCES

1. Anthony, Robert N., Hawkins, David F., and Merchant, Kenneth A. 2011. Accounting:
Text and Cases. New York: McGraw- Hill/Irwin.

2. Garrison, Ray H., Noreen, Eric W., and Brewer Peter C. 2012. Managerial Accounting.
New York: McGraw-Hill/Irwin.

3. Weetman, Pauline. 2011. Financial and Management Accounting: An Introduction.

Harlow, Essex: Pearson