You are on page 1of 7

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) Activity

Major differences between Traditional costing approach and

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

3. 2. It is very easy to find out cost of production per unit. 5.Report to Andreas Briquest by Anthony Joseph 1. It includes both raw material and labour. 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. 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. 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. 4. It reduces the chances of undercosting and overcosting of products. It is helpful in cost management and cost reduction. Product costing policy helps us in determining the cost of a unit of product. The main problem Gauna limited is facing is that they are unaware of the cost of goods they are producing. . It helps in decision making. 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. 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. This demonstrates the significance of determination of actual cost of goods produced. 2. “Cost of production per unit = produced “ Total manufacturing cost / Number of units Arguments in support of undertaking an appropriate product costing policy – 1.

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

where variety manufacturers of numerous identical products. 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. 2. It is used where overhead cost is not It is used produce much and manufacturers produce different products.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. NO TRADITIONAL COSTING ACTIVITY BASED ACCOUNTING APPROACH APPROACH 1. Our information and not by financial accounting balance sheet or income statement cannot tell us production per unit or do cost analysis. . It focuses on structure rather than on It is more on the activities than on the processes. manufacturing costs. structure. 3. It is composed of manufacturing costs It includes both manufacturing and non- only. ISSUE – 2 (A) Major differences between Traditional costing approach and Activity Based Accounting (ABC) costing approach - SR .

It is very easy to apply. would use have included multiple products for production. It is only failing because it is producing numerous variety or diversity of goods and is unaware of its product costs. For instance – if Gauna limited For instance – as Gauna limited company company and no produced other product traditional only coffee has now expanded their business and they they method of costing. level. It is time consuming. In this overheads are related to cost In this overheads are grouped into activity centres or departments so they are not cost pools. 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 . facility level activities.4. 8. 5. It is flexible as compared to ABC It is a rigid form of costing approach. product level and fixed level activities. 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 basically assumptions. 9. costing approach. only based unit level on It maintains full accuracy. batch level. now they should use activity based costing method. or It includes unit level. It includes variable 7. (B) Some tell-tale signs indicating the need of Activity Based Costing Approach1. 6. realistic of cost behaviour.

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. 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.2. coffee exporting. As Gauna limited company has expanded its business and performing various activities such as poultry farming. complexity etc so the manufacturing of these require a lot of resources. 4. coffee processing. bulk fuel distribution. batch level. printing press. 3. mechanical workshop. If any company has very high indirect cost in relation to its direct cost then it should use Activity Based Costing. Moreover Gauna limited is an export company it deliberately requires to start using management accounting information. 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. Mr Andreas Birkquest should also start using ABC approach so that costs can be assigned to . paper packaging manufacturing etc these all products go through a lot of stages like production. Costing So the company has to opt Activity Based Approach.

2. Noreen. Kenneth A... Ray H. “Managerial Accounting”. Weetman. Hawkins. Anthony. Essex: Pearson . Harlow. 2011.cost objects and he can know the accurate cost of all products and each process they go through separately. Garrison. 2011. New York: McGraw-Hill/Irwin. 2012. “Financial and Management Accounting: An Introduction”..Hill/Irwin. Pauline. Robert N. David F. Eric W. “Accounting: Text and Cases”. and Merchant. New York: McGraw. REFERNCES 1. 3.. and Brewer Peter C.