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Introduction to Management Accounting Group Assignment

Introduction to Management Accounting (Taylor's University)

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Modular Programme Assignment

List of students (State full name & tutorial group in block capital)
Cover Sheet
(Group and Individual Assignments Only)
1. KOK KE LYN SEC 01

2. LAM JUIN YUEN SEC 01

3. NATALIE TEE YEE TING SEC 01

4. ABDOOL SATAR SHAKEEL SEC 01

Fold corner of EACH copy separately and seal to obscure your
Please complete the form (in capital letters) and attach it securely to the front of your assignment before submitting your assignment.

Student 1 ID: ………0349070………………………………. Student 2 ID: ………0342445……………………………….

Student 3 ID: ………0342486………………………………. Student 4 ID: ………0348710……………………………….

Programme: BACHELOR OF ARTS (HONOURS) ACCOUNTING AND FINANCE

Name of module: INTRODUCTION TO MANAGEMENT ACCOUNTING

Name of tutor: MR SHAZRUL EKHMAR ABDUL RAZAK

A C C 6 0 2 0 4
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Assignment title: GROUP ASSIGNMENT

Due date & time: 25 OCT 2021 @ 2pm

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ASSIGNMENT FEEDBACK FORM

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Student ID:

Programme: Dual Award (Accounting & Finance)

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Module code and title: ACC60204 – INTRODUCTION TO MANAGEMENT ACCOUNTING

Module Lecturer/ Tutor: MR SHAZRUL EKHMAR ABDUL RAZAK

Assignment number: Due date: 25 OCT 2021 Word Count: 2008

Assignment topic as stated in the guidelines provided:

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Key: 1. Outstanding 2. Very Good 3. Good 4. Satisfactory 5. Weak 6. Unsatisfactory

(Lines left blank by the tutor are not relevant to this assignment)
Structure & Presentation 1 2 3 4 5 6

    
Executive Summary Little relevance to question

     Lacking continuity
Introduction

     Many Inaccuracies
Findings/ Discussion


Appropriate Headings and subheadings  Inappropriate Headings

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Appropriate Layout system 

     Inappropriate numbering


Conclusion (linked to discussion)
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Overall presentation       Messy presentation

Content

Demonstrate engagement with topic       Lacking logical

flow/poorly set out
Good reference of sources       Inadequate range
Demonstrates critical thinking  Text book response
    
Clearly identifies problem/ topic       Lacks clarity
and provides appropriate
recommendations

Language

Grammatical sentences       Weak grammatically

Correct spelling  Many incorrect spelling
    
Effective/accurate use of figures and  Use ineffective or
tables      inaccurate

Any additional comments (if there is any): Comments:

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WRITTEN COMMUNICATION SKILLS THROUGH

ASSIGNMENT REPORT (PART C – 30 MARKS)

Traits Performance Score Wt. Marks

levels
Poor (1 2 3) Fair (4 5) Good (6 7) Excellent (8 (%)
9 10)
The The The
1 Purpose/Aim The organization, organization, organization, 25
purpose style, and style, and style, and
and the content content are content are
aim of the sometimes good and excellent and
paper are interfere with explain the explain the
not clear to the purpose purpose and purpose and
the reader. and aim of the aim of the aim of the
paper. paper. paper very
clearly.
Most ideas Presents ideas Supports Explores
Explanation of are but the most ideas ideas with
2 25
ideas unsupported supports are with good sound
and very inconsistent. evidence and arguments
confusing. Reasoning is reasoning and
The not clear. evidences.
reasoning is Reasoning is
flawed. very
effective.
Develops and Develops Develops
organizes ideas unified and ideas
Does not
in paragraphs coherent cogently and
develop ideas
that are not ideas within logically with
Logic & cogently and
3 well connected. paragraphs very good 20
organization logically,
There is some and the connection
ineffective
evidence of transition between
organization,
organization. from one paragraphs.
unclear
Introduction paragraph to Organization,
introduction,
and conclusions another is introduction,
and
not well good. and
conclusion
focused. Organization, conclusion
introduction, are very
and good.
conclusion
are good.
Uses words Word forms Word forms Employs the
4 that are and sentence and most apt 20
Language usage
unclear, structures are sentence words and
sentence adequate to structures sentence
structure convey basic are structures are
lacks clarity, meaning. effective. concise and
errors are However, There are very
seriously there are errors but effective.
distracting errors that these do not
cause cause
distraction. distraction.
There are

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Writing Frequent errors minor The writing is

5 Spelling & contains in spelling and errors. But error free in 10
grammar numerous grammar the general terms of
spelling and interfere with conventions spelling and
grammatical comprehension. of spelling grammar.
errors. Very and
difficult to grammar
comprehend. have been
followed.

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A COMPARISON OF TRADITIONAL ABSORPTION COSTING AND ACTIVITY-BASED

COSTING: LIMITATIONS AND RECOMMENDATIONS

Prepared for:

Mr. Tarmizi, Management Accountant

Southern Digital Sdn. Bhd.

Prepared by:

Kok Ke Lyn, Lam Juin Yuen,

Natalie Tee Yee Ting, Abdool Satar Shakeel

Interns of Southern Digital Sdn. Bhd.

October 25, 2021

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Table of Contents
EXECUTIVE SUMMARY.......................................................................................................................9
1.0 INTRODUCTION.................................................................................................................................9
2.0 DISCUSSION OF FINDINGS............................................................................................................10
2.1 COST OF PRODUCT PER UNIT UNDER TRADITIONAL ABSORPTION COSTING AND
ACTIVITY-BASED COSTING............................................................................................................10
2.2 PROFIT OF PRODUCT PER UNIT UNDER TRADITIONAL ABSORPTION COSTING AND
ACTIVITY-BASED COSTING............................................................................................................11
3.0 LIMITATIONS OF COSTING SYSTEM............................................................................................13
3.1 TRADITIONAL ABSORPTION COSTING...................................................................................13
3.2 ACTIVITY-BASED COSTING.......................................................................................................13
4.0 RECOMMENDATIONS.....................................................................................................................15
4.1 IMPROVE PROFITABILITY BY ACTIVITY-BASED COSTING................................................15
4.2 CONCERN ON THE SUPPLY IN SILVER CIRCUIT BOARD.....................................................16
5.0 CONCLUSION...................................................................................................................................17
6.0 APPENDIX.........................................................................................................................................18
CALCULATION: TRADITIONAL ABSORPTION COSTING...........................................................18
CALCULATION: ACTIVITY-BASED COSTING...............................................................................20
7.0 REFERENCE LIST.............................................................................................................................23

LIST OF TABLES

TABLE 1: COMPARISONS OF COSTS UNDER TRADITIONAL ABSORPTION

COSTING AND ACTIVITY-BASED COSTING...…………………………………….10

TABLE 2: COMPARISONS OF REVENUE UNDER TRADITIONAL ABSORPTION

COSTING AND ACTIVITY-BASED COSTING……...………………………….........12

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EXECUTIVE SUMMARY

This report examines traditional absorption costing and activity-based costing to study the
effectiveness on improving Southern Digital Sdn. Bhd.’s profitability. Due to the distinct
allocation methods of overhead rate, traditional absorption costing tends to provide inaccurate
and misleading data for Southern Digital Sdn. Bhd., whereas activity-based costing that prevents
cost distortion is effective to enhance profitability. Despite the shortcomings that can be
conquered, implementing activity-based costing is beneficial to the company in general.

1.0 INTRODUCTION

Along with the imminent contract renewal with Tech World Sdn. Bhd. and the mission of
sustaining the company’s profitability amid the pandemic outbreaks, Sothern Digital Sdn. Bhd.
are required to evaluate the company’s current costing system.

This report into the costing system of Sothern Digital Sdn. Bhd is designated to compare
and analyze the different results of cost and revenue of the three circuit boards by integrating the
traditional absorption costing and activity-based costing system. In this report, limitations and
recommendations are proposed, which attempts to address and tackle the current issues faced.

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2.0 DISCUSSION OF FINDINGS

2.1 COST OF PRODUCT PER UNIT UNDER TRADITIONAL ABSORPTION COSTING
AND ACTIVITY-BASED COSTING

Table 1: Comparisons of cost under traditional absorption costing and activity-based costing

Table 1 indicates the differences in cost per unit between the three boards, showing that
gold and platinum boards have higher cost under activity-based costing, while silver board has
higher cost under traditional absorption costing. Although both costing systems allocate direct
costs to the cost objects in the same way, the distinct approaches of determining the overhead
rate used result in different indirect costs and costs per unit.

Under traditional absorption costing, RM 195,270 of total overhead costs are treated as a
single pool of indirect costs and prorated based on the portion of direct cost. Besides, there is
only a single predetermined overhead rate and cost allocation are applied consistently across the
production activities, which is RM 28.30 per labour hour and a total of 6,900 direct labour hours
respectively.

In comparison, activity-based costing identifies the different activities involved, breaking

down the indirect costs precisely with multiple cost drivers and activity pools [ CITATION SAY15 \l
1033 ]. Moreover, the overhead rates in activity-based costing are determined depending on the
activities and assigned uniformly based on the actual consumption of the resources. Therefore,
the two costing systems often provide different pictures of the cost per unit.

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Likewise, the high accuracy in activity-based costing accentuates the differences in cost
data. Traditional absorption-costing tends to over cost silver board, which is reported more cost
with a low level of resources, demonstrating a difference of RM 0.94 per unit. On the other
hand, the gold and platinum board are reported with an under-costed value, where the high level
of resources has a lower cost per unit. In traditional absorption costing, the cost per unit of the
gold board is RM 1.05 lower, whereas the cost per unit of the platinum board is RM 0.10 lower.

2.2 PROFIT OF PRODUCT PER UNIT UNDER TRADITIONAL ABSORPTION COSTING

AND ACTIVITY-BASED COSTING

Table 2: Comparisons of revenue under traditional absorption costing and activity-based costing

Comparisons between the profit of board in traditional absorption costing and activity-
based costing are made in table 2. Under traditional absorption costing, the gold board has
revenue of RM 0.29 per unit. However, the gold board’s revenue drops to a deficit value in
activity-based costing due to the failure of providing accurate information on the cost per unit by
traditional absorption costing.

Product cost plays a significant role in determining the sales revenue. As traditional
absorption costing was utilized to allocate indirect cost during the 20 th century, its uncomplicated
single allocation base and overhead rate applied uniformly provides limited
accuracy[ CITATION Ath10 \l 1033 ]. The simplistic manner to align the cost allocation base
leads to distortions in product costs and impedes the ability on establishing appropriate
measurement of the cost[ CITATION Sha97 \l 1033 ]. Therefore, the gold board is not profitable

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as expected because it is under-costed and underpriced in traditional absorption costing. The

under-costed products will generate lesser revenue and cause a loss to the company, which is
conflicted with the objective of sustaining the company’s profitability.

In addition, selling price is also one of the chief determinants for revenue. In general, an
increase in the selling price will lead to a higher product margin and revenue obtained from each
board, and vice versa. However, there is also a possibility for the over-priced silver board to
decrease the revenue as it will lose its competency to the lower price’s competitors [CITATION
BHU03 \l 1033 ].

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3.0 LIMITATIONS OF COSTING SYSTEM

3.1 TRADITIONAL ABSORPTION COSTING

Instead of using multiple cost drivers to establish the cost outcome accurately, the
traditional absorption costing system offers a limited accuracy in cost data and information
compared to activity-based costing. Since the traditional absorption costing system uses a single
rate for overhead allocation that applies across the entire company operations, it is not
appropriate for large corporations that involves several operations in the manufacturing
process[ CITATION Ras111 \l 1033 ]. The widely applied and arbitrary manner in allocating
indirect cost to the products will lead the costs per unit to be either understated or overstated,
which steers the company to make wrong decisions about the profitability based on the incorrect
information. For example, the gold board holds a loss of RM 0.76 instead of a profit of RM 0.29
by using traditional absorption costing.

Furthermore, traditional costing system tends to disregard and neglect the unforeseen and
additional costs [ CITATION Mol18 \l 1033 ]. There seems to be no means for this system to
account the fact that it may cost our firm higher or lower to produce goods. Therefore, the
product mix, pricing, cost control, and other decisions made by managers using those distorted
costs can result in significant long-term losses [ CITATION Mis02 \l 1033 ]. For instance, the
company will continue losing more money if the fact that the production of gold circuit is loss-
making is not discovered.

3.2 ACTIVITY-BASED COSTING

Although activity-based costing provides companies with comprehensive information in

formulating business decisions, activity-based costing still should not be implemented as the sole
strategic tool to achieve profit maximization as it has its shortcomings as well.

The first limitation of initiating activity-based costing is the difficulties that emerged in
identifying the most accurate cost drivers for a variety of production activities. Unlike
traditional absorption costing, activity-based costing involves a diversity of cost pools and cost
drivers to determine the respective overhead rates. Due to the varying cost allocation bases,
activity-based costing is likely to increase the odds of making errors during the measurement of

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allocation rate and the assignment of production cost if the cost drivers are not selected
accurately [ CITATION Nam16 \l 1033 ]. For instance, the product cost for three circuit boards
will differ if the production run is selected as the cost driver instead of production hours per unit.
The mistakes made will provide misleading information to establish the incorrect selling prices
of the three circuit boards and further influence the company’s profitability.

The second limitation is derived from the multiple cost drivers in which the
implementation of activity-based costing is time-consuming and cost-ineffective. As all source
data are indirectly linked to the three circuit boards, which costs are unable to allocate straight to
the circuit boards, activity-based costing involves more lengthy process, complex calculations,
and heavier workload to determine allocation rates[ CITATION Mah15 \l 1033 ]. Moreover,
although activity-based costing provides more precise and accurate information for the company,
the accuracy of allocation rates for diverse production activities has to be ascertained constantly.
Activity-based costing requires a costly and strenuous accumulating and analyzing process to
ensure the allocation rates of every production activity are regularly up to date. The absence of
correct and latest information might lead to erroneous decisions on product costs and
significantly exacerbate the concerns on profitability.

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4.0 RECOMMENDATIONS
4.1 IMPROVE PROFITABILITY BY ACTIVITY-BASED COSTING

Activity-based costing is advocated as a powerful tool for reducing product cost due to its
ability to reveal the embedded cost. As the silver board consists of the highest product cost, the
implementation of activity-based costing helps to reduce the cost of the silver board by
identifying the accurate and logical overhead costs. When multiple overhead costs are traced and
spread uniformly to all product activities, managers can differentiate between efficient
production and unnecessary cost incurred. Therefore, actions can be taken to minimize the waste
during production activities and eliminate the non-value adding or costly activities, leading the
production activity to be more streamlined. By doing so, the cost of the silver board will be
reduced and significantly contribute more revenue and greater profitability to the company.

In addition, activity-based costing helps to resolve the cost distortions caused by

traditional absorption costing. As there is only a single overhead rate and allocation base applied
across the production activity, the cost information is easy to be distorted. For example, the
golden board is under-costed and the silver board over-costed when traditional absorption
costing is used to calculate the product cost per unit. It leads the management to erroneously
expect that the gold board is profitable, yet the silver board is unprofitable, which shifts their
attention to the wrong profitable products and results in suffering significant financial losses. By
integrating the activity-based costing, it is capable of monitoring the hidden losses and hidden
profit. An activity-based costing system offers an accurate costing mechanism, providing
accurate cost data and useful information to management to establish appropriate selling prices
and profitable operating decisions.

With the implementation of activity-based costing, Southern Digital Sdn. Bhd. able to
manage better manufacturing performance, improve profitability, and maximize returns as a
result of more accurate product pricing and effective resource allocation.

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4.2 CONCERN ON THE SUPPLY IN SILVER CIRCUIT BOARD

After the analysis between traditional absorption costing and activity-based costing, the
good of continuing supply in the silver board has far outweighed the bad. Due to the less
accurate and misleading cost information provided by traditional absorption costing, the silver
board is over-costed, showing a loss of RM 0.42 per unit in revenue after subtracting with the
selling price. However, activity-based costing that distinguishes multiple indirect costs based on
the cost drivers helps increase the accuracy of cost data and reduce the likelihood of cost
distortions, indicating the production of the silver board brings revenue of RM 0.52 per unit to
the company [CITATION Yan12 \l 1033 ]. Moreover, silver board has the highest units sold
among the three circuit boards, which is 18,000 units. Therefore, the supply of silver boards is
not encouraged to be terminated.

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5.0 CONCLUSION

For Southern Digital Sdn. Bhd. to resume their contract with Tech World Sdn. Bhd. and
achieve the goal of sustaining profit during the pandemic outbreak, determining the accurate
costing system plays a vital role in addressing those issues. According to the comparisons and
findings above, activity-based costing has greater benefits than traditional absorption costing.
While traditional absorption costing is likely to increase the odds of cost distortions, activity-
based costing successfully provides accurate cost information, enabling the company to gain
competitive advantages and improve profitability. Thus, the introduction of activity-based
costing is the solution to overcome the difficulties encountered. Although the limitations of
multiple cost pool selection and time-consuming workload might hinder the implementation of
activity-based costing, but these shortcomings can be resolved effectively when company
management is strongly committed and supportive [ CITATION Kon12 \l 1033 ].

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6.0 APPENDIX
CALCULATION: TRADITIONAL ABSORPTION COSTING

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CALCULATION: ACTIVITY-BASED COSTING

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7.0 REFERENCE LIST

Athikah, N., 2010. Utilization of Activity-Based Costing System in Manufacturing Industries –

Methodology, Benefits and Limitations. International Review of Business Research Papers,
February, 6(1), pp. 1-17.

HUGHES, S. B. & GJERDE, K. A., 2003. Do Different Cost Systems Make a Difference?.
Management accounting quarterly, 5(1), pp. 22-30.

Konan, N. C., 2012. PROBLEMS ENCOUNTERED WITH THE IMPLEMENTATION OF AN

ACTIVITY-BASED COSTING SYSTEM. December .p. 87.

Mahal, I. & Hossain, M. A., 2015. Activity-Based Costing (ABC) – An Effective Tool for Better
Management. Research Journal of Finance and Accounting, 6(4).

Mishra, B. & Vaysman, I., 2002. Cost-System Choice and Incentives—Traditional vs. Activity-
Based Costing. Journal of Accounting Research, 39(3), pp. 619-641.

Molis, J., 2018. Advantages & Disadvantages of Traditional Costing. [Online]

Available at: https://bizfluent.com/info-8645304-advantages-disadvantages-traditional-
costing.html
[Accessed 2021].

Namazi, M., 2016. Time-driven activity-based costing: Theory, applications and limitations.
Iranian Journal of Management Studies (IJMS), 9(3), pp. 457-482.

Rasiah, D., 2011. Why activity based costing (ABC) is still tagging behind the traditional costing
in Malaysia?. Journal of Applied Finance & Banking, 1(1), pp. 83-106.

SAYGILI, A. T. & KAYALI, C. A., 2015. A COMPARISON OF ABSORPTION COSTING

AND ACTIVITY BASED COSTING SYSTEMS THROUGH AN OPTIMIZATION
PROBLEM. International Journal of Research In Social Sciences, July.5(5).

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Sharma, R. & Ratnatunga, J., 1997. Teaching note: Traditional and activity based costing system.
Accounting Education, 6(4), pp. 337-345.

Yanpirat, P. & Maneewan, J., 2012. Employing Fuzzy-Based CVP Analysis for Activity-Based
Costing for Maintenance Service Providers. Proceedings of the International MultiConference of
Engineers and Computer Scientists, Volume 2.

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