(a) Calculate the total profit for each of the product groups: (i) using the current absorption costing system; (ii) using the proposed activity-based costing system .(b) Explain how the information obtained from the activity-based costing system might be used by the management of the company and outline the circumstances under which an activitybased costing system would produce similar product costs to those produced using a traditional absorption costing system
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
A large company sells a range of electrical, clothing, and homeware products through a chain of department stores. The main administration functions are provided from the company’s head office. Each department store has its own warehouse which receives goods that are delivered from a central distribution centre. The company currently measures profitability by product group for each store using an absorption costing system. All overhead costs are charged to product groups based on sales revenue. Overhead costs account for approximately one-third of total costs and the directors are concerned about the arbitrary nature of the current method used to charge these costs to product groups. A consultant has been appointed to analyse the activities that are undertaken in the department stores and to establish an activity-based costing system. The consultant has identified the following data for the latest period for each of the product groups for the X town store in the image below:
(a) Calculate the total profit for each of the product groups:
(i) using the current absorption costing system;
(ii) using the proposed activity-based costing system
.(b) Explain how the information obtained from the activity-based costing system might be used by the management of the company and outline the circumstances under which an activitybased costing system would produce similar product costs to those produced using a traditional absorption costing system
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