MANAGEMENT ACCOUNTING Essay Example | Topics and Well Written Essays - 2000 words

MANAGEMENT ACCOUNTING - Essay Example Therefore this is the final appraisal report of the evaluation and it is designed to methodically address the said requirements of the Sprocket Ltd management as follows. Table of Contents 1An Overview 2 1.1Existing costing system (20 marks) 3 1.2Issues in the traditional system 3 2An alternate method 5 2.1ABC system 5 2.2Recommended ABC implementation strategy 7 2.3Possible issues for Sprockets with ABC 10 3Conclusions and recommendations 11 4References 12 5Appendix: the most recent costing sheet 13 1.1 Existing costing system (20 marks) Sprockets Ltd was found to be a production company which engages approximately 300 jobs a year. The undertaken jobs are specified by the customers and production is carried on accordingly. At the moment there are three jobs (A, B and C) in production which are broadly similar to each other. As it was understood that A, B and C presents the typical size of a job that is accepted by Sprockets Ltd, they were used to appraise the existing costing system in the company. (The most recent job costing sheet is attached in the Appendix) The current costing system keeps an account of the direct production information i.e. direct materials, direct labour hours and machine operation hours for each job very efficiently. Thereby the respective expenses along with the direct expenses (i.e. 75% of the labour cost) are allocated to each job accurately. The production overhead on the other hand is absorbed at a flat rate of ?3 per machine hour. Based on the total cost calculated by this method for each job, the selling price is set to produce 25% gross profit. 1.2 Issues in the traditional system 1.2.1 The primary issues identified for Sprocket Ltd in their prevailing costing system stems from the production overhead allocation. Production overheads amount to approximately 20% of the total cost of production (ref appendix); which is a significant proportion of costs that must be accurately absorbed into each job separately. The total production overhead was recently analysed and split by Sprocket Ltd as in figure 1. Figure 1 Machinery is said to be a cost pool which consists of machine related expenditure and total salaries (?40,000) of two members of staff. Only the salary cost allocation was identified to be inaccurate in this cost pool as it does not depend on the operation of machine hours. Material handling costs (which are 20%) according to the analysis description is derived from material issues and thus remains unrelated to the machine hours. Inspection cost, which is the salary of the inspector hired by Sprocket Ltd to examine each job too is only barely associated to the machine hours. Sundries on the other hand are only 2% and are related to the factory. Thus its allocation by machine hours is acceptable. Thereby we’ve identified that, absorption of production overheads at ?3 per machine hour for each job is quite inaccurate for most part of the production expenditure. 1.2.2 It is a fact that the data co llected and produced by a costing system is also incorporated into the general accounting system. For this reason the costing approach must allow for easy and sensible delivery of the data for reports to upper management. Sprockets’ traditional costing approach was identified to be lacking in this facility. For an example an in-depth analysis costs in ‘