Assignment 2 Deadline 02/11/2019 16:59 Instructions Please R

Assignment 2deadline 02112019 1659instructions Please Read The

Please read the assignment instructions carefully. The assignment requires avoiding plagiarism; all work must be in your own words, and proper referencing is mandatory. Submissions containing copied content without proper citation will receive zero marks. All answers should be typed in Times New Roman, size 12, double-spaced. No images containing text are allowed, as these will be considered plagiarism. Write your answers directly below each question.

Paper For Above instruction

The assignment focuses on two core accounting concepts: the Equivalent Number of Units and Activity-Based Costing (ABC). Both topics are vital in understanding cost accumulation and allocation processes within managerial accounting. This paper discusses each concept with illustrative examples, explores their advantages, and elucidates practical applications in a business context.

Introduction

Cost accounting plays an essential role in managerial decision-making, involving intricate methods to allocate and manage costs efficiently. Among these, understanding the equivalent number of units enhances production cost analysis, while ABC costing offers a refined approach to overhead allocation. Both concepts endeavor to improve cost accuracy and operational efficiency, which are critical for strategic planning and competitive advantage.

Equivalent Number of Units

The equivalent number of units is a fundamental concept in cost accounting related to the conversion of partially completed goods into an equivalent number of fully completed units. This concept enables businesses to determine costs associated with work-in-progress (WIP) inventories accurately. The calculation considers the degree of completion of units in various production stages, facilitating precise cost allocation for periods where some units are incomplete.

For example, assume a manufacturing process produces 1,000 units, with 60% of them completed at the end of the period. To determine the equivalent units of production, multiply the number of units by their completion percentage: 1,000 units x 60% = 600 equivalent units. This conversion allows the company to allocate manufacturing costs proportionally to completed and in-progress units.

The advantages of using the equivalent number of units include improved accuracy in cost calculation, better inventory valuation, and enhanced decision-making concerning production efficiency. It also facilitates consistency in financial reporting and cost control, especially when production involves multiple stages with varying completion levels.

Activity-Based Costing (ABC)

ABC costing assigns overhead costs to products based on the activities that drive costs, rather than traditional volume-based methods. This provides a more accurate reflection of the true costs associated with specific products or services. For instance, consider a factory that produces two products: Product A and Product B. The overhead costs include machine setup, quality inspections, and maintenance activities, which are performed in varying degrees for each product.

Suppose the total overhead cost amounts to $100,000. The activities and their respective cost drivers are as follows: setup (100 setups), inspections (200 inspections), and maintenance (1,000 hours). If Product A requires 40 setups, 80 inspections, and 400 hours of maintenance, while Product B requires 60 setups, 120 inspections, and 600 hours, we can allocate overheads accordingly.

To find the overhead allocation rate for each activity, divide the total activity cost by the total activity driver units:

• Setup rate = $50,000 / 100 setups = $500 per setup
• Inspection rate = $30,000 / 200 inspections = $150 per inspection
• Maintenance rate = $20,000 / 1,000 hours = $20 per hour

Applying these rates, the overhead allocated to Product A is:

• Setup: 40 x $500 = $20,000
• Inspection: 80 x $150 = $12,000
• Maintenance: 400 x $20 = $8,000

Total overhead for Product A = $40,000. Similar calculations apply for Product B.

Advantages of ABC Costing

ABC costing offers several benefits over traditional costing methods, including increased accuracy in cost allocation, better identification of high-cost activities, and improved product profitability analysis. It enables management to pinpoint which activities consume resources and makes strategic decisions to optimize operations, reduce waste, and improve cost efficiency. Furthermore, ABC supports better pricing strategies and product mix decisions by providing detailed cost insights.

Conclusion

Both the equivalent number of units and ABC costing serve as vital tools in managerial accounting to enhance cost accuracy and operational control. The equivalent units allow for precise handling of partially completed products, while ABC costing refines overhead allocation by linking costs directly to activities and cost drivers. Integrating these methods into managerial practices can significantly improve a firm’s cost management accuracy and strategic decision-making, leading to sustainable competitive advantages.

References

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• Horngren, C. T., Datar, S. M., & Rajan, M. V. (2012). Cost Accounting: A Managerial Emphasis. Pearson.
• Kaplan, R. S., & Cooper, R. (1998). Cost & Effect: Using Integrated Cost Systems to Drive Profitability and Performance. Harvard Business School Press.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.
• Blocher, E., Stout, D., Juras, P., & Cokins, G. (2019). Cost Management: A Strategic Emphasis. McGraw-Hill Education.
• Anthony, R. N., & Govindarajan, V. (2007). Management Control Systems. McGraw-Hill Education.
• Arnaboldi, M., Lapsley, I., & Rostami, N. (2017). Cost Management and Cost Accounting. Routledge.
• Kaplan, R. S., & Anderson, S. R. (2004). Time-Driven Activity-Based Costing. Harvard Business Review.
• Innes, J., & Mitchell, F. (1995). Activity-Based Costing: Some Evidence on the Relationship with Manufacturing Performance. Accounting, Organizations and Society.
• Langfield-Smith, K. (1997). Management Control Systems and Strategy: A Critical Review. Accounting, Organizations and Society.