Traditional and Activity-Based Costing - Sewing Easy Ltd

This unit is based on Sewing Easy Ltd which is dealing in manufacturing sewing machines in the recent year they earned high profit thus they planned to expand business activity.

• Determine the cost per unit of basic and advance models under current traditional costing system.
• Analyze basic and advance models under Activity-based costing system.
• Explain major reason in the context of overseas buyers for buying advanced model.
• Explain reasons on the basis of the same overheads and recommending ways for dealing with its fluctuations.
• What is the Merit and demerits of activity-based costing system?

INTRODUCTION

Management accounting can be referred as process of preparing accounts and reports which will be helping manager for finding financials which are accurate and even the information which will be useful for short term decision making such as statistical information. On the perspective of business unit, better planning has been ensured by management accounting and proper control over the organization. This report is totally based on case scenario of Sewing easy ltd whose business model can be described as basic and advanced especially in manufacturing context. The main objective of organization is to enhance the base of customer and profit level should be maximised as each business units has a desire to explore there operations at global level. This report is giving very deep insight about two methods i.e. traditional based costing and activity-based costing. The report will be elaborating there merits as well as demerits.

Q1 Cost per unit of basic and advance models under current traditional costing system

Traditional costing system

Particulars	Amount of basic model	Amount of advance model
Manufacturing overhead	250000 (working note 1)	451700 (Working note 2)
Labour cost (Working note 3)	240000	390000
Overhead rate	$1.04	$1.16

Working notes

W.N 1 Representation of total indirect overheads (Basic model)

W.N 2 Representation of total indirect overhead cost by taking consideration of operating expenses (Advance model)

W.N 3 Aggregate of labour cost

Q2 Cost per unit of basic and advance models under Activity-based costing system

Assessing unit cost on the basis of activity based costing

Particulars/Relevant cost drivers	Overhead costs	Sum of activities	Overhead cost/ sum of activity ($)
Inspection	20000	950	21.05
Assembly	90000	8000	11.25
Production scheduling	105000	550	190.91
Machine set up	35000	350	100

A	Activity rate
B	Activity usage by basic model
C	Activity Cost Assigned to basic model [C = (A * B)]
D	Activity usage by advance model
E	Activity cost assigned to advance model [E =(A * D)]

Particulars	Total Indirect / overhead costs($)	Total of activities	A ($)	B	C ($)	D	E ($)
Inspection	20000	950	21.05	200	4210.53	750	15789.47
Assembly	90000	8000	11.25	4600	51750	3400	38250
Production Scheduling	105000	550	190.91	50	9545.45	500	95454.55
Machine set-up	35000	350	100	100	10000	250	25000
Selling and administration	140600						140600 * 36% = 50616 (Working note 4)
Interest	25200						25200 * 6% = 1512 (Working note 4)
Rent of office	35900.						35900 * 9% = 3231 (Working note 4)
Aggregate overhead cost			Figures in		75505.98		229853
Per unit (overhead cost)					75505.98 / 1600 = 47.19		229853 / 1500 = 153.24

W.N 4

Particulars	Total Indirect / overhead costs ($)	Cost of labor
Selling and administration	140600	390000	36.00%
Interest	25200	390000	6.00%
Office rent	35900	390000	9.00%

Consumption of unit cost of advanced model

	Basic model ($)	Advance model ($)
Cost per unit of direct material	325	560
Cost per unit of direct labour	150	260
Cost of overhead	47.19	153.24
Unit cost	522.19	973.24

UPTO56%

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