COST ACCOUNTING

Cost Accounting

Case Study - Vroom plc

Introduction

Accounting has been integral part for companies as it keep track over resources of the company. Beside this, accounting support different function of the company that assists in decision making process and these are planning and controlling. Company use different counting methods in order to increase their revenue and to reduce their cost. Hence, the focus of this paper would be on case study of Vroom plc in which different methods have been used to calculate total profit. Addition to this, report to the directors of Vroom plc on management accountant discussing the both methods of costing systems for Vroom Plc and how it is beneficial for the company.

(a) Calculate the total profit on each of Vroom plc's three types of product using each of the following methods to attribute overheads:

a) i. Existing method based upon labour hours (see appendix for calculation)

Through existing method based upon labour hours, total profit would be £2,740,000. Total cost of Sunshine will be £6,000,000, Roadster cost would be £6,640,000 and Fireball total cost would be £2,420,000. Profit/ (loss) per unit for Sunshine is £1,000, Roadster with £1,360 and Fireball with £ 380 (Kinney, Raiborn, 2012, p. 145).

ii. Activity Based costing (see appendix for calculation)

Based on activity costing, total profit is £2,739,990. Total cost of Sunshine will be £5,950,010, Roadster cost would be £6,199,167and Fireball total cost would be £2,910,833. Profit/ (loss) per unit for Sunshine is £1,050, Roadster with £1,801 and Fireball with -£111.

Hence, with existing method i.e. Labour Hours Method total profit is £ 2, 740, 000 while with Activity Based Costing method total profit is £ 2, 739, 990 which stating that Labour Hours Method is much better than Activity Based Costing in this scenario. Furthermore, Profit/(loss) per unit of Labour Hours Method is showing better picture as compared to Activity Based Costing method due to loss per unit in Fireball. But from logically perspective, Activity Based Costing method a true picture since each activity has been allocated to cost (Drury, 2012, 144).

(b) Write a report to the directors of Vroom plc, as its management accountant discussing the both methods of costing systems for Vroom Plc.

Report - Vroom Plc

To: Directors of Vroom plc

From: Management Accountant

Subject: Costing System

November 2013

In this report the focus would be on comparing and discussing the both methods of costing systems for Vroom Plc i.e. activity-based costing as well as Traditional costing system.

Activity based costing is a costing method that has dual phase i.e. first costs are allocated to different activities and after that the products based material or are based on activities requires by products. As far as traditional system is concern, it is based on volume metric like direct labour hours, production machine hours. Cost of manufacturing is assigned only to products and it does not consider non-manufacturing costs which has direct connection with the production like administrative expenses etc (Kinney, Raiborn, 2012, p. 114).

Direct Cost: By using the activity based costing, the ...