MANAGEMENT ACCOUNTING

Essendon Electronics: Regal or Monarch



Essendon Electronics: Regal or Monarch

a. Profitability of the Regal and Monarch Models

i. Costing through Existing System

 

Monarch

Regal

D.M

208

584

D.L

18

42

Machine usage cost

144

72

Manufacturing overheads

 

 

22000*8+4000*4 = 192000 hours

 

 

4800000/192000 = 25 per hour

200

100

Cost per unit

570

798

ii. Costing through Activity Based System

 

Monarch

Regal

Per Unit

 

D.M

4576000

2336000

208

584

 

D.L

396000

168000

18

42

 

Machine usage cost

3168000

288000

144

72

 

Manufacturing overheads

 

 

Activity Costs

Total

 

Soldering

711000

231000

942000

1570

600

Shipment

696600

163400

860000

20000

43

Quality control

899200

340800

1240000

77500

16

Purchases

400500

549900

950400

190080

5

Machining

52800

4800

57600

192000

0.3

Machine setups

400000

350000

750000

30000

25

Total cost

11300100

4431900

Cost per unit

514

1108

b. Difference of Profitability in different Costing Systems

By studying the above calculations, the difference in the per unit cost can clearly be seen due to which, the profitability will also differ. This difference is due to basis of allocation of traceable cost, the traditional style has used the machine hour method, while all traceable cost are not related to machine hour but with other factors such as machine set ups, no of shipments, etc (Sharman, 1993, 17-22). Therefore, the allocation of traceable cost is different and more realistic in Activity Based Costing rather than traditional costing method.

c. Comments and Recommendations

The findings of the Activity Based costing is opposite as compared to the traditional costing. The existing costing shows the Regal series more profitable than the Monarch series; while in Activity Based costing the Monarch, series is profitable far wide than Regal series.

i. Costing through Existing System

Monarch

Regal

Selling price

900

1140

Cost to manufacture

570

798

Selling and admin

265

244.5

Operating profit per unit.

65

97.5

ii. Costing through Activity Based System

Monarch

Regal

Selling price

900

1140

Cost to manufacture

514

1108

Selling and admin

265

244.5

Operating profit per unit.

121

-212.5

This shows that the newly introduced Regal series is not profitable and is below the breakeven point. The company should concentrate on Monarch as it is showing more profit than Regal as per Activity Based Costing. However, in traditional method the Regal seems more profitable. The ABC costing is more realistic as it considers each and every production factor in determining cost per unit, therefore the decision should be based on it and the Monarch should be concentrated. However, we can also observe the costly Regal series and ponder on the production activities to minimize cost where possible, which will decrease the overall cost and increase the profitability in future.

d. Benefits, Costs and Limitations of ABC Costing

Over the past two decades, Activity-Based Cost has grown from an obscure almost novelty costing methodology to a commonly accepted cost management methodology. One evidence of this is the plethora of supposedly new variations.  Most of these variations result from marketing efforts to distinguish one software or consulting provider from the pack. Yet, the common problem of any company striving to improve its profitability through better cost management is not the particular variant but failing to adhere to basic underlying principles of good Cost Management (Cokins, 1996, 15-25).

ABC allows defining the activity during which each element of cost is incurred. You may configure costs to be fixed per batch, or based on the quantity being handled. You can recover pre-production costs such as buying, expediting and goods-in, as items are received into stock from purchase orders. You can recover manufacturing costs at the time of receipt into stock of goods from Work in Progress. The recovery of these ABC overhead costs may be over-and-above the overheads recovered using traditional ...