Management Accouting Essay Example | Topics and Well Written Essays - 1500 words

Management Accouting - Essay Example (Accounting Tools) If a company produces 2 different products namely Pi and Chi, the Company has cost of overheads which is 500. The company can allocate the costs on the basis of material cost of each product. If material cost of each of Pi and Chi is 200 and 300 respectively then the allocation will be as follows: In this method the indirect and overhead costs are apportioned by allocating proportionate costs to the products. The indirect costs can be apportioned by proportionate allocation on the number of units etc. If a company produces two products, Pi and Chi. The Company may apportion the overheads on a proportionate basis, by apportioning the cost on basis on ratio of 2:3. If the total budgeted cost is  £10,000. This method allocates the overhead costs to the manufacturing cost of products. The rates of absorption are used as benchmarks by the company and can be labor hour, machine hour or any other rate which suits the company’s overhead absorption. If the company is produces a product which requires labor for the production, then the company may apply labor hours of direct labor cost for the basis of absorption of the overheads to the cost of the product. If a company absorbs the overhead cost at a rate of  £10 per machine hour and the produces two products i.e. Pi and Chi and the products require 200 and 300 machine hours respectively then the company may absorb the overheads as follows. The traditional approaches to costing of the overheads has not been beneficial to the companies as these approaches are unable to provide the accurate allocation of the manufacturing and overhead costs to the products as per their actual share. Activity-based costing (ABC) is a modern and more established costing model which is used to allocate the costs that are attributable to the activities according to the usage of respective resources in accordance