In the case, we have review the allocation of overhead by using Traditional Cost Accounting (TCA) and Activity Based Costing (ABC) in a manufacturing company named Wilkerson. Through the case study, I have learnt the importance of Cost Accounting System, the principles of TCA and ABC, the advantages and disadvantage of ABC, the practical use of ABC and cost reduction using ABC.
1.Importance of Cost Accounting System.
Through the case study, I learnt that a proper Cost Accounting System is very important in a company. Without the accurate system, a company is unable to maximize the profit from the product sold. The product price might be charged too high (over-priced) or too low (under-priced). All these will eventually affect the profitability and revenue as it is actually making very minimum profit or even having loss by selling under-priced product and also might find difficulty to market its over-priced product. Indeed, with the accurate cost accounting system, the company can maximize the profit by setting the appropriate price and compete in the market, or the company can even identify the highest profit-generating product and concentrate their marketing promotion on it.
2.Principles of TCA and ABC.
By studying the case, I also learnt the cost accounting system had evolved from TCA to ABC. The TCA method assumes that all products indirect cost is only driven by one cost driver which is number of direct labour. The allocation of the indirect cost will be distributed following the ratio of the direct labour in production. Whereas in ABC method, it divided the indirect cost to several cost drivers based on the activity that the product was produce, from the incoming of the raw materials to outgoing shipment. For example of the activities are incoming receiving, machining, setup time, packing and shipment. After this, the indirect cost will be calculated based on the frequency or resources need for each of the product.