True Cost of King Plc

Based on the information provided, the study analyzes the traditional costing method used for financial accounting and the direct costing approach recommended in management accounting. Other methods of appraisal are also reviewed to determine the appropriateness of measure for King Plc.The underlying problem of the management is how to apportion and allocate the overhead costs into the two production centers after the introduction of the new product line. To resolve the issue, the management decided to apportion the overhead costs into the four cost centers quarterly as follows:The management had also simplified the allocation and spread it into the two production centers, namely £50,000 each for the low tech and high tech centers. The two centers, therefore, are absorbing the costs of operation of the Maintenance and Stores services Centers.Ben Hogue’s costing used absorption process wherein the fixed cost is allocated in the unit cost of the product. The calculation shows the second quarter net profit falls below the target production, fixed cost remain the same causing a net loss in the second quarter.It is a method wherein the cost of the product or operations is determined by allocating to it an appropriate portion of the variable cost or direct cost. It treats fixed overheads such as selling and administrative costs as period costs. Period costs are those associated with time and not an output. It is a variable that is constant per unit of output, and in total varies proportionately with the volume (Gordon amp. Shillinglaw, p. 574) By doing so, the direct contribution of the product is shown. The inclusion or exclusion of the fixed expenses in the inventory and cost of goods sold causes the profit to vary in the contribution margin of the two computations.

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