Management finance Essay Example | Topics and Well Written Essays - 2500 words - 1

Management finance - Essay Example Thus, to go deeper, cost drivers refers to activities, which cause costs to be incurred (Yahya-Zadeh, 2011). Some of these activities would include; the number of purchase orders, the number of machine set ups, the number of batches, the number of machine hours as demonstrated below among many others. For instance, Offenbacker (2004) argues that, â€Å"the product costs are much more accurate under ABC– although overhead costs will NEVER be accurate because they are INDIRECT costs since the overhead to be absorbed is exactly the same overhead but analysed differently.† Moreover, Sharman (2003) argue that, â€Å"the potential implication of applying ABC system in the company is that there will not be product cost distortion and will provide the more accurate and that resulted in better product pricing and more accurate evaluation of the relative profitability of the products† (Roztocki et al., 1999). Conversely, during the production process different product lines and products use overhead resources at substantially different rates, thus, a slight change in the mix of products can result to dramatic changes in costs, which cannot be accurately predicted using the absorption costing method, hence, leading to making of incorrect buy or make decisions. Therefore , this can demonstrated by the reports below for both ABC and absorption costing method. Therefore, based on the new method, the ABC system the cost per unit of the products produced by the company based on the budgeted number of products for the three products will be as determined above; X= £78.5; Y= £91.9; Z= £66.9. However, based on the old technique of absorption costing the cost per unit of the products will be as shown below. Therefore, based on the cost per unit figures determined from the above, the products have a unit costs of X= £78.5; Y= £91.9; Z= £66.9 under the ABC system while under the current absorption costing system the products have units of X= £79.3; Y= £93.1; Z= £65.4.