Session 3 Seligram_updated.pptx - MANAGERIAL\/COST ACCOUNTING ACC 359 ACC 387.1 Case Seligram Ronghuo Zheng 1 Summary of Giberson\u2019s Glass Studio \u2022

# Session 3 Seligram_updated.pptx - MANAGERIAL/COST...

This preview shows page 1 - 11 out of 31 pages.

MANAGERIAL/COST ACCOUNTING ACC 359/ ACC 387.1 Case: Seligram Ronghuo Zheng 1
Summary of Giberson’s Glass Studio Main issue: not profitable Decision problems: pricing strategy and product mix Special feature: all costs are fixed Implication: no need for cost allocation Constrained resource: Mr Giberson’s time Pricing strategy Opportunity cost of time: charging by per minute If charging by per minute, product mix does not matter Price given Compare CM per minute 2
Direct vs. Overhead (Indirect) Cost Direct Cost : directly traced to cost object Indirect Cost (= Overhead/OH ): cannot be traced to the cost object in an economically feasible way 3
How to Allocate OH? Step 1: Accumulate the total overhead (OH) cost For example \$10,000 Step 2: Select the cost allocation base for assigning OH cost to different jobs For example 5,000 direct labor hours Step 3: Calculate the overhead(OH) rate per unit 4
5 Traditional Two-stage Cost System Cost Pool 1: Direct labor hours Products P 1 & P 2 Cost Pool 2: Machine hours Electricity Maintenance Supervision Direct Labor Direct Material \$15/kg \$10/hr \$10/M hr \$5/DL hr Engineering Product cost = 15*DM+10*DL+5*DL+10*MHrs
Traditional Two-stage Cost System Direct Material (kg) Direct Labor (hr) Machine Hours (hr) Product 1/unit 2 3 4 Product 2/unit 4 2 5 6 Product 1 Product 2 DM (\$15/kg) 2*15 4*15 DL (\$10/hr) 3*10 2*10 Cost pool 1: \$5/DL hr 3*5 2*5 Cost pool 2: \$10/ M hr 4*10 5*10 Cost/unit \$115/unit \$140/unit Product cost = 15*DM+10*DL+5*DL+10*MHrs
7 Seligram Focus: Cost allocation systems Influence of the cost system on firm strategy Synopsis: ETO tests electronic components No direct material costs Testing requires increasingly more expensive and less labor intensive equipment
8 Single Cost Pool System Existing Cost System Two-stage allocation procedure Labor dollar is the cost allocation base Overhead Cost pool 4,713k Products Overhead costs Direct labor dollars \$4,713k 3,260k = 1.45 100% traced =
9 Single Cost Pool System Product Direct Labor \$ Overhead 145% Cost (\$) ICA 917 1330 2247 ICB 2051 2974 5025 Capacitor 1094 1586 2680 Amplifier 525 761 1286 Diode 519 753 1272 Cost = Direct Labor + 1.45*Direct Labor What is wrong with the existing system?
10 Single Cost Pool System What is the major flaw of the current system?

#### You've reached the end of your free preview.

Want to read all 31 pages?