Managing%20Cost%20II.StudentCopy_6slides - Learning...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Managing Costs II: Activity Based Accounting Linda Chang Lecturer [email protected] Learning Objectives Understand the views of the ABC model. Apply and understand issues associated with ABC. 2 Utilise ABM as an approach to cost control and value creation Understand cost management and process improvement techniques that may make use of ABC information Required Readings Langfield-Smith Chapter 8 3 Previously In Week 2&3 …… Understanding costs: Cost drivers Cost behaviour 4 Cost estimation Overhead cost Allocation Conventional Costing System Product Traced Direct Labour 5 or Service Overhead Allocate Direct Materials Predetermined Overhead costs Predetermined activity X Actual Activity * OH Cost Pool Allocated using a base e.g. DL Allocate * Features of conventional systems Direct material and direct labour costs are traced to products Manufacturing overhead costs are allocated to products using a 6 allocated to products using a predetermined overhead rate Manufacturing overhead rate is calculated using some measure of production volume Non-manufacturing costs are not assigned to products
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
2 Lecture Illustration Wyvern Portal Comic Ltd (Wyvern Ltd) produces and prints two lines of comic books: Serpent Sword - dungeon & dragon style comic 7 Serpent Sword dungeon & dragon style comic books Galaxy Portal – science fiction style comic books 12 issues per year Illustration: Wyvern Ltd Serpent Sword Galaxy Portal Direct Material per comic $0.50 $0.50 Direct Labour rate $30.00 $30.00 Direct Labour hours 2,500 500 Comics printed 50 000 10 000 8 50,000 10,000 Comics per printing batch 1,000 400 Number of printing batches 50 25 Overhead costs (printing batch level activity) 108,000.00 $ Conventional cost allocation: OH allocated on the basis of Direct Labour hours Required: Calculate the cost of each comic Lecture Illustration: Wyvern Ltd Conventional costing: Overhead costs allocated on the basis of Direct Labour Hours Serpent Sword Galaxy Portal $ $ 9 Total Per Comic Total Per Comic Direct Material 25,000 0.50 5,000 0.50 Direct Labour (rate x DL hrs) 75,000 1.50 15,000 1.50 Overhead cost [108k/ (2500+500) x DL hrs] 90,000 1.80 18,000 1.80 Product cost 190,000 3.80 38,000 3.80 Lecture Illustration: Wyvern Ltd Correct allocation: Overhead costs allocated with printing batches as cost driver $108,000 Galaxy Portal 10 75 batches X 25 batches = $36,000 Serpent Sword’s overhead overstated by $0.36 Galaxy portal’s overhead is understated by $1.80 !! Serpent Sword $108,000 75 Batches X 50 batches = $72,000/ 50,000 comics = $1.44 per comic / 10,000 comics = $3.60 per comic Implications Serpent Sword is subsidising Galaxy Portal Pricing – what if Wyvern Ltd’s mark-up is 30%? Serpent Galaxy 11 Sword Portal Conventional Costing Cost of production 3.80 3.80 Mark-up (30%) 1.14 1.14 Price 4.94 4.94 Correct costing 3.44 5.60 Profit/(loss) $1.50 -$0.66 Indicators of Problems With a Product Costing System Product costing systems are likely to result in inaccurate product cost when… Proportion of direct material and direct labour costs to total cost decrease 12 Proportion of manufacturing overhead costs to direct costs increase
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 9

Managing%20Cost%20II.StudentCopy_6slides - Learning...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online