5.46 - ( a ) The traditional costing system of allocating...

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Unformatted text preview: ( a ) The traditional costing system of allocating overhead on the basis of labour Rs. Basis as currently used by XYZ Ltd. Fails to give a realistic picture of how the company uses its resources.For more accurate costing of activities,specially in a multi-product manufacturing company, the accountant may resort to activity based costing szstem in which all of the costs have the same or a similar cause-and-efect ( or benefits received ) relationship with the cost allocation base. XYZ in its existing costing szstem muses direct manufacturing labour costs at the cost-allocation base for all overhead costs, whether in set up, receiving,engineering and/or packing.Direct manufacturing labour cost do not drive the costs in these activity -coat pools.So, measuring the direct manufacturing labour costs incurred on various products does not capture the overhead costs demanded by the dofferent products.In answer to Question 3( b ) below, the unit costs of the three products A,B,C, as calculated under the ABC approach show a more accurate...
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