• What changes does ETO face?
10 Single Cost Pool System • Why do these changes make the current system obsolete? • What evidence do we have? • Why is this a problem?
11 Single Cost Pool System Example 1 • Assume two types of components • A: requires extensive testing (long labor hours) • B: requires little testing (few labor hours) • Assume overhead consumed by each test is identical
12 Single Cost Pool System • Which component is over or undercosted? • What will happen to the product mix?
13 Single Cost Pool System Example 2 • Assume two types of components • A: requires expensive automated testing machinery • B: requires very inexpensive equipment • Assume the labor for each test is the same • Which component is over- or undercosted? • What happens to the product mix?
14 Single Cost Pool System • The current cost system also causes changes in strategy, because • capital intensive procedure look favorable • while labor intensive procedures look unfavorable
15 Cost Allocation Scheme • How to improve the cost system? • Overhead is differently consumed in different parts of the production process (e.g., electronic and mechanical testing rooms)
16 Two Cost Pool System Overhead costs Admin & Technical $685k Component Lot $685k Direct labor dollars Test room $4,029k $4,029k 50,304 = 80 per mach hr Directly traced Directly traced Machine hours $3,260k = 0.20 per Direct labor
17 Two Cost Pool System • Product cost = DL + 0.2*DL + 80*total hours • What new insights does the new cost system provide? Product Direct Labor $ Overhead (DL) Total Machine hours Overhead (Machine hours) Cost ($) ICA 917 18.5 ICB 2,051 40 Capacitor 1,094 7.5 Amplifier 525 5 Diode 519 12
18 Two Cost Pool System • Since we now use machine hours as a cost driver, costs • go up for… • go down for…
19 Three Cost Pool System • How can we further improve the accounting system?
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- Cost Accounting