Managers may wish to create separate cost pools for committed and flexible

Managers may wish to create separate cost pools for

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Managers may wish to create separate cost pools for committed and flexible costs, but it is not always clear whether the benefit of separating these costs exceeds the cost. Another uncertainty about cost pools relates to the availability of appropriate cost drivers. The benefits of developing additional cost pools depend on the ability to identify and measure a cost driver for each pool. 10. Each cost pool could have errors in the measurement of costs assigned to the pool. Further measurement error could arise in tracking the number of events for each cost driver. When the number of cost pools (and cost drivers) increases, the effects of these errors tend to magnify, and measurement error can quickly increase. 11. Students are asked to discuss the pros and cons of using a team of individuals to develop an ABC/ABM system. Examples of pros and cons that may be discussed are listed below; students may think of others. Pros: Team members bring different types of knowledge and perceptions about the company to the team meetings Diversity increases creativity Diversity increases the likelihood that appropriate issues will be considered as choices are made about activities and cost drivers A system developed by a team may obtain greater support throughout the organization Cons: Working within a team can slow down the process of developing and implementing a system Sometimes only a few members of a team are actively involved even though all team members are present, and this could be a poor use of time for those who are uninvolved. 12. Students are asked to discuss the similarities and differences between ABC, GPK, and RCA Similarities: Multiple allocation bases Refined costing system Differences: Treatment of idle/excess capacity GPK/RCA focus on encouraging managers to use resources effectively GPK focuses on marginal costs for short term decision making Problems 1. a.Allocation rate = $500,000/500 hours = $1,000 per employee hourCheck processing gets (150/500 x $500,000) = $150,000Loan processing gets 260/500 x $500,000 = $260,000Other services are allocated the remaining $90,000b.Cost for Buggies using office-wide rate = 11 x $1,000 = $11,000c.Allocation rates:Credit risk assessment = $120,000/60,000 = $2 per assessmentLoan processing = $200,000/260 = $769/employee hourMiscellaneous services = $180,000/9,000 = $20 per event.Total costs for Desert Dune Buggies:
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Credit risk assessment ($2 x 1,000)$2,000Loan processing ($796 x 8)6,368Misc. Services ($20 x 80)1,600Total$9,968d.Under the office-wide rate system, the overhead costs were combined into a single cost pool and then allocated based on employee time. Employee time may or may not be related to costs in the overhead pool. However, under ABC the overhead costs are divided into three cost pools that relate to specific types of services performed. The cost pools are then allocated using cost drivers that are more likely to reflect the use of resources. The cost driver for loan processing (employee time) is the same as under the office-wide rate. However, the cost drivers for the credit risk assessment and miscellaneous services differ from the allocation based used under the office-wide rate.
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  • Spring '15
  • YaoTian
  • Cost driver

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