Managers may wish to create separate cost pools for

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 hour
Check processing gets (150/500 x $500,000) = $150,000
Loan processing gets 260/500 x $500,000 = $260,000
Other services are allocated the remaining $90,000
b. Cost for Buggies using office-wide rate = 11 x $1,000 = $11,000
c. Allocation rates:
Credit risk assessment = $120,000/60,000 = $2 per assessment
Loan processing = $200,000/260 = $769/employee hour
Miscellaneous services = $180,000/9,000 = $20 per event.
Total costs for Desert Dune Buggies:

Credit risk assessment ($2 x 1,000) $2,000
Loan processing ($796 x 8) 6,368
Misc. Services ($20 x 80) 1 ,600
Total $9 ,968
d. 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.