B3.3 Cost Accounting Part 3
ABC vs Traditional
ABC increases cost pools and allocation bases both are used to assign indirect costs to products ABC is more costly than traditional
process costing and job costing
acceptable for internal and external purposes
job costing
accumulation of costs associated with a specific job
The direct method or the step-down method can be used to
allocate service (department) costs under activity-based costing.
Joint and by-product costing attempts to
allocate the joint costs of two or more separate products using unit volume relationships or net realizable value. Under this allocation method, common or joint costs relate to multiple products that cannot be separately identified.
activity based costing
assumes that resource consuming activities of an enterprise that generate costs are activities and not outputs appropriate for all types of cost accumulation systems, including both job order and process costing seeks to assign overhead costs in a manner that identifies consumption of resources
engineered cost
bears an observable and known relationship to a quantifiable activity base
sales price less cost to complete
defined as net sales value at split off this is the additional contribution to income generated by the completion of the product
Factors to consider when sellecting ABC cost drivers
degree of correlation; behavioral effects; cost of measurement volume based production is not included
ABC
designed to eliminate distortion associated with allocating indirect costs when proportional usage differs
Activity based costing
divides the production process into activities where costs are accumulated assumes that activities consume resources and that the outcome of the production process requires the performance of activities
ABC reduces costs by
eliminating non-value adding activities
implementing ABC
evaluate existing system to assess how well the system supports the objective of ABC system identify activities for which cost information is needed with differentiation between value added and nonvalue adding activities
Application of activity-based costing techniques attempts to
improve cost allocation by emphasizing long-term product analysis.
issue of indirect materials to a production process
increases factory overhead control
activity based costing
leads to more competitive position by evaluating cost drivers associated with the complexity of the transaction rather than production volume streamline production process by reducing non-value adding activities ex. reduced set up times, optimal plant layout, improved quality provides management with a more thorough understanding of product costs and product profitability for strategy and pricing decisions
plant wide rates for overhead would probably be used if:
manufacturing operations are all highly automated or basically labor based or manufacturing overhead is the largest cost component of its product cost
one of most significant non value added costs
moving, handling, and storing inventory management can reduce these costs
when multiple products are manufactured
multiple overhead rates are preferable to a single overhead rate; activity based costing would be even better
to allocate joint costs based on relative sales basis
multiply sales price by units sold to find proportions
variable costing
not allowed for external reporting; internal use only
fixed costs
organization and plant costs that continue to be incurred and cannot be reduced without damaging organization's ability to meet long-range goals
traditional cost approach for allocating indirect costs
plant wide application rates applied to machine hours causes managers, who are aware of distortions in the traditional cost system, to make intuitive imprecise adjustments to traditional cost information without understanding the complete impact was designed to value inventory in the aggregate and not relate to product cost information
activity based costing
refines product cost information because it emphasizes long term product analysis (when fixed costs become variable costs)
Activity-based costing (ABC)
refines traditional costing methods and assumes that the resource- consuming activities (tasks, units of work, etc.) with specific purposes cause costs.
ways to allocate joint costs
relative unit or sales volume relative sales volume at split off constant gross margin percentage net realizable value method
value added costs
resources uses that add value to customer
to allocate joint costs based on NRV
sales - separable costs = NRV
allocating joint costs to joint products
sales price at the point of sale, reduced by cost to complete after split off is assumed to be equal to net sales value at split-off
joint product method
selling expense is deducted from gross margin to find net income
by product method
selling expense is netted against selling price to find COGS
target cost
standard cost that should be attained
ABC results in
substantially greater unit costs and set up costs for low volume products than reported by traditional costing
generally, individual departmental rates (rather than plant wide rates) would be used if
the manufactured products differ in the resources consumed from the individual departments in the plant
ABC assumes that the best way to assign indirect costs to products (cost objects) is based on
the product's demand for resource-consuming activities (i.e., costs are assigned based on the consumption of resources).
if a single or plant wide rate is related to several identified cost drivers
the single rate is accurate and appropriate if cost drivers were the same over all processes, a single rate could also be used
Activity based costing
uses cause and effect relationships to capitalize costs to inventory not allowed for external reporting; internal use only
benefit of traditional based costing
uses common departmental or factory wide measure of activity, such as direct labor hours or dollars to distribute manufacturing overhead to products
new trends for allocating indirect costs
using cost drivers as application bases to increase accuracy of reported product costs using throughput time as an application base to increase awareness of the costs associated with lengthened throughput time using several machine cost pools to measure product costs on the basis of time in a machine center
ABC costing assigns costs to products
using multiple cause and effect relationships
when allocating costs to joint products
you have to deduct NRV of byproduct from total joint costs before you can allocate costs