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