RSM322H1 Lecture Notes - Lecture 11: Total Absorption Costing, Opportunity Cost, Decision Management
Document Summary
Criticisms of absorption cost systems: inaccurate product costs. When firms produce multiple products, absorption costing often does not accurately represent the opportunity costs of different products. The cost drivers in absorption costing use a few input factors, such as direct labor hours or machine hours, to allocate overhead costs. Absorption costing does not clearly show how costs are influenced by the diversity and complexity of production processes. Absorption cost systems assign too few costs to small batches and complex special orders. Especially set-up costs associated with each batch and product line. Each department could use different cost drivers. Cost analysts attempt to identify cause-and-effect cost drivers for allocating overhead costs. Reduces overhead cost pools that are allocated with an arbitrary allocation base. Classify cost drivers into one of four categories: Defined: activities performed at least once for each unit of product. Total amount of unit-level costs is a linear function of the quantity produced.
