ACT202 Chapter Notes - Chapter 6: Management Accounting, Peanut Butter, Simple Lens
ACT 202 Management Accounting
Activity-based costing
Purposes of cost allocation
• Assigning indirect costs to cost objects:
• these costs are not traced
• indirect costs often comprise a large percentage of total overall costs
Criteria to guide cost-allocation decisions
• Cause-and-effect variables are identified that cause resources to be consumed:
• most credible to operating managers
• integral part of ABC.
• Benefits received – the beneficiaries of the outputs of the cost object are charged with costs
in proportion to the benefits received.
• Ability to bear – costs are allocated in proportion to the cost object’s ability to bear them:
• generally, larger or more profitable objects receive proportionally more of the allocated
costs.
Broad averaging and its consequences
• Historically, firms produced a limited variety of goods while their indirect costs were
relatively small.
• Allocating overhead costs was simple use broad averages to allocate costs uniformly ‒
regardless of how they are actually incurred, for example:
• peanut butter costing.
• The end-result – over costing and under costing
Undercosting and overcosting
• Undercosting – a product consumes a high level of resources but is allocated low costs per
unit.
• Overcosting – a product consumes a low level of resources but is allocated high costs per
unit.
• Product-cost cross-subsidisation
• The results of overcosting one product and under costing another:
• are that the over costed product absorbs too much cost, making it seem less profitable than
it really is
• the under costed product is left with too little cost, making it seem more profitable than it
really is
Simple costing system at Realenz Ltd
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