As for ABC, it determines the cost of activities without distortion and timely information is provided to management. It consists of two-stage procedure in order to assign overhead costs to products and services. In the first stage, ABC identifies production activities and assigned costs based on the number of transaction involved. An activity cost pools is a grouping of all overhead costs associated with it. The second stage of ABC is identifying cost drivers to each activity cost pool (Hilton 2008, p. 173).
Costing Model: There are two costing models that can be used to allocate costs: traditional costing and activity based costing. Both costing models allocate direct material costs, direct labor costs and manufacturing overhead costs to the products being manufactured. However, the difference between the two models involves how the manufacturing overhead costs are allocated. Traditional costing allocates overhead costs to the products manufactured on the either direct labor hours, number of units produced, or machine hours used in production. The traditional costing method lumps all overhead costs into a single pool and allocates those costs across all products produced based on one of the three cost drivers (direct labor hours, number of units produced, or machine hours).
Elaine Ust ACC 202 Module 4 Case Allocating fixed costs Activity based management and activity based costing is different from a more traditional costing method because it uses multiple cost drivers and multiple overhead pools to allocate or apply overhead to products and cost objects. The main characteristics of ABC and ABM is that the charge the division or products for use of overhead resources consumed by charging for activities that are thought to drive costs. The goal is to create awareness that activities drain resources and have the products that use the resources have the costs mapped to their product or division. In this way the divisions and products that use the most resources are charged for those resources. Traditional allocations with one resources to spread overhead often charges products an "average rate" and so fussy and difficult products get a break (charged less than they consume or "under costed") and easy low-hassle products look worse than they are (charged more then they consumer or "over costed").
With this system direct material and labor costs are standard prices. Overheads are charged as 300% of the direct labor cost and is applied to the total costs pool. The system the company is using is inappropriate and leads to wrong assumptions in terms of profitability and price decisions, as well as ineffective cost management. The company needs to use Activity Based Costing to find a relationship between the volume of product producing and the overhead. For this method, we need to categorize costs pool and their costs in separate categories.
PTC is therefore able to make value judgements on the costs in relation to volume. Incremental Cost Analysis Incremental cost analysis is the most conclusive method to further understand that a single change that a company experiences to a single balance sheet item has farreaching effects on the entirety of the business. In the case of PDS, seeking to learn the effect on income of increases and decreases to service costs and the subsequent demand reaction demonstrates that incremental cost analysis effects both the variable costs and the fixed costs. This analysis is an important tool in budgeting and securing the notion of profitability. Contribution Analysis The contribution analysis allows the user to see the difference between the unitselling price and the variable cost per unit.
Ronald Coase in 1937 suggested that the existence of transaction cost i.e. the costs of using markets would result in organisational hierarchies being more efficient when the costs of negotiating, monitoring and enforcing contracts are too high. The existence of high transaction cost is the reason that more economic activity is carried out within
However, the exclusive use of volume drivers to allocate overhead costs in an environment of high product variety systematically and grossly underestimate the cost of resources required for specialty, low-volume products and overestimate the resource cost of producing high-volume, standard products. In general, cost systems that allocate overheads to products based on any production volume measure of each product produced, as in the “job order” practice by Societé Bonlieu, will lead to high-volume jobs’ costs being overestimated and low-volume jobs’ costs being underestimated in the following two situations: 1. High indirect and support expenses, especially when they exceed the cost of the allocation base itself (such as direct labour cost); and 2. High product diversity: products of both low and high volumes, simple and complex, and custom and standard
Activity based Costing: Activity-based costing (ABC) is a special costing model that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing models. With ABC, an organization can soundly estimate the cost elements of entire products and services. That may prepare decisions on • Either identify and eliminate those products and services that are unprofitable and lower the prices of those that are overpriced (product and service portfolio aim) • Or identify and eliminate production or service processes that are ineffective and allocate processing
Price of the Combination is the most important variable that can impact on demand. As per the law of demand it is negatively related to demand. Higher is price, lower is demand. The amount of money spent can be expected to increase demand in a positive manner. Both these relations are borne clearly in the regression results.
This way ABC will reduce costs and allocate resource costs to services and products. By doing this, more overhead costs are assigned to direct costs. The significant difference between throughput accounting and activity-based costing is what each methodology defines as productivity (Corbett, 1998, p. 108). “TOC is concerned with the system as a whole, it is concerned with aligning local decisions with the global goal” (Corbett, 1998, p. 108). Another major difference between throughput accounting and activity-based costing is found in the statement Corbett (1998) made about cost accounting methods, “if we want a good overall performance for the system all we need to do is optimize the various links of the system” (p. 109).