Sociate Bonlieu Essay

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[pic] Case Analysis 3 – Societé Bonlieu B6017 Accounting for Decision Making and Control By Group 3 (Chen Yan (Jennifer) Choi Ryoon (Michael) Lim Boon Leong (Calvin) Jad Abou Ibrahim) 28th Nov 2012 1) Without looking at the product costs, what evidence is there that Activity Based costing might be suitable in this company? (10%) Many manufacturing companies, including Societé Bonlieu, use a simple “job order” system with cost drivers that vary directly with the volume of products produced—such as direct labour hours, or machine hours—for allocating production expenses to products[1]. Firstly, the traditional cost system allocates all traceable indirect and support expenses to production cost pools. Then, the accumulated amounts in these pools are reallocated to the respective products on the basis of the volume cost driver for that cost centre: direct labour, machine hours, units produced, or materials quantity processed. 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[1]. 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]: 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

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