ACCT7107
MANAGEMENT ACCOUNTING AND
CONTROL
Lecture 3
REFLECTION ACTIVITY
Custom Design Pty Ltd makes custom-order curtains and soft furnishings . In
June 2013 when managers prepared the budget for the 2014 year, they estimated Mfg Oh would total $100,000. As the process is labour intensive, OH is allocated to jobs based on DLH and 400,0000 total DLH were expected.
During September and October 2013, employees worked on only 3 jobs.
Relevant information for each follows:
Monthly data
Cost System Refinement I:
Understanding cost allocation;
Overhead Allocation & RefinementTraditional vs Departmental
Costing
**Activity: Bridgeton Industries ACF Case available on BBd under L3 Learning Materials – read and prepare for discussion at commencement of next week’s lecture (L4). We will use this as a practice for the cases.
Summary: Reasons for refining and guidelines for refining
-
DM cost
$0
$10 855
$6 250
DL cost
$9 750
$22 800
$2 370
DL hours
1 000
2 400
280
Understand what is meant by ‘capacity’ concepts for fixed overhead
It is assigning indirect costs to cost objects
Indirect costs are not traced due to relative cost vs benefit 5
As a result, an inaccurate allocation can have significant costs to an organisation
Does “What is the information used for” matter?
How?
•
Raises question as to the accuracy of cost (& allocation)?
Indirect costs often comprise a large percentage of total costs in contemporary environment
•
Use? Factors that impact cost system design? o Traditional Costing
-
Develop and apply principles of cost allocation and refinement Demonstrate the 2 stage allocation process
Absorption costing vs variable costing; allocate Fixed OH or not? Capacity concepts for fixed overhead allocation under normal and standard costing systems; a strategic management decision
Explain how broad averaging of indirect costs can result in under-costing and over-costing of products and services
Explain how choice of allocation bases can impact accuracy and decisions
Understand how an existing costing system when analysed in light of a firm’s characteristics including its competitive position, output and processes; impacts on management decision making (and behaviour) and ultimately firm
4
performance
o
-
DL hours
•
•
2.
-
-
Identify the different purposes of cost allocation
Explain the difference between variable and absorption costing
•
What do we know? o Purposes of Cost Allocation o •
-
$35 880
1. COST ALLOCATION
- WHAT DO WE KNOW?
LECTURE – OVERVIEW
Cost accounting purpose
$12 986
DL cost
LEARNING OBJECTIVES – L 3
3
Criteria for cost allocation
DM cost
2
Required:
1) What was the budgeted (predetermined) overhead rate for 2014?
2) Calculate the cost of each job (using data provided) at the end of (i) September (ii) October .
3) What was the WIP balance on Sept 30? Oct 31?
4) What was the COGM for September? October?
5) What was the COGS for October?
•
Job 78
Job 76 was started in Sept and finished and delivered to the customer in Oct.
Job 77 was started in October, finished in October and delivered to the customer in November. Job 78 was started in Oct and finished in November.
CONTINUED.
•
Job 77
October
Reading: Horngren Ch14 to p489 and pp492497; Ch 6 to top p 199 (and the reading from L
2 on Job Costing Ch 5)
1.
Job 76
September
Different costs for different purposes!
Increase accuracy by ‘refining’
•
Issues when refining:
Number of indirect cost pools?
Appropriate cost allocation base(s)?
6
1
ACCT7107
PURPOSES OF COST ALLOCATION
CRITERIA FOR COST-ALLOCATION
1.
Four purposes of cost allocation:
Cause and Effect – variables are identified that cause resources to be
