Costs Essay

Submitted By chicchicchic
Words: 3640
Pages: 15

ACFI 3416 Advanced Decision Management

Marking Tutor: Ashok Patel


1.0 Cost Estimation Worksheet 1

2.0 Rationale for the Amendments 3

2.1 Purchasing Overheads 3

2.2 Stores Overhead 3

2.3 Labour Overhead 3

2.4 Training &Retention Costs 4

2.5 General Overhead 4

3.0 Further processing of by-product from CardiAce-Q10 5

3.1 Increase in concentration of active ingredient from 15% to 25% 5

4.0 Costing system 6

4.1 Backgrounds of TAC & ABC 6

4.2 Differences between TAC, ABC and the costing system Duohelix Biolabs Ltd adopted 6

4.3 Standard Costing System and suitability of Duohelix Biolabs Ltd 7

5.0 Joint and By-product costing 8

5.1 Physical measurement method (PMM) 8

5.2 Relative sales value at the point of separation (RSV) 9

5.3 Notional sales value method (NSV) 9

2.0 Rationale for the Amendments

2.1 Purchasing Overheads

According to the cost review, it is accepted to recover 3.80% on the stocked material and 0.60% on the Just-in-time (JIT) material.

It is reasonable to separately recover purchasing cost on stored material and JIT material. An entity is more likely to spend more money and time to looking for the qualified material with fair price. The three different products consist different percentage of stocked material and JIT material spent. Therefore, it will bring more accuracy and fairness to the cost estimating system and avoid demotivation to the sales staffs.

It is also recommended in the cost review that the charge on JIT material will have an increase from 0.60% to 0.70% considering the legal cost incurred in the process of implementing annual purchase contracts. In order to allocation the cost, several problems have to be considered. Has the cost allocated to the accounting year it occurred or has the cost allocate to the following accounting year on a certain basis. If the cost has been taken into account to the accounting year when it incurred which is 20 months ago, it should be considered as an overhead already then. If it has been allocated to this year, the amount charge has to be negotiated and it will not be an increase of 0.10%.

2.2 Stores Overhead

It is suggested by the cost review that the handling cost was separated out from the total store overhead and charged on 0.80% separately. What is more, the stores overhead would be charged on a different basis with 18.00% on all stocked material and 6.00% on other material instead of recovering 9.40% on all stocked material.

It is more reasonable and accurate to separate the handling cost out with the recovery rate of 0.85% on both stocked material and JIT material since the stores overhead consist the handling cost of the two kinds of material. And the rest of the cost, which is exclusively related to the stocked material, will be allocated to it solely. Since the High Risk Material spends larger amount of money on insurance cost and inspection cost on the security system, it would be fairer to separate High Risk Material from the stocked material. In this case, the recovery rate for High Risk Material and other material should be 18.00% and 6.00% respectively instead of 9.40% charging on all material because of the insurance cost and inspection cost incurred due to the High Risk Material. However, it should be noted that part of the High Risk Material might be High Risk JIT material, which are issued within 2 hours, therefore, there is no insurance and inspection cost incurred. It will be more sensible to separate the High Risk JIT material out and work out the new recovery rate for the High Risk Material.

2.3 Labour Overhead

Under current costing system, labour overhead was recovered at a rate of 27% on total staff expenses. It is suggested by the cost review that labour overhead is recovered at 21.25% for the supervisory grades and 18.25% on other grades if the supervisory grade staffs out of the…