Essay on Example: Management Accounting and Costs

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ACCT7107

ACCT7107
MANAGEMENT ACCOUNTING AND
CONTROL

DISCUSS BRIDGETON INDUSTRIES ACF
AND THE CASE APPROACH
Background
Identify/define the problems and issues
 Analysis to support the problems and issues you
have identified



Lecture 4:
Cost system refinement II:
Activity-based costing;
Process Costing

Quantitative?
Qualitative?





Recommendations:
Alternative actions/recommendations that come out
of your analysis and what is your preferred action
plan?


1

Reading: Horngren Chapter 7 (Ch 5 in 14th edition); and Ch
8 to p 276 and pp281-283 (Ch 17 14th edition)
Note: the FIFO method will not be examined in this course
and nor will Hybrid (Operation) Costing , therefore you do
not need to read the pages that relate to these topics.

LECTURE OVERVIEW

LEARNING OBJECTIVES
Be able to identify when cost systems should
be refined
 Understand the principles of cost refinement,
particularly in relation to Activity-based
costing
 Understand the characteristics of cost objects
(output) suited to process costing in
manufacturing, retail and service businesses
 Demonstrate the application of process costing
techniques to cost output requiring multiple
processes
 Consider accounting cost flows and inventory
cost flow assumptions for the manufacturer.

2

1.







Cost System refinement II
Broad averaging under simple costing systems
Reasons for refining; are departmental rates the solutions?
Activity Based Costing – 2 stage procedure
Volume vs non-volume related activities












2.





3

Process Costing –
Comparison with Job Costing
Features of Process Costing (& Cost Flows)
Equivalent Unit Calculation
Equivalent Unit Cost Calculation
The Cost of Production Report







BROAD AVERAGING UNDER SIMPLE COSTING SYSTEMS


However, the individual products or services use those
resources in non-uniform ways
 Broad averaging leads to product over-costing and
product under-costing
 Simple costing is less realistic


Lecture 4 – Process Costing

4

Weighted Average Example

REASONS FOR REFINING:

Question that we need to answer:
Do reported costs reflect the way costs are actually consumed?

There are a variety of methods to accomplish this
goal of representing reality
 These methods often involve trade-offs between
simplicity and realism


Complex
Methods
Realistic

First process
Subsequent process – transferred-in costs
Journal entries
WIP ledger account

Refined costing systems reduce the use of broad averages.
Why refine?
 Increase in product diversity
 Increase in indirect costs
 More competition in product markets
 Need for more accurate costs for decision making, as simpler cost
systems produce distorted product costs that may result in managers
making poor decisions.

Simple costing broadly averages or spreads the
cost of resources uniformly to cost objects

Simple Methods
Unrealistic

ABC Cost hierarchy
Activity Cost Drivers

Product diversity? Resource consumption ratio
Implementing ABC
Why use ABC? Symptoms
Limitations
Behavioural issues
Activity-based management (ABM)



Guidelines for refining a costing system:
1.

2.

5

3.

Direct cost tracing – identify as many DIRECT costs as possible.
These can be traced. This reduces the extent to which costs have to
be allocated. (Remember - question is: should they?)
Indirect cost pools – expand the number of indirect cost pools
until each is more homogeneous. All costs in an homogeneous cost
pool have the same or similar cause-and-effect or benefits received
relationship with a single cost driver (Remember: cost vs benefit)
Cost allocation bases – use the cost driver (the cause of the
indirect costs) for each homogeneous cost pool (the effect) .

6

1

ACCT7107

1. INACCURACY DUE TO PRESENCE OF : VOLUME (UNITLEVEL) AND NON-VOLUME RELATED…