ACT202 Chapter Notes - Chapter 12: Cost Driver, Management Accounting
ACT 202 Management Accounting
Allocation of support department costs, common costs and revenues continued…
Activity-based costing compared with the two-stage cost allocation process
• Departmental rates
- Stage one: allocation bases used are ideally determined by causal relationships
- Stage two: one cost driver per department, with cost drivers being measures of
production volume
• Activity-based costing
- Focuses on the costs of activities
- Has many activity cost pools and cost drivers which may be volume or non-volume
related
Evaluating the alternatives for allocating overheads
• Plantwide and departmental overhead costing systems tend to over cost high-volume
relatively simple products and under cost low-volume complex products
• A system with multiple cost drivers and overhead rates is more complicated and costly to
operate, compared with a single plantwide rate, but may produce more accurate and useful
information for decision making
Issues in estimating overhead rates Identifying overhead cost drivers
• What is the major factor that causes manufacturing overhead to be incurred?
• To what extent does the overhead cost vary in proportion with the cost driver?
• How easy is it to measure the cost driver?
• It is difficult to identify one factor that is a dominant cause of manufacturing costs,
particularly at the plant or department level
Volume-based cost drivers
• Conventional costing systems assume that overhead costs vary proportionally with
production volume
- Based on output: number of units produced
- Based on inputs: direct labour hours, direct labour cost, machine hours, direct material
quantity
- For plantwide rates, select a cost driver that is common to all products
- Cost drivers that are measured in dollars should be avoided
Non-volume-based cost drivers
• Not all aspects of manufacturing overhead varies with production volume
• Need to be careful in assigning volume-based cost driver to fixed costs
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Document Summary
Allocation of support department costs, common costs and revenues continued . Activity-based costing compared with the two-stage cost allocation process: departmental rates. Stage one: allocation bases used are ideally determined by causal relationships. Stage two: one cost driver per department, with cost drivers being measures of production volume: activity-based costing. Has many activity cost pools and cost drivers which may be volume or non-volume related. Volume-based cost drivers: conventional costing systems assume that overhead costs vary proportionally with production volume. Based on inputs: direct labour hours, direct labour cost, machine hours, direct material quantity. For plantwide rates, select a cost driver that is common to all products. Cost drivers that are measured in dollars should be avoided. Monthly rates tend to fluctuate due to price changes and seasonal factors. A normalised overhead is an overhead rate calculated over a relatively long period: smooths out fluctuations in overhead rates, therefore smoothing out product costs.
