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Brief overview of -
Week Four Activity based costing
Job-order costing and Process costing
Cost allocation - processes used to allocate costs to Dept‐
discuss benefits and limitations
Costing Systems Use of Standard Costing and reconciliation
Stage One
Overhead costs are assigned to activity cost
ABC identification
pools associated with significant activities
of activity cost pools
Q- When should a firm use ABC?
Overhead cost
Production jobs consumes production-related
are Assigned to
activities
production jobs
1
Job-Order Costing and Process Costing – COST FLOWS IN A JOB-ORDER COSTING SYSTEM
Types of Processing
Sequential Processing
Q- What is Equivalent unit?
Process 1 Process 2 Process 3 Finished Goods
2
Standard Costing – A Quick Review
Support Department Cost Allocation
There are three approaches to allocating the costs of service Standard costing systems – product costing using the
departments: standard system
direct method, step method, and reciprocal method.
Q - What is a Standard? What is the difference
Q – How accurate this product cost is? between ideal and attainable standards?
Q- Why Price and quantity standards are determined Your poor scheduling
separately? I am not responsible for sometimes requires me to
this unfavorable material rush order material at a
quantity variance. higher price, causing
Q - What are the limitations of using price variance in You purchased cheap unfavorable price variances.
performance evaluation? material, so my people
had to use more of it.
Remember: The materials variances are not always
entirely controllable by one person or department.
3
Overhead Variances
Q- who is Responsibility for Labour Fixed and Variable overhead variance
Variances Total fixed and variable overhead variance can be decompose
I think it took more time
to process the into Spending and Efficiency Variances
I am not responsible for materials because the
the unfavorable labour Maintenance Fixed overhead spending variance - is the difference between
efficiency variance! Department has poorly actual and budgeted fixed overhead.
maintained your Fixed overhead efficiency variance -measures the effect of
You purchased cheap equipment. actual output differing from output used to compute
material, so it took more predetermined standard fixed overhead rate.
time to process it.
Variable overhead spending variance -measures aggregate
effect of actual variable overhead rate with standard rate.
Variable overhead efficiency variance -measures change in
variable overhead consumption because efficient (inefficient)
use of direct labour hours.
• •
Whole life product cost - is the life-cycle cost of product
Favorable Limit plus its post purchase costs (operation, support, maintenance
1 2 3 4 5 6 7 8
•9 than cost control. Therefore, Target costing is a useful tool for
achieving cost reduction goal.
Variance Measurements