Management Accounting and product costs
...rs as the cost driver to apply manufacturing overhead costs to products. It assumes that more the labour hours consumed by a product, more is the consumption of overhead resources. As the volumes of lamingtons are more, they tend to get a greater share of overheads. However, Danish pastry is more complex to make and uses more overhead resources than do the lamingtons. This is overlooked by the conventional system. PART 2 (b) Costs are assigned to a separate cost pool for each activity using resource/cost drivers/cost categories. Resource drivers are cost drivers used to estimate the cost of resources consumed by an activity/activity centre (sales & dispatch - example of an activity centre/department in the given case study). Here building floor area is a cost driver for sales & dispatch activity. U. B. Bright has used cost categories so that costs can be assigned to a separate cost pool for each activity. c) U.B. Bright would have obtained the cost of resources from the existing accounting system. These costs can include items such as wages, building cost, consumables etc. Where cost were of similar nature such as rent, insurance, she combined them into a single cost category “building costs” She reduced a large number of general ledger accounts to six cost categories – Wages, Depreciation etc. An activity is a unit of work performed by any organisation. Here product development, administration are all activity centres within Cravings for Cakes. Cost drivers or cost categories are used to estimate the cost of resources consumed by any activity or activity centre. For example machine hour is the resource driver for depreciation costs. So the number of machine hours used by mixing pastries & batters department can be used as a cost driver to allocate depreciation costs. U.B. Bright identified the factors that cause the costs in each department. Example of costs: Wages: salary, overtime; Building costs: rents, taxes, insurance; Depreciation: depreciation costs of assets, write-off expenses; Consumables: cost of placing purchase and sales order, cost of inspecting goods received; Energy: electricity expenses, gas expenses; Other: sales staff expenses, customer support costs, return item processing d) There are some costs which can be traced to activity centres .The wages of people who work in a particular activity centre can be directly traced to that activity centre. This is a more accurate method than allocating wage costs to activity centres. PART 4 (c) In order to calculate the product cost for Lamingtons & Danish Pastries, we need to include the direct material cost/unit to the activity cost per unit of Lamingtons & Danish Pastries respectively. Also, if there are any direct costs associated with Lamingtons or Danish Pastries such as research costs in relation to increasing the shelf life of Lamingtons or Danish Pastries has to be included in the product cost of the given product. (d) Many activities consumed by both the products are batch level activities. The small size of the batch results in higher cost per unit of the Danish pastry. In the same way, due to bigger batch sizes of the Lamingtons, its cost per unit is low. The conventional costing system would not have reflected the difference and would have overstated the cost of the lamington & und...