Question

compute two different unit cost for each of the cable division products. What managerial objectives are being served

Answer 1

The following table shows example to compute two different unit cost for each of the cable division products:

The management objective served by these units’ costs is that the management is able to understand the behavior of cost products to provide a special activity service of Cable Service division in each of its product. Meanwhile, these costs as a sale service or manufacturing cost is identifiable.

2. Meaning of each cost of Cable Service Division is:

1. Direct tracing cost:

Direct tracing relies on physical observance of causal relationships to assign costs to cost objects. And direct tracing cost is directly relatable to the product and easy to identify as per unit cost, like in this case, the cost of special service incurred which is directly attributable to the cost for providing the service.

2. Driver Traced Cost:

Driver tracing relies on drivers as causal factors to assign costs to cost objects. Therefore, this cost is allocated as per Activity Based Costing. It means that the cost is allocated the product cost on the basis of cost driver that is the rate of absorption of overheads on the basis of the most used Activity. The question is that the Direct labor cost is drive by direct labor Hours.

3. Allocated cost:

A type of expense that is clearly associated with business process. It is the process of identifying, aggregating, and assigning costs to cost objects that is any activity or items for which you want to separately measure costs. Meanwhile, it is the cost or overhead cost which we are unable to identify on per unit basis as well as the driver of this cost

Cable service division uses an Activity Based Costing system. The Activity Based Costing system distributes each cost or overhead among products based on a relevant cost driver, which is reflected in the per-unit driver traced cost in Cable Services Division’s March report.

Differences between Activity Based Costing and Functional Based Costing

Activity Based Costing (ABC) allocates costs based on activities performed while Functional Based Costing (FBC) considers the total costs of all activities performed by one functional unit. Unlike FBC that adds up all expenses incurred at departmental level, ABC divides departmental workflow into individual component tasks. Activity Based Costing takes into account resource drivers and activity drivers (number of units produced or customers served) to evaluate the cost efficiency of various activities. In contrast, Functional Based Cost budgets for each department and includes the costs generated by every activity in that department. There is also difference in the allocation of overhead between ABC and FBC. Activity Based Costing distributes overhead costs to specific activities according to the actual amount of fixed expense the activities incur. However, Functional Based Costing assigns overhead to output on the basis of functional units.

Activity-Based Costing

Activity-based costing (ABC) allocates expenses based on activities performed. Rather than adding all costs incurred in a single department, ABC breaks departmental workflows down into component tasks. Activity-based costing considers both resource drivers, such as the time and space required for each task, as well as activity drivers, such as the number of units produced or customers served, to determine the cost-efficiency of different activities. The ABC system pegs overhead costs directly to specific activities based on the actual amount of each fixed expense they incur. If an activity requires 10 hours of electricity, for example, accountants can easily determine an exact amount of electric utility expense incurred by the activity.

Functional-Based Costing

Functional costs are made up of the total costs of all activities performed by a functional unit. Functional-based costing considers total expenses incurred at the departmental, business-unit, work group or individual level. Functional-based cost budgets for departments, for example, will include costs incurred by every activity performed in that department. In functional-based costing, accountants assign fixed costs such as manufacturing overhead to output on a per-unit basis.

The Cable Service Division offers three options of products: a basic package with 25 channels; an enhanced package including basic package and 15 additional channels plus two movie channels; and a premium package, which is the basic package plus 25 additional channels and three movie channels. The Phone Division’s products vary from inexpensive touch-tone wall and desk phones to expensive and high quality cellular phones. According to Cable Service Division’s March report, the cost is evaluated based on each sales unit

3. The main difference between the product of cable service division and product of phone division is that the cost in cable service division and the product of phone division is that the cost in the cable service division is attributable to its product on the basis of direct labor cost on labor hours cost drivers and the amount of cost directly attributable to the product. On the other hand, the overhead cost and labor cost of telephone division is distributed on the basis of blanket overhead absorption costing or functional overhead costing method. The result given by the cable division product is more reliable and realistic as compare to the result of telephone division.