Question

Give at least four examples of possible constraints. Explain why they would be constraints.

From a decision-making point of view, should joint costs be allocated among joint products? Explain.

What, if any, benefit is provided by activity-based costing related to relevant costs and decision making?

Answer 1

Examples of possible constraints	Reason
Machine Time	Machine hours available to manufacture ALL the products/orders in hand may be limited to what is actually required(reasons could be machine failure, unavailability of machine in the market, etc). At that time, management has to decide mix of which products to be manufactured/order to be first fulfilled so that maximum profit is earned.
Direct Labour Time	There may be many reasons for shortage of labour hours like labour strike, labour unavailability because of peak season, etc because of which they sometimes becomes one of the constraints.
Floor Space	Floor space may be limited to manufacture ALL products/orders in hand.
Raw Material	Raw material unavailability, limited raw material in stores could result in raw material being one of the constraints.

Should joint costs be allocated among joint products?

Ans - Apportionment of Joint Cost amongst Joint Products using -

Market Value at the Point of Separation - This method is used for apportionment of joint costs to joint products upto split off point. It is difficult to apply if the market value of the product at the point of separation is not available. It is useful method where further processing costs are incurred disproportionately.

Net realizable value method - From sale value of joint products (at finished stage) the following are deducted -

- Estimated profit margins

- Selling and distribution expenses, if any

- Post split off costs

The resultant figure so obtained is known as net realizable value of joint products. Joint costs are apportioned in the ratio of net realizable value.

What, if any, benefit is provided by activity based costing related to relevant costs and decision making?

Ans -

1. More accurate costing of products/services, customers, SKUs, distribution channels.

2. Better understanding overheads.

3. Utilises unit cost rather than just total cost.

4. Integrates well with six sigma and other continuous improvement programs.

5. Makes visible waste and non value added.

6. Supports performance management and scorecards.

7. Enables costing of processes, supply chains and value streams.

8. Activity Based Costing mirrors way work is done.

9. Facilitates benchmarking.