Question

Discussion Post in paragraph format:

You are responsible for updating the predetermined overhead rate for your company, analyzing the current costs, using projected changes, and creating the rate for the next year. You notice the maintenance cost had almost doubled last year compared to prior years. You need to analyze this situation more and determine ways to better track this increase. The factory manager has suggested you spread the costs over all the departments to smooth the increase.

1. Determine a costing system to use to help better analyze the increase. Explain how this system will allow for future analysis to identify the increases.

2. If the manager pushes to spread the costs, what are the options you have to ensure you are protecting the company from irregular increases?

Answer 1

Question 1

Is is advisable for the company to adopt activity based costing for the given situation.Also known as ABC Costing, the activity based costing  that assigns cost of each activity to products and services based on the consumption level by each of them. This method helps the company to find out the cost of the entire products and services and helps to find out the products or services which are not of much value addition or which are not profitable and aviod them which results in decrease of costs. This method of costing is preferable over the standard method involving allocating overheads at a single rate to the entire deprtment or the entire plant where the funds go in vain whether the activities are conducted or not.

Question 2

To avoid irregular increase of costs, it is advisable to find out that department which incurs the highest cost and allocate the maximum amount of overheads to the same department and reduce the overhead allocation to those with low cost. Analysing variances between the actual and budgeted costs also would help to find out the deviations incurred and thereby take steps to reduce the gap and irregular increases in the cost.