Question

1. Identify the differences between actual costing, normal costing, and activity based costing. 2. What has happened in recent industrial history to reduce the usefulness of direct labor hours as the primary basis for allocating overhead costs to products? 3. What is a cost driver? What makes a cost driver accurate and appropriate? 4. What are the advantages of activity based costing? What are the disadvantages of activity based costing? 5. What factors may indicate that activity based costing may be appropriate? 6. Describe Value-Added Activity analysis management. Distinguish between value-added activities and non-value added activities. 7. If a company wants to use just-in time-processing, list two requirements of that system. What advantages are associated with just-in time processing? What are disadvantages of the just-in time processing system?

Answer 1

1. Differences between actual costing, normal costing, and activity based costing.

All the three add actual cost of materials & direct labor & manufacturing overheads to decide the cost of production of products.

But the difference is with respect of quantum of manufacturing overheads to be added.

Normal costing applies the pre-determined manufacturing overhead rates to the manufactured products.

Actual costing adpots actual overheads incurred   &

Activity based costing identifies various measurable activities undertaken during the manufacturing process of a product(called cost-driver)--assigns cost to every activity or driver--& allocates proportionate overhead costs --according to the quantum of activity done,in various activities-- &the total is the OH cost allocated.

2. What has happened in recent industrial history to reduce the usefulness of direct labor hours as the primary basis for allocating overhead costs to products?

Major development is mechanisation or automation---ie. Doing things with machines rather than with humans.

When machines & equipments take the place, then overhead -costs associated with them like depreciation, repairs & maintenance , cannot possibly be allocated with direct labor hrs. /cost as the basis.

Hence, using direct labor hrs. as the basis is largely getting reduced , if not totally eliminated.

3. What is a cost driver? What makes a cost driver accurate and appropriate?

A cost driver means the quantum --in number or some measure --of an activity(during the manufacturing process , a product undergoes) ,that drives the cost to be aggregated to the product ---ie.the cost to be attached to the product is driven by the number or duration, the product has to be in that activity --consumption -cost

ABC spreads the OH costs according to activities ,that are almost exhaustive,in nature--ie. Nothing is left out--unlike labor hrs or machine hrs.

4. Advantages of activity based costing.

a.As said above, it is the identificataion of distinct activities ,in the manufacturing process , & the effort taken to cost each activity , that makes OH allocation , maximum accurate possible.

b. As the costing is accurate, fixing selling prices also becomes accurate & many seemingly-failing product lines are saved from being dis-continued.

c. Aids management in decision-making such as the above.

Disadvantages of activity based costing

a. Should be very costly & expensive.

b. Also time-consuming & very doubtful, if worth the effort , as it is ultimately , overall profit that the management is bothered about & may not be interested in such segregation of Ohs ,that too at such extra costs.

5.Factors that indicate activity based costing may be appropriate:

That ABC is preferred increasingly , nowadays , may be due to the following reasons:

a. Mainly the volume of Manufacturing overheads have increased tremendously

b.Types of activities demanded by different products , being entirely different , under one manufacturing roof --making the entrepreneur , realise the folly of allocating Ohs under one common cost-pool.

c. Continuing on the above,not anymore making sense to use machine hours or direct labor hours as the only basis

d.Increased demand both in quantity & quality of products from ever-growing customers

e.Different nature of production processes involved.

6. Value-Added Activity analysis management-- and non-value added activities

When a product moves from one stage /process to another, some value is added to that product--ie. Costs are accumulated. Identifying the different small/big activities in between , & studying the respective costs , will help the management to know whether that cost has created value or gone waste.

Even though waste or non-value adding activities cannot be totally eliminated, this type of analysis helps the management to minimise waste & add more value to the end product.

Value-added activities

Value-added activities are those that increase the value of the product ,that is offered to the customer.For example, by adding a special feature in the final product , the product can be sold for a higher cost, like a car with stereo systems ,in addition. ie. which when added the customer is willing to pay more-- by spending that much time/effort /labor ,we gain teh most--that is called value added activity

Non-value added activities:

These are such activities that are ,in truth, a clear waste ,like idle time of labor, material handling time,delays & waiting for the raw materials,rework or warranty work that resulted as a consequence of faulty work in the first instance, etc.--- some which are unavoidable & normal , but some sholud be addressed & reduced.

7. Just-in time processing requires that

the demand is forecasted accurately &

must be sure of the supplier ,both with respect to quality & quantity .

Advantages:

a. shorter production runs & hence least wastages

b. Lesser inventory carrying & other costs

c. Lesser investment in inventory

Dis-Advantages:

a. May run short of stock, if there is unexpected delays

b. Possibility of customers being turned down or losing them permanently to competitors , because of this tight policy--which may not work to our favor always.

c.Possibility of rise in other costs like last- minute procurement in haste , leading to more wastages , than that saved by JIT