Cost Allocation

Question 1

Traditional costing

Answer 1

Appropriate if not allot of oh to allocate.
Use volume based allocation bases as they are dominant factory costs.
High cost of error. Low cost of operating. Low level of accuracy. Arbitrary allocations.

Question 2

Abc

Answer 2

Get major activities and assign cost pools to each activity.
Determine cost drivers for each activity and assign costs to products.

Use volume and non volume based cost drivers. Consider cost vs benefit of using abc. Ideal where companies have mostly indirect costs.

Classification of activities:
Unit level activities
Batch level activities
Product/service sustaining activities to enable production and sale of g and s
Facility/business sustaining activities. To support facility’s general manufacturing process.

Use this for abc profitability analysis.

Use normal activity for physical resources and practical capacity for human resources.

Budgeted activity is a st measure which could lead to fluctuating driver rates.

Question 3

Variable vs absorption costing

Answer 3

Reconciling difference between profits would be change in inventory levels x foh absorption rate.

Abs does not understate importance of fc. Ias 2. Avoid fictitious losses.foh is important for production.
Variable more useful info. Removes effect of inventory changes from profit. Avoid fc being capitalized to unsalable inventory.