Limiting Factors and ABC Flashcards
What is a limiting factor in management accounting?
A limiting factor is a resource that limits a company’s ability to fulfill production or sales, such as labor or materials, which affects output capacity.
What steps should be followed when making decisions under limiting factors?
- Identify the bottleneck
- Calculate contribution per unit per limiting factor
- Rank products by contribution
- Allocate resources accordingly
How do you calculate contribution per unit of a limiting factor?
First, find contribution per unit by subtracting variable costs from selling price. Then, divide this contribution by the amount of the limiting factor used per unit.
If labor hours are the limiting factor, how should a company allocate its production?
The company should calculate the contribution per labor hour for each product and prioritize production of products with the highest contribution per labor house until the labor hours are fully utilised.
Under what conditions should a special order be accepted when facing a limiting factor?
Accept if the order’s selling price exceeds the relevant costs (including the opportunity cost of using the LF) and if it provides a higher contribution margin than other potential uses of the resources.
Why was ABC developed?
To provide more accurate product costing, especially as indirect costs became a larger portion of total costs due to increased automation and reduced direct labor usage in modern production environments.
What is ABC?
ABC is a method of costing that assigns costs to products based on the activities required to produce them.
Why is ABC useful?
It is useful for more accurately tracing overhead costs to products, improving cost control, and identifying non-value-added activities.
What is the ABC cost hierarchy?
- Unit level activities
- Batch level activities
- Product-sustaining activities
- Facility-sustaining activities
How do you calculate costs using ABC?
- Identify activities and associated costs
- Determine cost drivers
- Allocate overhead costs to products based on their actual consumption of each activity, using the identified cost drivers
