Piecework, Traditional and ABC

Question 1

Piecework Incentive Schemes

Answer 1

1. Standard weekly basic pay
2. Standard weekly production
3. Basic Piecework Rate ( 1 / 2 )
4. Incentive Enhancement ( % )
5. Standard Incentive Piecework Rate ( 3 + %) - answer is rate per unit

Question 2

Traditional Approach to Overheads

Answer 2

1. Allocation
2. Apportionment (i.e by floor space)
3. Re-Apportion support cost centre overheads to productive cost centres
4. Absorption - Absorb overheads into product costs using a calculated OAR

Question 3

Activity - Based Approach to Overheads

Answer 3

1. The costs of an organisation’s significant activities are grouped into overhead cost pools
2. An overhead cost driver is identified for each pool
3. Overhead costs are assigned by using the overhead cost drivers and assessing the relative proportion of the activity consumed by a product

Question 4

Activity - Based Approach Cost Driver Rate

Answer 4

Total activity cost / Total volume of cost driver = cost driver rate (e.g. per machine hour or per unit)

Question 5

Benefits of Activity - Based Costing

Answer 5

1. Improves accuracy of product and service costing as specific overhead costs are matched to the activity that gave rise to them.
2. ABC emphasises that activities have costs. This identification of activities and overhead cost pools focuses management attention on understanding how costs arise and the type of these costs.
3. ABC can help to identify/eliminate non value added activities. When the costs of an activity are calculated, management can analyse these costs to try and identify which costs do not add value to their products/services.

Question 6

Limitations of Activity - Based Costing

Answer 6

1. ABC systems are expensive to develop and maintain. Setting up an ABC system requires significant time and effort
2. Identifying activities, overhead cost pools and overhead cost drivers is a subjective exercise. How many activities should be identified? Can some activities be consolidated?
3. Implementing ABC, whereby a different focus is placed on activities and costs. They may have behavioural implications e.g. resistance from staff and/or management to the new costing system