The company and industry are currently both experiencing a process of change. This has lead to the need to evaluate alternatives to the current cost accounting system. This requires the evaluation of whether burden should be traced to either one, two or three cost pools. Currently burden is only being traced to one. Furthermore the company is certain that it will soon have to purchase expensive machinery, thus changing it operational asset base and cost structure, in order to remain competitive. Therefore I will also examine the effect that this acquisition would have upon the current and alternative systems so as to see which system would be the most appropriate and effective method to supply management with the necessary information need to be able to outperform both market and competition. If any of these methods comes in question at all.
Table of Contents
1. Introduction
2. Current Asset Base
2.1 Component Analysis
2.1.1 IC A & IC B
2.1.2 Diode
2.1.3 Capacitor
2.1.4 Amplifier
2.2 Summary regarding System changeover
3. Changed Asset Base
3.1 The New Costs
3.1.1 Depreciation
3.1.2 Direct Labor Cost
3.1.3 Engineering Cost & Fixed Overhead
3.1.4 Variable Overhead
4. Comparison
5. Initial Conclusion
6. The Third Way
6.1 Standard Cost / Flexible budgeting System
6.1.1 The new cost centres
6.1.2 Variable, fixed and standard costs
6.2 Direct or Full Costing?
6.3 Inventory valuation for legal purposes
7. Activity Based Costing
8. Conclusion
Objectives and Topics
The primary objective of this work is to evaluate the effectiveness of current and alternative burden allocation methods within a company facing operational changes and technological investment. The paper explores how different costing systems impact pricing accuracy, resource allocation, and managerial decision-making in a competitive environment.
- Comparison of single-pool vs. multi-pool burden allocation systems.
- Impact of machine acquisition on cost structure and overhead rates.
- Evaluation of Standard Costing and Flexible Budgeting systems.
- Assessment of the limitations of traditional Direct Labor-based costing.
- Introduction to Activity-Based Costing (ABC) for enhanced profitability analysis.
Excerpt from the Book
Summary regarding System changeover
The current system has distorted costs causing components with high direct labour portions to be over and components with low direct labour portions to be under priced. Therefore a system change is vital especially when one considers that experiences made with customers substantiate this and the fact that the company will be required to introduce more and more automation to remain competitive in the future.
Chapter Summary
1. Introduction: Discusses the need to evaluate current cost accounting systems due to industrial changes and the upcoming purchase of expensive machinery.
2. Current Asset Base: Examines how current burden allocation methods incorrectly influence the perceived costs of specific components like ICs, Diodes, and Capacitors.
3. Changed Asset Base: Details the financial implications of acquiring new machinery, including depreciation calculations and new labor and overhead cost projections.
4. Comparison: Analyzes the impact of the new machine acquisition on burden rates and evaluates the performance of different allocation proposals.
5. Initial Conclusion: Argues that existing costing systems lead to gross misallocation and urges a transition to more sophisticated methods.
6. The Third Way: Proposes a Standard Cost / Flexible Budgeting system as a superior alternative to address cost distortions.
7. Activity Based Costing: Suggests that while a flexible system is beneficial, Activity Based Costing is necessary to capture complex process costs accurately.
8. Conclusion: Recommends a two-phased approach: implementing flexible budgeting immediately while developing an ABC system for long-term profitability analysis.
Keywords
Burden Allocation, Cost Accounting, Flexible Budgeting, Standard Costing, Activity Based Costing, Machine Hours, Direct Labor, Overhead, Cost Centers, Profitability Analysis, Asset Base, Pricing Strategy, Inventory Valuation, Cost Distortion, Management Accounting.
Frequently Asked Questions
What is the fundamental focus of this research?
The paper examines how different burden allocation methods impact a company's cost structure and product pricing, especially in light of changing technological requirements and increasing automation.
What are the central thematic fields covered?
The research covers cost management, industrial accounting practices, the transition from traditional to flexible costing systems, and the implementation of Activity-Based Costing.
What is the primary goal of the study?
The primary goal is to determine the most appropriate and effective cost accounting method to provide management with accurate information to maintain competitiveness.
Which scientific methods are employed?
The author uses a comparative analysis of different cost pool scenarios (current vs. proposed) and a case study approach based on specific data sets from the company's testing departments.
What is covered in the main body of the work?
The main body details the current cost distortion, calculations for future machine investment costs, comparisons between different allocation systems, and the theoretical proposal for a "Third Way" using flexible budgeting.
Which keywords characterize this paper?
Key terms include Burden Allocation, Flexible Budgeting, Activity Based Costing, Cost Distortion, and Management Accounting.
How does the introduction of new machinery affect the burden allocation models?
The new machinery increases overhead costs significantly; the author demonstrates that continuing to use the old Direct Labor-based system would lead to inaccurate pricing and potentially cause the company to lose competitive advantage.
Why does the author suggest that the "Accounting Manager's approach" is insufficient?
The author argues that the manager's proposal to use two cost pools is overly simplistic and fails to account for the varying usage of resources in a complex multi-product environment.
- Citar trabajo
- Andrew Brabner (Autor), 2003, Burden allocation methods, Múnich, GRIN Verlag, https://www.grin.com/document/7645
