Lecture 5

Question 1

Predetermined overhead rate (POHR)

Answer 1

Estimated total manufacturing overhead cost for the coming period/(Estimated total units in the allocation base for the coming period)

Question 2

Overhead applied

Answer 2

POHR x Actual activity

Question 3

How has the cost structure of overheads changed?

Answer 3

We now have wider ranges of products
Direct labour is not the dominant cost
Overheads are now of considerable importance

Question 4

What is volume and non-volume based cost drivers?

Answer 4

Volume-based drivers are appropriate where the activities are performed each time a unit of product/service is produced (i.e. direct labour hours, machine hours)
Non-volume related activities are not performed each time a unit of a product or service is produced (i.e. setting-up machines)
the more of these there are the more distorted your product costs will be if you do not use ABC

Question 5

Pros and cons of ABC

Answer 5

Pros
Does not treat OH as a homogeneous cost item.
Rejects the idea that the volume produced drives all costs.

Cons
Costly complex system to design
Measurability
MArginal refinement of the traditional management accounting techniques

Question 6

Stages in designing an ABC system

Answer 6

1. Identify the major organisational activities
2. Assign costs to activity cost pools/centres
3. Select appropriate cost drivers for assigning the costs for activities.
4. Calculate activity rates
5. Assign costs of activities to products according to the products consumption rate of activities.