notes - management accounting - seal. w., et. al

7/28/2019 Notes - Management Accounting - Seal. W., Et. Al.

http://slidepdf.com/reader/full/notes-management-accounting-seal-w-et-al 1/3

Traditional cost accounting advantage

-Designed primarily to provide unit product costs for external reporting

purposes P.298

-Aims to properly value stocks and COGS for external financial reports. P.298

-When cost systems were developed in the 1800s, data relating to direct

labour were redily available and convenient to use, and managers believed

there was high positive correlation between direct labour hours and overhead

costs. Useful back then p.299

-Idle capacity – predetermined overhead rates computed by dividing

budgeted overhead costs by a measure of budgeted activity such as direct

labour hours. This practice results in applying unused capacity to products

p.300

-unstable product costs – if product volume falls, overhead rate increasesbecause fixed components of overhead spread over smaller base. P.300

Traditional cost accounting disadvantage

-ALL manufacturing costs assigned to products, even manufacturing costs

that are not caused by the products. Eg security guard’s wage allocated to all

product even though his wage is totally unaffected by which products are

made or not made during a period. P. 299

-nowadays in many companies, direct labour may no longer be highly

correlated with overhead costs p.299

-because of large variety of activities encompassed in overhead, and when

company has a range of products that differ in volume, batch size or

complexity of production, overhead will not be correctly assigned, because

traditional approach rely on volume as the factor in allocating overhead cost

to products, and assumes overhead is directly proportional to allocation base.

P.300

-on economy wide basis, direct labour and overhead costs have been moving

in opposite directions for a long time. Direct labour cost decreasing,

overhead costs increasing advancement of technology, automate

equipment p.299

-place too much reliance on unit-level allocation bases such as direct labour

and machine hours, which results in over-costing high volume products and

under-costing low-volume products. P.325



-auditors likely to be uncomfortable with allocations based on subjective

data, which is easily manipulated by management.

-most companies confine ABC efforts to special studies for management, and

no attempt to integrate abc into formal cost accounting systems.

notes - management accounting - seal. w., et. al

Documents