please see attached question

Running Head: ACCOUNTING 0

abc

Cost Accounting

Student’s Name:

Institutional Affiliation:

Cost Accounting

Question 1: Why ABC is not used in external reports

ABC system does not follow the rules and principles of accounting bodies such as GAAP. The accounting bodies require the company to report all manufacturing costs and the ABC system do not include all costs. The ABC system is used to determine unit cost and it does not include all costs incurred by the firm. Another reason why ABC system in not used for external reporting is that auditors will be uncomfortable with allocation that is based on the company management. The organization can easily manipulate the accounting information to look more favorable. Also most of the accounting systems uses in firms are embedded in computer programs that cannot be easily changed without causing errors. The ABC method will require regular adjustments in the system resulting to unreliable information; therefore, ABC is used for internal purposes only.

Question 2: Reason for 2 stages of allocation in ABC

The main objective to allocate expenses in two stages is to determine the amount used per production activity and to allocate expense per cost driver used in the production process. The first stage involves identifying activities such as order processing, this assist in identifying the cost drivers associated with the production activity. The second stage involves identifying the cost drives related to a specific production event (Davis, 2013). The cost drivers are used to computer per driver cost which is used to determine costs associated by products by multiplying the number of cost driver units by the cost driver rate. The main objective of stage two is to determine the rate per cost driver. The ABC system assumes that different products consume activities and the organization allocates resources to activities. Therefore, costs are allocated to activities and then to cost drivers.

Question 3: Why direct labor is a poor base for overhead allocation

Direct labor is not efficient in allocating overhead in many firms due to replacement with automated machines which are components of overhead. Automation increased machine hours and reduced direct labor hours which resulted to increase in manufacturing overheads, due to other cost such as depreciation. Only a small amount of direct labor is used compared to traditional approach which was labor intensive. The traditional allocation method distorted the cost per unit that provides useful information for decision making (Davis, 2013). Nowadays direct labor is not a major coat of production since of the work is automated, thus direct labor cost allocation is more effective in production processes where production process requires a lot of direct labor hours. The more logical way of allocating machine costs in terms of machine hours instead of the traditional direct labor hours.

Question 4: Why the first stage of allocation process in ABC is based on interviews

The interviews are carried out to determine to collect first-hand information from the workers on time spent on production activities. Then the collected information is used for costing purposes using ABC system. The best effective way is to ask the workers the percentage of time spent on each activity. The employees can also be asked to record the time they are spending on each activity for a period of time before the interview comes to collect the information. Interviewing is important in collecting data related to different activities and collecting from the involved personnel is the most effective way. Although there are challenges with this method, for example employees tend to work harder when being observed thus providing incorrect data. The interviewer should try to come up with a strategy to reduce the error caused by the employees change in behavior when observed.

Benchmarking

Benchmarking is the process of searching for the best practices within and across industries for continuous improvement in improvement in internal organization. Benchmarking is also used to find out ways of becoming more competitive and for business sustainability. It is undertaken when a firm feels that other firms have better knowledge about different processes, accounting procedures, technology and quality that are superior to the firm’s current state. In order for the process to be successful, the company must decide the functions and activity that will be considered (Davis, 2013). Then a benchmarking team is formed and the benchmarking partners are identified. The benchmarking process is carried out on input data, output, cost and flows are observed and analyzed. From the results obtained the firm takes the recommended course of action to improve its operations

Customer level activities

Customer-level activities are performed to assist customer but they are not related to any product. It also may involve customer analysis to determine the profitability of each customer and assists management in introducing more profitable products that will improve customer experience, reduce service costs and to offer discounts(Davis, 2013). The main aim of customer-related services is to satisfy customer and sell a product at the required profit margin. Customer profitability analysis starts with identifying activities cost necessary to the customer before and after sale without including the production cost. These cost activities include customer unit-level such as shipping costs, batch-level cost such as invoicing and order processing. Other customer activities costs include visiting the customer, distribution-channel cost and sales sustaining costs. All costs involved in customer level activities cannot be traced to the product sold but they are important in selling and satisfying the customer.

Reference

Charles E. Davis (2013). Managerial Accounting. New Jersey: John Wiley and Sons.