MAF THEORY SUMMARY
TRADITIONAL ALLOCATION (Arbitrary Allocation)
Limitations of linear regression WRAM NV
W – Possibility of choosing wrong CD
R – All. FC should be removed from dept. cost – Common + unavoidable
A - Data adj. sometimes req. reflects forecast period
M – Missing data, docs lost or misplaced – can’t detect
N – Should be sufficient number, at least 30
V – Regression estimates only valid in certain range
3 Reasons use Pre- det. rather than actual rates: (DEAF)
D – Product cost calc would have to be delayed until end of acc. period.
Not practical if quotations needed urgently
F – Actual then calc monthly: Large Fluctuations in overhead rates due to fluctuations in
production
E – Some overhead costs not incurred evenly throughout the year e.g. heating in winter
A – Use od budgeted is based on annual estimate over expenditure
Advantages and disadvantages for budgeted Fixed and variable manu costs
ADVANTAGES DISADVANTAGES
1. Linear Regression More accurate Adj. needed for inflation
At least 30 obs
2. Inspection of accounts Quick and easy to use Very subjective
3. Scatter graphs Use of all observations no Visual line of fit may differ
just hi-lo from mathematical line
, ACTIVITY BASED COSTING
Comparing current system with ABC - % change?
Talk about scenario whether (+ or -) %
When current system – over cost HIGH VOL
Under cost LOW VOL
Then say how ABC changed the GP%
ABC superior to dept. + plant-wide as uses causes-effect relationship to assign costs
to products.
ABC thrives – 1. Strong competition
2. High proportion of non-volume related products
3. Diverse range of products
ABC increases DM through accuracy of cost allocation
It is however very expensive hence consider the cost vs benefit.
Common finding is that ABC increases costs of low vol
Decreases costs of high col
Disadvantages - Expensive
Requires training + well developed staff
Complex product lines
Benefits of ABC: FLACS
F – Flexibility extends cost analysis to areas like customer-cost +internal mgnt cost
L – PC reflect variance PC in long-run which increases SDM
A – More accurate than traditional, high proportion OC non-vol + wide range of products
C – Increases cost estimation as cost understanding improves
S – Increases SDM
TRADITIONAL ALLOCATION (Arbitrary Allocation)
Limitations of linear regression WRAM NV
W – Possibility of choosing wrong CD
R – All. FC should be removed from dept. cost – Common + unavoidable
A - Data adj. sometimes req. reflects forecast period
M – Missing data, docs lost or misplaced – can’t detect
N – Should be sufficient number, at least 30
V – Regression estimates only valid in certain range
3 Reasons use Pre- det. rather than actual rates: (DEAF)
D – Product cost calc would have to be delayed until end of acc. period.
Not practical if quotations needed urgently
F – Actual then calc monthly: Large Fluctuations in overhead rates due to fluctuations in
production
E – Some overhead costs not incurred evenly throughout the year e.g. heating in winter
A – Use od budgeted is based on annual estimate over expenditure
Advantages and disadvantages for budgeted Fixed and variable manu costs
ADVANTAGES DISADVANTAGES
1. Linear Regression More accurate Adj. needed for inflation
At least 30 obs
2. Inspection of accounts Quick and easy to use Very subjective
3. Scatter graphs Use of all observations no Visual line of fit may differ
just hi-lo from mathematical line
, ACTIVITY BASED COSTING
Comparing current system with ABC - % change?
Talk about scenario whether (+ or -) %
When current system – over cost HIGH VOL
Under cost LOW VOL
Then say how ABC changed the GP%
ABC superior to dept. + plant-wide as uses causes-effect relationship to assign costs
to products.
ABC thrives – 1. Strong competition
2. High proportion of non-volume related products
3. Diverse range of products
ABC increases DM through accuracy of cost allocation
It is however very expensive hence consider the cost vs benefit.
Common finding is that ABC increases costs of low vol
Decreases costs of high col
Disadvantages - Expensive
Requires training + well developed staff
Complex product lines
Benefits of ABC: FLACS
F – Flexibility extends cost analysis to areas like customer-cost +internal mgnt cost
L – PC reflect variance PC in long-run which increases SDM
A – More accurate than traditional, high proportion OC non-vol + wide range of products
C – Increases cost estimation as cost understanding improves
S – Increases SDM
