Discussion response What are your thoughts and response and arguments to the following: 1. Traditional volume-based cost
Posted: Sun Jul 03, 2022 3:54 pm
Discussion response
What are your thoughts and response and arguments to thefollowing:
1. Traditional volume-based cost allocation systems arelikely to distort product costs because they don't allocate costsas accurately as other systems such as ABC costing. The main reasonfor this is because traditional cost allocation systems allocatebased on a single cost driver which is typically direct labor ormachine hours. This is a very simple approach to cost allocationbut it doesn't take into account what is truly driving the overheadcosts.
An example of this would be if you were manufacturing two parts(parts A & B). Part A doesn't take much floor space to producebut is very labor-intensive and requires 10 direct labor hours perpart. Part B requires multiple pieces of complex machinery but onlytakes 5 direct laborers to produce. In a traditional costallocation model, part A would be the more expensive part becauseit requires more direct labor hours which is how all of the costsare allocated. In reality, part B is probably more expensive toproduce because it requires more complex machinery and takes upmore floor space to produce.
2. Traditional volume-based cost allocation systems cancertainly be considered antiquated when examining product costs.This is caused by two potential oversights that can occur whencosting with traditional costing systems. The first distortion ofcosts can occur when the manufacturer produces different productsin both high and low volume quantities. For instance, thesetraditional volume-based systems consider the entire productionvolume in the allocation of overhead costs onto all products, eventhough the high-volume products consume significantly lessoverhead. Meanwhile, the production of more intricate or customproducts will most often consume tremendously greater amounts ofoverhead, but the product cost will not be reflective of this. Thesecond cause of product cost distortions when using traditionalvolume-based costing is when there is a variance in the size,weight, and complexity of the products being manufactured. Intraditional accounting, there will be significant cost distortionssince both the direct labor costs and machine and labor hours arenot considered when assigning costs. This means that smaller, lesscomplex products will be overpriced, while larger, heavier, morecomplex products will become underpriced.
What are your thoughts and response and arguments to thefollowing:
1. Traditional volume-based cost allocation systems arelikely to distort product costs because they don't allocate costsas accurately as other systems such as ABC costing. The main reasonfor this is because traditional cost allocation systems allocatebased on a single cost driver which is typically direct labor ormachine hours. This is a very simple approach to cost allocationbut it doesn't take into account what is truly driving the overheadcosts.
An example of this would be if you were manufacturing two parts(parts A & B). Part A doesn't take much floor space to producebut is very labor-intensive and requires 10 direct labor hours perpart. Part B requires multiple pieces of complex machinery but onlytakes 5 direct laborers to produce. In a traditional costallocation model, part A would be the more expensive part becauseit requires more direct labor hours which is how all of the costsare allocated. In reality, part B is probably more expensive toproduce because it requires more complex machinery and takes upmore floor space to produce.
2. Traditional volume-based cost allocation systems cancertainly be considered antiquated when examining product costs.This is caused by two potential oversights that can occur whencosting with traditional costing systems. The first distortion ofcosts can occur when the manufacturer produces different productsin both high and low volume quantities. For instance, thesetraditional volume-based systems consider the entire productionvolume in the allocation of overhead costs onto all products, eventhough the high-volume products consume significantly lessoverhead. Meanwhile, the production of more intricate or customproducts will most often consume tremendously greater amounts ofoverhead, but the product cost will not be reflective of this. Thesecond cause of product cost distortions when using traditionalvolume-based costing is when there is a variance in the size,weight, and complexity of the products being manufactured. Intraditional accounting, there will be significant cost distortionssince both the direct labor costs and machine and labor hours arenot considered when assigning costs. This means that smaller, lesscomplex products will be overpriced, while larger, heavier, morecomplex products will become underpriced.