Destin Brass

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General Comments About the Case

The essence of choosing among cost accounting systems frequently involves selecting the proper means to assign overhead costs to products. This case provides the opportunity to evaluate two costing systems and to calculate costs under a third, using the tools you’ve developed in this class. The overriding objective is to determine which of the three systems provides the most useful information for one or more of the many purposes that we maintain cost accounting systems.

Last class, we talked about the difference between the traditional, one-stage allocation technique that many firms employ (Figure 1) and a more involved 2-stage departmental OH allocation system that could be used (Figure 2). In the former, only one overhead rate (OHR) is computed. In the latter costs are first separated into departmental OH cost pools (i.e., traced to departments), and a separate OHR is computed for each department. The advantage of the two-stage system is that a different allocation base can be used for each department.

Figure 1. Figure 2.

Activity-based costing is a 2-stage system (Figure 3). The difference is that in the first stage costs are separated into activity cost pools. Activities do not necessarily correspond directly to departments; you might have several activities within one department (or I suppose one activity could span multiple departments but this is less common).

Figure 3.

A separate OHR is computed for each activity cost pool and these multiple OHRs are used to allocate OH from each activity cost pool to the products based on the products’ consumption of the activity.

See the lecture notes and the text for more information and for examples.

ANALYSIS QUESTIONS

1. Use the Overhead Cost Activity Analysis in Exhibit 5 and other data on manufacturing costs to estimate product costs (per unit) for valves, pumps, and flow controllers. To do this, you will need to do...