Management Cost Accounting

Question One:

a) Explain why the firm may have chosen to implement a job costing system. Specifically explain what characteristics make an organization well suited to the use of job costing and why these may or may not be descriptive of Dewey, Cheatem and Howe.

Organizational characteristics consistent with job costing:

* Relatively high product/service variety, especially unique, custom products/services

* Relatively lower volume of such products/services.

DCH is a professional service firm:

* Custom services => job costing.

b) Explain what is meant by “over-costing or cross-subsidization” in this context and how this can be related to the choice of the allocation base.

“over-costing or cross-subsidization” occurs when costs are not accurately allocated to the different projects undertaken. The government is concerned that it would be paying for costs that its project did not actually incur (i.e., its project is over-costed), resulting in it cross-subsidising the other projects undertaken by DCH.

If the chosen allocation base is not a (good proxy for a) cost driver, the allocation of indirect costs to different services/customers will not correspond to their true consumption of resources.

Because costs are allocated from common pools, any under-allocation of cost to one service/customer will be matched by an over-allocation of cost to another. If billing is based on assigned costs, one service/customer will subsidize the other.

c) Briefly contrast the two stages of cost allocation in an ABC system with the two stages of cost allocation in a departmental cost allocation system. Particularly, explain why the first stage cost allocation in the departmental cost allocation system may be more objective (or less subjective) than that in the ABC system.

d) Assuming that the Messaging Department expects 40,000 of direct consultant labour hours compute the predetermined overhead rate for the Messaging...