Case Study - the Engine Company

Management Accounting

Case Study - The Engine Company

1. In Management Accounting we use direct costs and indirect costs (or overheads) to

cost the products, orders or services a certain company provides. However, these cannot be treated in the same way. Direct costs can be accurately traced to cost objects but indirect costs cannot be directly traced to a cost object as they are common to several cost objects, so they are assigned to these through cost allocations (allocation bases). To allocate the costs, we have different systems such as the Traditional Costing System (TCS). Under this system, we can find the Single Overhead Rate (the most simplistic type of TCS) and the Homogeneous Cost Pool (a more sophisticated TCS). In this exercise, we have four cost centres, each one having homogeneous tasks and a unit of work. The main or production cost centres are the Machining and Assembly because they are involved directly in the production process and the support or service cost centres are the Plant and Equipment Maintenance and the Material Handling as they rent their services to the production cost centres. More precisely, we are asked to find the overhead rates of the production centres using the sequential (or step-down) method and also the simultaneous equation method. In the first method, the service cost centre that renders the highest percentage of its total service cost is the first one to be allocated. The last method uses two equations that include the mutual services among the service cost centres and the result obtain is the cost being reallocated to each of the other cost centres.  Step-Down Method

Production Centres Machining Manufacturing overheads directly assigned Reallocation of the costs: P. E. Maintenance Material Handling Total Unit of Work 180.000 € 213.333 € 793.333 € 198 € 300.000 € 26.667 € 526.667 € 176 € Assembly

Service Centres Plant / Equip. Material Maintenance Handling

Total Costs

400.000 €

200.000 €

600.000...