Aldis Moch Sajawandi

MGT – 3
014201900250
Session 13-14

 Please read the related chapters for the session 14 today (see the syllabus) chapter
13 and chapter 14, and make a summary.

Responsibility accounting is a management control system that involves

dividing an entity into segments and placing each segment under the control of a
designated man- ager. Three main types of segments may be identified: cost centres
(responsible for costs only), profit centres (responsible for costs and revenues) and
investment centres (responsible for costs, revenues and investment decisions).
Control is achieved by giving each manager complete responsibility for the costs
incurred by his or her centre (and for any revenues received). Such costs (and
revenues) can then be said to be direct to that centre. However, direct costs are
normally defined as those that can be easily attrib- uted to specific cost units. Those
costs that cannot be easily attributed to specific cost units are known as indirect
costs.
A direct cost is a cost that can be easily and economically identified with a specific
cost centre and some costs can also be easily identified with specific units or
products. Those that cannot be so identified are known as indirect costs.
Costs are usually classified into elements of cost. By building the costs up in layers, it
is possible to determine a selling price, although market conditions have also to be
taken into account when doing so.
Direct material costs include raw materials and component parts. If the cost of mate-
rials used in a particular product is known, then there is no problem in charging them
out to products. The unit cost will be used. Otherwise, a pricing method has to be
selected. The recommended ones are first-in, first-out, an averaging method or the
standard cost. Direct labour costs are those costs that can be easily attributed to
specific units. They are charged out on the basis of hours worked and the hourly rate
paid plus an allowance for employer’s employment costs, such as national insurance,
pension contributions and holiday pay. There may be other direct costs that can also
be attrib- uted to specific units but these are relatively rare.
 In this chapter we have continued our study of cost accounting that we began
in Chap- ter 13. In this chapter we have explained how production overheads are
absorbed into product costs. In summary, the procedure is as follows.
1 Allocate all costs to appropriate cost centres.
2 Distinguish between production and service cost centres.
3 Examine the individual costs in each production service cost centre and, where
pos-
sible, apportion them on some equitable basis to other cost centres.
4 Apportionthetotalofanyremainingservicecostcentrecostseither(1)toproduction cost
centres or (2) to production cost centres as well as other service cost centres. If (2),
continue to reapportion the service cost centre costs until they have all been
charged to production cost centres.
5 Select an absorption method based on either the number of units flowing through
a
particular cost centre or on the time a unit spends in the cost centre based on direct
labour cost, direct labour hours or machine hours.
6 Divide the total overhead in each production cost centre by the selected
absorption
factor.
7 Charge each unit with its share of overhead e.g. direct labour hours or machine
hours * the absorption rate.
8 Add the amount calculated to the total direct cost of that unit.
It is also necessary to determine whether the above procedure should be
done on a historical or a predetermined basis and whether non-production
overheads should also be absorbed into product cost.
The above method has been in use for well over 100 years. Some academics
and practitioners do not believe that it is suitable for modern manufacturing
methods. In recent years a new method called activity-based costing has been
adopted by some large companies. ABC is similar to traditional overhead absorption
costing except that both production and non-production overheads are assigned to
one of a number of identifi- able cost pools. The main factor that causes those
overheads to be incurred (known as a cost driver) is identified and a cost driver rate
calculated (the pool overhead divided by the cost driver). Products are then charged
with their share of each of the cost pool overheads.
 Do all the learning Activity in the chapter 13-14.

There are a range of reliefs available for some properties. The most useful for
small firms is the small business rate relief. This is available if your property has a
rateable value of less than £15,000, and generally if your business only uses one
property. Full relief is available on properties with a rateable value of £12,000 or
less. For those between £12,001 and £15,000, relief goes down gradually from 100
per cent to zero per cent. If you’re a small business but you don’t qualify for small
business rate relief, your bill will still be worked out using the lower small business
multiplier (for properties with a rateable value below £51,000).

There are other business rates reliefs available, including the rural rate relief
and charitable rate relief. You can read more about these on the government
website.
If you want to estimate your business rates bill, you'll need to find out your
property’s rateable value. This enables you to find the correct multiplier, which will
depend on the rateable value. Then, deduct any reliefs you’re entitled to. You can
use the government’s business rates calculator. This article is a guide only – but for
more help with business rates, the government says you can contact qualified
surveyors. They list the Royal Institution of Chartered Surveyors (RICS), the Institute
of Revenues, Rating and Valuation (IRRV) and the Rating Surveyors Association.

A small but growing number of suppliers in business markets draw on their

knowledge of what customers value, and would value, to gain marketplace
advantages over their less knowledgeable competitors. These suppliers have
developed what we call customer value models, which are data-driven
representations of the worth, in monetary terms, of what the supplier is doing or
could do for its customers.
 Customer value models are based on assessments of the costs and benefits of a
given market offering in a particular customer application. Depending on
circumstances, such as availability of data and a customer’s cooperation, a supplier
might build a value model for an individual customer or for a market segment,
drawing on data gathered from several customers in that segment.
Customer value models are not easy to develop. But the experiences of
suppliers that have built and used them successfully suggest several guidelines that
we believe will be useful to any company attempting to define and measure value
for its customers.

 Do the Check your learning in the chapter 13-14.

The answers to these questions can be found within the text.

1 What is (a) a production cost centre, (b) a service cost centre?

a.) Impersonal and personal cost centres:

Impersonal Cost Centre: consist items of impersonal nature like an
equipment or location. Example of Impersonal Cost Centre: a department, a branch,
a region of sale, etc.
Personal Cost Centre: consist items of personal nature like a person or a
group of persons. Example of Personal Cost Centre: Regional Manager, Sales
Manager, Marketing Manger, etc.

b.) Production and service cost centres:

Production Cost Centre: is the place where the production activity is carried
on. Example of Production Cost Centre: a assembly shop, a paint shop etc. Service
Cost Centre: is the place where all types of assistance are given to the production
activities. Example of Service Cost Centre: the store department, the labour office,
the account/costing department etc.

2 What do the terms ‘allocate’, ‘apportion’ and ‘absorb’ mean?

3 Suggest three ways that service cost centre costs may be charged to other cost
centres.
The reciprocal method
This approach is used where some service cost centres provide services to
other service cost centres, and the service is reciprocated. In Example 3, cost centre
C serves centre D, and vice versa. In reality, an organisation may choose to ignore
this reciprocal service and re-apportion overheads by using the direct or step down
approach. In Example 3, the direct approach would involve re-apportioning C’s
overhead on the basis of 40/90 and 50/90 to A and B respectively and ignoring the
reciprocal service to D. D’s overheads would be similarly reapportioned on the basis
of 75/95 and 20/95.
However, if we choose to fully reflect the reciprocal services between C and
D, one of two methods are possible – the repeated distribution approach or the
algebraic approach. Both are methods of solving a simultaneous equation and should
give the same result. Example 3 demonstrates both methods. In the exam, the
examiner will indicate that he wants you to use one or either of these methods by
asking for a method that ‘fully reflects the reciprocal services involved’. Practically in
the FMA/MA exam, where this topic would be examined by two-mark questions, the
focus will be on the algebraic approach as repeated distribution would be too time
consuming.
4 What is meant by ‘reciprocal service costs’?
Reciprocal services occur when different service departments within an
organization provide services to each other. For example, the information
technology department provides software maintenance support to the janitorial
services department, which in turn provides cleaning services to the information
technology department. This back-and-forth swapping of services can be taken into
consideration when calculating the allocation of overhead costs.

5 Indicate three ways to deal with them.

Like many anuran species worldwide, the frogs and toads of North Carolina
have a difficult road ahead. Worldwide, scientists have documented drastic declines
in many frog and toad populations. For many of these disappearances and declines,
the exact causes are difficult to determine. In some parts of the United States,
scientists have documented strange body malformations in some species. These
alarming developments have prompted an increased interest in the threats facing
amphibians. Many organizations have developed programs to monitor the status of
frogs and toads throughout the world.
In North Carolina, loss of quality habitat is one of the greatest threats frogs
and toads face. Habitat destruction and fragmentation threaten entire populations
by:

Eliminating wetland habitats necessary as breeding sites,

Removing forested areas and other upland habitats where many species live most of
the year, and
Creating barriers between these two habitats that prevent individuals from
migrating to and from breeding areas.

6 What is the basic formula for absorbing production overheads into product
costs?

There is general acceptance that the time based methods (direct labor hours,
machine hours and to some extent direct labor cost) are more likely to reflect the
load on a cost center as production overheads also tend to be incurred on a time
basis so even in exams students should use these methods unless questions requires
to use some other methods.
 In respect of capital intensive operations or machine related departments,
machine hours’ base is more appropriate since most of the overheads in these
departments would be closely related to machine hours. However, for labor
intensive operations direct labor hours base is the most appropriate method.

7 List six methods of how this may be done.

8 What is non-production overhead?

Quick Reference. The indirect costs of an organization that are not classified
as manufacturing overhead. They include administration overheads, selling
overhead, distribution overhead, and (in some cases) research and development
costs. From: non-production overhead costs in A Dictionary of Accounting

9 How should it be absorbed into product costs?

In order to obtain the product cost under absorption costing, first the per-
unit costs are added together (direct labor, direct materials, variable overhead).
After that, per-unit costs need to be obtained from the fixed overhead so that the
per-unit overhead can be applied to the per-unit cost. Adding the overhead to the
per-unit costs completes what is absorption costing per unit
10 What is a predetermined absorption rate?
To determine the absorbed overhead amount, multiply the actual number of
machine hours used during the term by the predetermined overhead rate, also
referred to as the overhead absorption rate.

11 What is meant by under- and over-recovery of overhead?

Under-absorption is also termed as 'under recovery', Meaning of over-
absorption of overheads. Over-absorption of overheads means the excess of
overheads absorbed over the actual amount of overheads incurred.
12 What do the initials ‘ABC’ mean?
acronym for "already been chewed".

13 What is a cost pool and a cost driver?

 A cost driver is the unit of an activity that causes the change in activity's cost.
It is used to assign overhead costs to the number of units produced.

14 How does ABC differ from traditional absorption costing?

A fundamental difference between traditional costing and ABC costing is that
ABC methods expand the number of indirect cost pools that can be allocated to
specific products. The traditional method takes one pool of a company's total
overhead costs to allocate universally to all products.