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Table 2 Calculation of ABC overhead absorption rate- Kino Publishing Co

Table 2 Calculation of ABC overhead absorption rate- Kino Publishing Co

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absorption purposes. Secondly, ABC exposed the weakness of using a single blanket overhead recovery rate and therefore the need to absorb each type of overheads based on their respective cost drivers. In essence ABC is an extension of the TCS. It extended the bases for splitting the overheads into multiple bases from the previous single base. Next ABC demonstrated the need for the inclusion of support department overheads into product costs. Whilst the above three major improvements are salient and reflected the leap in management accounting practices, one key weakness of the TCS remains partly unresolved in ABC, which is the use a single standard absorption rate for each cost pool, determined by its cost driver . The use of the single standard absorption rate for each cost pool, determined by its cost driver. Currently ABC derives the absorption rate for each of its cost pool by dividing the total costs of each pool with total number of units of cost drivers for that particular cost pool, thus using the overhead absorption rate per cost driver. The absorption rate per cost driver is then used to calculate and absorb the cost absorbed for each cost objects 01 products. In order to demonstrate the point discussed, an illustration in Scenario 1 is given below:
absorption purposes. Secondly, ABC exposed the weakness of using a single blanket overhead recovery rate and therefore the need to absorb each type of overheads based on their respective cost drivers. In essence ABC is an extension of the TCS. It extended the bases for splitting the overheads into multiple bases from the previous single base. Next ABC demonstrated the need for the inclusion of support department overheads into product costs. Whilst the above three major improvements are salient and reflected the leap in management accounting practices, one key weakness of the TCS remains partly unresolved in ABC, which is the use a single standard absorption rate for each cost pool, determined by its cost driver . The use of the single standard absorption rate for each cost pool, determined by its cost driver. Currently ABC derives the absorption rate for each of its cost pool by dividing the total costs of each pool with total number of units of cost drivers for that particular cost pool, thus using the overhead absorption rate per cost driver. The absorption rate per cost driver is then used to calculate and absorb the cost absorbed for each cost objects 01 products. In order to demonstrate the point discussed, an illustration in Scenario 1 is given below:
The information given in Table 4 is costing information calculated for each unit of CHB and MGZ. It can be seen from the analysis above that the profitability of the CHB and MGZ using the TCS or ABC is almost the same. However using EBAC, it clear that CHB is the profitable one, and MGZ has actually been making a loss. The more efficient CHB have been subsidizing MGZ when the overhead cost is absorbed using the TCS or ABC. The percentage of change in profitability from adopting the more accurate EBAC as compared to TCS or ABC is very significant at 36.5 % and 37% for CHB and -304% and -298% for MGZ. Table 3 Calculation of EBAC overhead absorption rate- Kino Publishing Co Volume 25, Number 6
The information given in Table 4 is costing information calculated for each unit of CHB and MGZ. It can be seen from the analysis above that the profitability of the CHB and MGZ using the TCS or ABC is almost the same. However using EBAC, it clear that CHB is the profitable one, and MGZ has actually been making a loss. The more efficient CHB have been subsidizing MGZ when the overhead cost is absorbed using the TCS or ABC. The percentage of change in profitability from adopting the more accurate EBAC as compared to TCS or ABC is very significant at 36.5 % and 37% for CHB and -304% and -298% for MGZ. Table 3 Calculation of EBAC overhead absorption rate- Kino Publishing Co Volume 25, Number 6
Table 4 Cost and Profitability of CHB and MGZ under different costing methods - Kino Publishing Co
Table 4 Cost and Profitability of CHB and MGZ under different costing methods - Kino Publishing Co
Table 6 Calculation of ABC overhead absorption rate- Home Style Table 5 Calculation of TCS overhead absorption rate - Home Style
Table 6 Calculation of ABC overhead absorption rate- Home Style Table 5 Calculation of TCS overhead absorption rate - Home Style
Table 7 Calculation of EBAC overhead absorption rate - Home Style
Table 7 Calculation of EBAC overhead absorption rate - Home Style
Volume 25, Number 6
Volume 25, Number 6
Table 9 Percentage of Change in Profit from TCS and ABC to EBAC - Home Style The information given in Table 8 is the costing information calculated for total units of Kitchen, Bathroom and Dining Room. The results for Kitchen by using TCS show a profit of $16,750. However by using ABC the profits go up to $31,911. When compared to TCS, ABC is known to move cost from the high volume products to the low volume products. However moving overheads costs from high volume to low volume products without taking into account each product’s level of efficiency in using or incurring those overheads is wrong. Kitchen has in fact been making losses when overheads are absorbed using EBAC. The results for Bathroom are even more contradicting under all three methods. The TCS reported Bathroom as making a loss of $6,406 while ABC seems to suggest that it is actually making a profit of $1,053. Volume 25, Number 6
Table 9 Percentage of Change in Profit from TCS and ABC to EBAC - Home Style The information given in Table 8 is the costing information calculated for total units of Kitchen, Bathroom and Dining Room. The results for Kitchen by using TCS show a profit of $16,750. However by using ABC the profits go up to $31,911. When compared to TCS, ABC is known to move cost from the high volume products to the low volume products. However moving overheads costs from high volume to low volume products without taking into account each product’s level of efficiency in using or incurring those overheads is wrong. Kitchen has in fact been making losses when overheads are absorbed using EBAC. The results for Bathroom are even more contradicting under all three methods. The TCS reported Bathroom as making a loss of $6,406 while ABC seems to suggest that it is actually making a profit of $1,053. Volume 25, Number 6
Table 12 Calculation of EBAC overhead absorption rate- Pantai Volume 25, Number 6
Table 12 Calculation of EBAC overhead absorption rate- Pantai Volume 25, Number 6
Table 13 Cost and Profitability of Products under different costing methods- Pantai
Table 13 Cost and Profitability of Products under different costing methods- Pantai
The information given in Table 13 is costing information calculated for each unit of Throat and Nose eration. The cost information for X-ray cost is a good example of the different absorption characteristics of ABC
The information given in Table 13 is costing information calculated for each unit of Throat and Nose eration. The cost information for X-ray cost is a good example of the different absorption characteristics of ABC
Related topics:
Business and ManagementActivity based costingApplied Business
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