My audit of the exhibits and the effectiveness of the company’s current accounting referred to in Exhibits 1-5 which report the most recent prioritization and analysis utilized, also include an identification of the cost drivers and advice on the way in which the cost schedule listed can be readjusted to include all of the activities needed for the production of products. In my opinion, this projected accounting based on services associated with the products presents fairly, in all material respects, the information set forth therein when read in conjunction with the related expenses, cost statements, and projected sells.
Whenever possible overhead costs cannot be traced directly to product lines, then costs should be allocated on the basis of transactions. Since transactions cause costs to be incurred; this is activity-based costing (ABC). The complexity of utilizing this methodology is only as complex as the firm itself. A product that causes 3% of the total transactions for receiving components would be allocated 3% of the total cost of receiving components.
The product costs for material, direct labor, and set-up labor is the same as for my revised unit costs (Exhibit 3), and to allocate other overhead costs. I just estimated how many transactions occur in total and are caused by each product.
Traditional costing involves allocating overhead costs to different departments based on a single cost driver. Currently in this firm, the single cost driver is labor dollars. The company assigns $4.39 of overhead per $1 of labor.
On the other hand, ABC uses multiple different cost drivers. Different overhead costs will use different cost drivers. For instance, machining costs will be based on the number of machines in each department; electricity costs will be allocated depending on labor hours in each department, and so forth.
Under the new method, the flow controllers have the highest product cost by far $100.48 per unit. This is very different from the previous...