1. Key features
Key features of Combined Cheeses Limited (CCL) that should be considered when selecting a costing system:
• Handmade cheese; significant due to production costs being heavily influenced by labour costs.
• Expanding quickly; require accurate costing information in order to remain efficient and competitive during growth.
• No purchasing power over suppliers; focus of managing costs of converting milk into cheese and minimising wastage costs.
• Distribution centre centralises quality control, storage, packing and shipping. Support department costs need to be allocated to the functional departments – factories.
• High level of product diversity; wide range of different cheeses each having a unique production process.
• Price …show more content…
Job costing deals with variety in the production process and will produce a separate cost for each job where the job is a run of production of one cheese type. Job costing will accurately accumulate costs of each job, tracing the specific labour hours and ageing for the unique cheese type. It does, however, require costs to be recorded which is not current practice at CCL.
A key requirement for CCL is being able to trace wastage, job costing will trace wastage to individual jobs to identify where wastage is occurring.
Absorption costing
Absorption costing includes all costs of production in the product cost. Direct materials and labour are traced directly to each job and overheads are allocated using Activity-Based costing (below).
Absorption costing gives managers pricing information as any price above the absorption cost will cover all long-term production costs, this informs managers whether competitive prices are sustainable. If CCL wishes to continue using volume of cheese as a performance measure for management, absorption costing will not be appropriate as it can lead to managers manipulating profit.
Actual …show more content…
Managers will know the minimum short-term price for each cheese that still covers variable costs of production. Since fixed costs are not relevant to short term decisions variable costing gives more informative pricing information for the short term than absorption costing.
Actual costing
Actual costing is the same as under Costing System A. Except with variable costing element of this system, direct costs and variable overhead are traced to each job and recorded at actual cost while fixed overheads are expensed as period costs.
Direct method
This aspect is similar to Costing System A, except under variable costing the variable overheads of distribution centre are allocated to the factories based on volume of cheese produced while fixed overheads are not allocated but expensed as period costs.
Conventional costing
Fixed overheads are treated as period costs under variable costing.
Variable overheads under conventional costing are pooled for each factory and allocated to jobs at a factory wide rate. The rate is based on period labour hours, labour hours are appropriate for CCL due to heavy reliance on labour in the production process. Conventional costing requires minimal data and is inexpensive but does not provide the detailed and accurate information that ABC
Key features of Combined Cheeses Limited (CCL) that should be considered when selecting a costing system:
• Handmade cheese; significant due to production costs being heavily influenced by labour costs.
• Expanding quickly; require accurate costing information in order to remain efficient and competitive during growth.
• No purchasing power over suppliers; focus of managing costs of converting milk into cheese and minimising wastage costs.
• Distribution centre centralises quality control, storage, packing and shipping. Support department costs need to be allocated to the functional departments – factories.
• High level of product diversity; wide range of different cheeses each having a unique production process.
• Price …show more content…
Job costing deals with variety in the production process and will produce a separate cost for each job where the job is a run of production of one cheese type. Job costing will accurately accumulate costs of each job, tracing the specific labour hours and ageing for the unique cheese type. It does, however, require costs to be recorded which is not current practice at CCL.
A key requirement for CCL is being able to trace wastage, job costing will trace wastage to individual jobs to identify where wastage is occurring.
Absorption costing
Absorption costing includes all costs of production in the product cost. Direct materials and labour are traced directly to each job and overheads are allocated using Activity-Based costing (below).
Absorption costing gives managers pricing information as any price above the absorption cost will cover all long-term production costs, this informs managers whether competitive prices are sustainable. If CCL wishes to continue using volume of cheese as a performance measure for management, absorption costing will not be appropriate as it can lead to managers manipulating profit.
Actual …show more content…
Managers will know the minimum short-term price for each cheese that still covers variable costs of production. Since fixed costs are not relevant to short term decisions variable costing gives more informative pricing information for the short term than absorption costing.
Actual costing
Actual costing is the same as under Costing System A. Except with variable costing element of this system, direct costs and variable overhead are traced to each job and recorded at actual cost while fixed overheads are expensed as period costs.
Direct method
This aspect is similar to Costing System A, except under variable costing the variable overheads of distribution centre are allocated to the factories based on volume of cheese produced while fixed overheads are not allocated but expensed as period costs.
Conventional costing
Fixed overheads are treated as period costs under variable costing.
Variable overheads under conventional costing are pooled for each factory and allocated to jobs at a factory wide rate. The rate is based on period labour hours, labour hours are appropriate for CCL due to heavy reliance on labour in the production process. Conventional costing requires minimal data and is inexpensive but does not provide the detailed and accurate information that ABC