Overview of Different Costing Systems

1328 Words Jan 30th, 2018 5 Pages
The current costing system is a simple costing system. This type of system is functional in terms of its simplicity, but often relies on allocations that may not be accurate. The choice of allocation drivers is usually based on convenience rather than the specific activity. In this case, the machine hours allocation seems to be arbitrary, at 2-to-1 brass to chrome. Yet, direct manufacturing labour is not allocated in accordance with the same ratio. If a unit of chrome takes 3.5 hours compared with 1.5 hours of brass, then allocating overhead costs on the basis of 2-to-1 distorts the true costs of that overhead. Thus, the way that Scotty is implementing its simple costing system is not delivering accurate cost information. Further, the addition of the new product (chrome) serves the purposes of reducing the overhead allocation for brass, making brass look more profitable than it would have looked without chrome in the lineup.
In addition to allocations, another potential weakness of this system is that it does not account for the other overhead categories. Many functions are simply lumped together as "overhead" and then allocated at the same 2-to-1 ratio. A more refined costing system would break out these overhead costs more finely and calculate them based on actual costs incurred by each product.
2. The activity-based costing approach seeks to break out the costs for each product (or customer, sometimes) via costing for each stage of the product's cycle to market.…