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C HAP TE R 1 1 Activity-based costing Teaching tips and points to stress Refining a costing system More refined cost systems are cost effective when (1) different jobs (customers,
services, etc)
consume resources differently, (2) competition in the output market is keen (accurate cost information helps companies decide what jobs to emphasise and how to price them) and (3) processing costs are lower.
Ask students, What jobs tend to be over- or undercosted?’ If the cost system
uses a single allocation base, then products that consume relatively more of that base
will tend to be overcosted, since all indirect costs are loaded on that base. Products that consume proportionally less of the base will tend to be undercosted. How can a manager tell if a cost system needs
refinement This is difficult, but several clues should spur management to examine the accuracy of their cost system (1) managers do not believe the cost data the system provides and may even keep their own private set of off-the- book records (2) the company loses bids it thought it priced high (3) the cost system has not changed much despite major changes in operations.
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