Bhimani, Horngren,
Datar and Rajan,
Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012 where they would be likely to get a larger return for their money. (It ought to be easier to reduce indirect costs since they are usually greater than DL costs and less attention has been directed to reducing them) Further, any benefit from reducing indirect costs is spread more thinly – it is not visible and so would not be likely to be rewarded. Some companies allocate all indirect manufacturing costs inline with manufacturing lead time. This gives employees a clear signal to reduce manufacturing lead time and these companies believe this benefit outweighs the disadvantages of less accurate product costs from the use of a single allocation base.
Eventually, employees are likely to reduce consumption of the single allocation base to a very low level (e.g. reduce manufacturing lead time to a very short time. At that point, the manufacturing lead time problem will be solved and some other problem will become the primary concern. Should management then change the cost system to motivate employees to attack the new problem Under what circumstances should the cost accounting system be used primarily as a proactive motivational tool Companies have traditionally used DLH and DL€ as allocation bases.
This is reasonable when (1) production is labour-paced, (2) DLH and DL€
are easily available, (3) indirect costs area small piece of the full-product cost pie and (4) companies have limited product-line diversity. Today, there is increased experimentation with new allocation bases because (1) more production is machine-paced; (2) advances in information technology make it feasible to collect
non-financial data such as MH, kg of the material, etc (3) indirect costs area more significant percentage of full-product costs and (4) companies have increased the diversity of their products.
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