Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed


Performance measures and absorption costing



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Performance measures and absorption costing
This section emphasises management’s incentives to manipulate AC OS. To increase AC OS, managers increase production and defer fixed manufacturing costs in the increased ES. This incentive opposes recent attempts to reduce (e.g. JIT). Conversely, managers might also decrease AC profit by drawing down, if they have met this year’s target profit. Ask students, Under what conditions is lengthening the time period used to evaluate performance likely to be most effective Ans When managers expect to be in the same position for the next 3–5 years The recent increase in managers mobility (whether voluntary or not) can limit the effectiveness of this proposal. Again stress the importance of multiple evaluation criteria, such as occurs in the balanced scorecard (see Chapter 22). The object is to get fixed manufacturing costs into the individual product costs. The only way to do this is to unitise the fixed manufacturing costs through a fixed manufacturing cost rate. To do so, we need to choose a denominator volume. This choice is the subject of Part II. Stress that this choice arises in AC but not VC or throughput costing. Neither VC nor throughput costing unitises fixed manufacturing costs since they are not attached to individual products, but are expensed as a lump sum in the period incurred.

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