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


Comparing alternative costing systems



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Comparing alternative costing systems
A major reason for low-volume products are often undercosted is that low-volume products batch-level and product-sustaining costs should be spread over the relatively few units of low- volume products rather than spread like peanut butter overall products.
Solutions to review questions
11.1
Cost smoothing
describes a costing approach that uses broad averages uniformly to assign the cost of resources to cost objects when the individual products, services or customers, in fact, use those resources in a nonuniform way.


Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012 One way of determining if cost smoothing is occurring is to examine separately how individual products (services, customers, etc) use the resources of the organisation and to compare the results with the way the accounting system represents that usage.
11.2
Overcosting may result in competitors entering a market and taking a market share for products, when a company erroneously believes those products to be profitable.
Undercosting may result in competitors selling products on which they are in fact losing money, when they erroneously believe them to be profitable.
11.3
Costing system refinement means making changes to an existing costing system that results in abetter measure of the way that jobs, products, customers and soon differentially use the resources of the organisation. Three guidelines for refinement are
a
Classify as many of the total costs as direct costs as is economically feasible.
b
Select the number of indirect-cost pools on the basis of homogeneity.

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