Costing Responsibility Centres and Products
Case Study: Wilkerson Company
Lessons learned from this topic and case study:
1. Managers need to be able to estimate the costs of different responsibility centres and products to assist with monitoring the performance of different departments and also to assist with decision making about product pricing, profitability of individual products, assist with decisions when making changes to product lines and various other managerial requirements such as controlling costs and valuing inventory for financial statements. 2. Dividing the business into cost objects such as departments or products can assist with creating greater accuracy when allocating costs to each ‘cost object’. 3. The more we break down the business into activities and cost objects, the greater the accuracy of allocating costs to each object. 4. Costs can be allocated as direct or indirect costs related to each cost object. Indirect costs must be estimated for each cost object and it is important to assess how much of the costs allocated to each object are indirect as the greater the proportion of indirect costs allocated, the greater the margin for error in these estimations. 5. Managers need to be careful of overpricing or under-pricing goods due to allocation of costs to each product. As was shown with the Wilkerson case on further analysis of costs using the activity based costing method the company had been under-pricing some goods while over pricing others. This was affecting their profits and their ability to make sound business decisions on the pricing of products to meet market demands. 6. Activity based costing is more complex to use however used correctly should improve the accuracy of allocating indirect costs to cost objects. This in turn produces more accurate allocation of costs and assists to make more informed management decisions. 7. Managers should weigh up the costs and benefits of using activity based...
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