Question

In the following scenarios, would you recommend that management use a plantwide allocation system or activity based costing?

-       A.       B.    In bidding for jobs, managers lost bids they expected to win, and won bids they expected to lose.       -       A.       B.    The calculated cost of the products are very similar under different methods of allocating overhead.       -       A.       B.    The industry is very competitive and pricing is important.       -       A.       B.    The company has very few indirect costs.       -       A.       B.    The company produces few products, and the products consume resources in a similar manner.       -       A.       B.    The company produces high volumes of some of its products and low volumes of other products.

A. Plantwide Allocation B. Activity Based Costing

Answer 1

A plant wide allocation system is a method in which a single rate is used to allocate all of the company's manufacturing overhead cost to the production output. Whereas Activity based costing provides a more accurate picture of product costing leading to more accurate pricing decisions. This method is mostly suitable in case of complex business model where different types of products are produced or there are different activities associated with the products etc. В. 1 In bidding for jobs, managers lost bids they expected to win, and won bids they expected to lose - The management should use activity based costing in deciding the most competitive bids for the jobs, so that it is competitive and enables the management to place the lowest bids for jobs. A 2 The calculated cost of the products are very similar under different methods of allocating overhead - The management should use a plantwide allocation system in such a case since the cost of the products are generally similar under different methods of allocating overhead so the company can use easier method of allocating overhead instead of using its resouces in calculating activity based costs and allocating them to products. B 3 The industry is very competitive and pricing is important - In this scenario, management should use activity based costing for allocating the overhead to various products as it would provide more accurate cost of the products and thus would help the management in deciding the prices for the products which are competitive. А 4 The company has very few indirect costs - In the given scenario, Management should use a plantwide allocation system since the management is less likely to benefit from the activity based costing as there are very few indirect costs leading to less amount to be allocated to products. A 5 The company produces few products, and the products consume resources in a similar manner - In this scenario, Management should use a plantwide allocation system since the business model of the company is not complex and it only produces few products and the products consume resources in a similar manner. Hence there is almost same usage of resources by each product and hence plantwide allocation system is recommended. B 6 The company produces high volumes of some of its products and low volumes of other products - In this case, the management should use activity based costing. It is recommended because, the company might use more resources in producing low volumes of other products and less resources in high volume of some products. This might lead to incorrect valuation of product cost if traditional plantwide allocation rate is used. However if activity based costing is used, then the manangement will alllocate the overhead costs based on the resouces used by the products and it might provide correct picture of the cost of the products.