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Please can you give me another answer for the question Jola Publishing (6/08) part a, Explain why the overhead allocations have changed in the way indicated above.
I have the the answers in both the BPP kit and the Kaplen kit but unfortunately I have not understand the logic of the answers.Please can you give me another answer more SIMPLE and where I will be able to understand the LOGIC???
PLEASE REPLY
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Oh this is not easy, because you have to keep an eye on what is happening for CB and TJ. The changes of overhead allocations, ie. $0.05 higher for CB and $0.30 lower for TJ would tell you that the changes are not significant after switching from AC to ABC.
What you can say next is by getting information from the overheads involved (because you are explaining about overhead allocation). Property costs are large proportion (75%) of total overheads and the cost driver is also machine hour which is used by company when doing AC. Therefore there will be no significant effect for overhead allocations from property costs because you are still using machine hour to allocate costs.
One key thing that caused the overhead allocations to change is the quality control cost. This is 23% of total overhead and therefore if allocation method changed (from AC to ABC), it is probably effect the overhead to be allocated to CB and TJ. Since the cost driver is number of inspections, you must find some information from the above paragraph. It seems like CB needs frequent governmnet inspection but for TJ, only small number of inspections are carried out. Therefore, more overhead will be allocated to CB than TJ for quality control cost.
One last thing to say is the production set up costs. It is only 2% of total overhead, so it does not have significant effect like quality control costs. The cost driver is number of set-up and so you have to look for relevant information which is the production runs. CB goes through 4 long production runs and TJ goes through 12 production runs in a year. CB may not have significant effect as it only go through 4 production runs but TJ would be different, it is more accurate to use number of set-up for allocating production set-up costs for TJ because it goes through 12 production runs in a year, this caused the changes in overhead allocating.
In conclusion, the key to answer this question is to read the relevant information and then give some comments for each overheads, remember to note the materiality of changes from using AC to ABC. 🙂
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