The tool to allocate the overhead costs

The manufacturing industry of the 21st century is marked by increase in automation of production, growth in demand for customized products and competitive product markets. The increase in automation and product diversity entails a high investment in capacity resources which subsequently leads to an increase in proportion of overhead costs in the total cost structure of companies. In order to remain competitive in the market, managers require refined costing systems to accurately allocate these costs to products (Horngren et al. 2015, Pg. 157).   In the last decades, ABC system introduced by (Cooper Robin, Robert S. Kaplan 1988) has gained widespread acceptance as a tool to allocate the overhead costs associated with capacity resources to products and services. The usage of multiple activity cost drivers as the basis for cost allocation enables a more accurate product costing as compared to the traditional cost accounting system.

In addition to a refined costing methodology, another advantage of the ABC system is its ability to decouple the supply of and the demand for capacity. This feature of the ABC system enables managers to quantify the costs of unused capacity (Balakrishnan et al. 2012). The efficient management of these unused capacity costs is of utmost importance for companies investing in modern production systems (Santana et al. 2017). The proponents of ABC argue that these costs of unused capacity should be reported separately as period costs and not allocated to individual products (Kaplan, Robin Cooper 1992). However, quantitative research efforts focusing on the effects of such allocations have been minimal. The research work performed in the scope of this thesis is aimed at quantitatively evaluating these effects.

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The objective of this thesis is thereby to perform an analysis of the effects of unused capacity cost allocation to products. To do so, multiple resource sharing multi-product manufacturing environments have been simulated using MATLAB for computation of product costs using ABC. The unused capacity costs are allocated to products using two possible approaches and the resulting effects of such allocations in particular are analyzed under the scope of this work. Additionally, an analysis on the unused activity costs and its influencing parameters has been performed. Overall, a framework has been developed that could be used by managers to verify the effects of redeployment of resources and processes towards unused cost reported in an activity.

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