Unit Cost Allocation Accounting SystemsI. Introduction: Costing SystemsThe market environment that firms have to operate in is frequently undergoing change with continually rising rivalry. Therefore organizations have to manage costs much more proficiently to ensure optimization of product margin above production costs. Accounting is largely involved with giving information to management and those who make decisions. Therefore it is imperative that measurement of the cost items be accurate in allocating cost for each unit of product. Brilliant Accents Company uses the traditional way to cost management referred to as full costing as is evidenced in their unit costs accounting.
Using this means, total cost is divided into direct plus indirect costs. Direct costs can be attributed directly to unit product while indirect costs/overheads include other elements of cost which cannot be attributed directly to units of product but are a result of general operation of the firm (Hermanson, Edwards and Ivancevich, 2007). For firms producing more than one brand or product type, allocation of overheads to a particular unit produce becomes more of a problem because all units cannot be allocated equal unit cost.
For a business like Brilliant Accents Company, one of the systems that can be used for allocation of overheads to particular unit product is by viewing overheads as service renderers for individual cost units (Atrill and McLaney, 1995). Since unit cost is not to be allocated equal portions of overheads, managers must identify observable measures for use as allocation basis. Brilliant Accents uses a system of allocation of overheads per hours used up in production between the two products. Although there is no totally accurate method for allocating overheads to unit cost, the level of accuracy in measurement of unit cost should uphold the Accrual Concept.
The Accrual Concept requires that all costs associated in production of a particular unit of a commodity be apportioned to it in the accounts (Mongiello, 2012). The system in use for allocation of overheads in Brilliant Accent falls short of acceptable levels of accuracy in that allocation of machine costs between Brass and Chrome product types is ambiguous in respect to machine repairs and maintenance. Manufacturing overheads other than machine costs seem to be arbitrarily allocated between the two product types and the method used to arrive to this allocation is not explicitly displayed in the accounts.
A more accurate system under the full/absorption costing employed by Brilliant Accent would be allocation of overheads by cost center apportionment. Full costing, however, has been criticized over its use of past cost and restriction of future costing to outlay cost only. II. ABC System for Unit Cost AllocationThe traditional cost management systems that were employed by organizations in the past have proven to be inadequate in the modern management context.
Therefore there is need for a more accurate cost allocation base of overheads for unit produce in multi-product firms like Brilliant Accent. Changes in the operating environment and increasing market competition have led firms to pay closer attention to overhead allocation. In firms producing more than one brand product, failure to accurately account overheads to unit cost may mask the actual performance of individual products in contributing towards profitability of the firm (Mongiello, 2012). The firm might actually be holding unprofitable products in their production lines at the expense of more profitable ones.