Lehigh Steel

Wilkerson employs a Normal Cost System, which means that they use predetermined overhead rates along with actual costs for direct material and direct labor. Normal costing systems are appropriate when overhead costs are a relatively small percentage of total manufacturing costs and product diversity is limited. For Wilkerson, normal costing does not make sense. Overhead costs make up over 50 percent of total manufacturing costs and their product offering is relatively more diverse. This indicates that the current accounting system in place may be distorting costs significantly. Supporting data:

Under an ABC system, the allocation of costs to products is achieved through at least four analytical steps. Firstly, costs are grouped into activity levels. Secondly, cost drivers are

• This cost method does not provide the best system for JDCW’s cost allocation. By using only three overhead rates the present system grossly undermines the true production costs since other activities of the production process are not acknowledged.

Lehigh Steel is a company specialised in the production of specialty steels for high strength, high use applications. In 1988 the company experienced record profits, but then in 1991, it reported record losses due to the decreasing demand as a result of recession. After the crisis, the demand rose again, but Lehigh Steel could not transform its revenue into profits. Therefore the management at Lehigh decided to rationalize the product mix to address the

3) It is still a method of allocation of costs, therefore, the problems arise in absorption costing system will appear in ABC as well.

The current method of apportioning production overheads based on direct labour hours can be described as a traditional approach to product costing. In a manufacturing company’s financial statements, each item produced must be allocated some of the production overheads to make the statements compliant. Sometimes the individual costs of these items can be calculated incorrectly based on overall production overhead and the system of allocating in place, however the overall financial statement can still be accurate. This traditional method of allocating the production

1. The current costing system is a simple costing system. This type of system is functional in terms of its simplicity, but often relies on allocations that may not be accurate. The choice of allocation drivers is usually based on convenience rather than the specific activity. In this case, the machine hours allocation seems to be arbitrary, at 2-to-1 brass to chrome. Yet, direct manufacturing labour is not allocated in accordance with the same ratio. If a unit of chrome takes 3.5 hours compared with 1.5 hours of brass, then allocating overhead costs on the basis of 2-to-1 distorts the true costs of that overhead. Thus, the way that Scotty is implementing its simple costing system is not delivering accurate cost information. Further, the addition of the new product (chrome) serves the purposes of reducing the overhead allocation for brass, making brass look more profitable than it would have looked without chrome in the lineup.

For successful implementation of ABC costing system, there is a procedure which needs to be followed. The first step is to divide

As corporate cost is the cost associate with Treasury cost, Human resource management cost. Acitivity based costing seeks to identify cost drivers that are directly link all the activities e.g. support activities and production activities to the product manufactured or service provided. The cost of all those activities are assigned to products or services via the activity cost driver, according to the each product relative consumption of these activities. Allocating corporate overheads based on the use of volume related cost driver alone can produce the misleading cost information such as inappropriate allocation can lead to faulty conclusions about the relative product profitability.

The objective of this note is to analyse the costing system used by our company. This article is specified in the following aspects: explaining why direct labour hour is not an appropriate basis for assigning overhead in traditional costing system, identifying the key drivers of manufacturing overhead, discussing pros and cons of using activity-based costing system and giving recommendation on product pricing.

In the traditional management system, the main emphasis is on the volumes allocated to overhead costs and overhead items. The main costing element under it is the Activity Bases Costing (ABC). ABC tries to utilize cost drivers in terms of both volume and nonvolume of activities and raw materials. Managers

| This criterion is not fit for mass production. Nowadays labor intensive production is used for the elite market.

Nowadays, the development of technology allow the company reduce the cost from direct labour and material cost, but the indirect or overhead cost become significant high. Therefore, price decisions on each product become essential. ABC costing system is a form of splitting overhead costs into different overhead activities. The costs are then allocated to products or projects proportionally by their cost driver activity levels. In another words, this system result the manager to look at the more accurate overhead cost from each products which they producing, then find out the intrinsic value of the product to make a fair price decision.

Cost accounting information play a crucial role for manufacturing organizations in making internal decisions. It is important for management to understand the cost implications of any decisions that they make for their organizations. Managerial accounting under which cost accounting lies, provides the management with a break-down of internal manufacturing and operational costs that help them in making the right decisions for their organizations. Some of the decisions that are made using cost accounting information include pricing decisions, production quantity decisions and inventory management decisions. It is important for manufacturing firms to monitor internal costs and control them in order to realize profits. This presentation will

Since the trading has started, the use of financial accounting has put into effect in the contemporary civilisation but it is later on that cost accounting began to make its appearance. The cost accounting system was first adopted in Robert Loder’s farm accounts in 1610-20 (Banerjee, 2014). Since then, the costing system has continued to evolute until up to now. There are two well-known costing systems. Firstly, the Conventional costing systems utilise the direct material and direct labour to products and assign the manufacturing overheads to products based on the volume-based cost driver (predetermined overhead rate) and secondly, Activity-Based costing is method that utilised multiple cost driver and allocation bases to trace overhead cost to final products (Cooper & Kaplan, 1991). As a result, these cost information was useful for external reporting, performance evaluation and analysis, and decision making and planning.