One need not use different rates for different policies under different product.
Similarly the cost for the policies for Life Insurance can be calculated and so for the while business unit. Disadvantage: The disadvantage of the single flat rates is that it does not take into consideration the actual effort or support function performed for the particular product and considers each production similar way.
However using the flat rate applies the cost to both the policies at the same rate irrespective of the difference in the level of activities required for the two policies.
1-4 What is the total costs allocated to the three business units (Midwest, Gibson, Compton)?
Thus the cost of product so calculated is not accurate.
The product which requires less support activities are allocated more cost and the products requiring the more support activities are allocated less cost.
The cost allocation will affect the decision of the company on pricing of the products and the allocation of the resources to the different products. Thus in order to redesign the cost accounting system the direct and indirect cost should be identified properly and accurately. To identify the equitable basis of allocation of cost: Another important requirement for designing the cost accounting system is to identify the cost drivers so that the cost can be allocated to the products or services on the basis of the actual activity performed on those products and services. In the current system Gibson meets the first criterion as the indirect cost are identified in the corporate general ledger but do not meet the second criteria as there are a large number of cost items recording the specific cost types.
Also the accurate information on cost of various products will help the company in compensating the sales personnel properly and identify the cost improvement areas. In order for it to be practical to undertake the redesign of a company's cost accounting system, there are two general requirements. All the different cost items with unique allocation means would became very difficult to implement and so there is required to define few cost pools of the cost that are of similar types and identify the cost driver for those cost pools. Consider the CURRENT cost accounting system at Gibson which allocates support costs based on a flat rate of .25 per policy.
Further the calculation of cost of various activities and resources will enable the management to identify the major cost areas and the activities responsible for those costs. Thus the method of implementing the ABC technique is complex, time consuming and costly (Nayad, N., 2011) References: Nayad, N. Enter final values in table below after calculating.
The management can apply appropriate cost control measures to reduce the costs or increase their efficiency. Answer The activities required per policy for the four types of policies: The Cost pools and their activity rates are as under: Multiplying the Rate per cost driver with the activity level for each policy the support costs are calculated as under: Answers(Cost per policy) 3-2. Answer Average cost per policy under the ABC system for all the three companies are: The original rate was .25 per policy.