Performance management homework 1 - Essay Example

To determine this rate, all the machining, assembly, and fabricating direct costs must be multiplied with the multiply of their sum total. This calculation will help in determining or estimating the overhead rates. Precision Joinery Co. Manufactures high-quality wooden products for the house-building sector, specializing in window-frames, doors and kitchen cabinets. For many years, the company’s costing system has relied on the assumption that direct labor hours were the critical factor in the occurrence of overheads.

Accordingly, overheads were allocated to products on the basis of the direct labor hours taken to manufacture each product. The company’s relationship with its customers has changed in recent years. House-building companies have become more rigorous in their demands in terms of both product design and service support after delivery. The Managing Director of Precision Joinery Co. Has become increasingly disillusioned with the current product costing system, which he believes to be producing costs which do not reflect the change in the market environment initiated by the company’s customers.

Under duress, the Management Accountant has carried out a further examination of available costing information, some of which the Managing Director considers useful in a possible redefinition of the costing system. The activity based costing or the ABC cost allocation often assigns the manufacturing overhead costs of the products in a highly logical way than the normal or the traditional approach that simply allocates costs on the basis of the machine hours (Armstrong and Baron, 2005; p. 85).

The ABC initially assigns costs to activities that really lead to the overhead. After that, it assigns costs to activities or products that are actually demanding the activities. The overall result often maps the miscalculations on the true cost of the manufacturing overhead. Therefore, it is apparent that the ABC