By Eldon S. Hendriksen
A common body of reference is used to judge the numerous parts of monetary accounting thought and perform. It encompasses a variety of theories that aren't inevitably in step with one another and that could result in varied conclusions. reviews are made at 3 uncomplicated degrees: the structural point, the semantic interpretation point, and the pragmatic point. Emphasis is put on the inductive-deductive and the capital industry techniques within the reviews, even though different methods are mentioned the place applicable. advised strategies are tentative and topic to alter as new facts turns into to be had.
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What drives the cost of the annual external audit, for example? ABC is sometimes introduced because it is fashionable, not because it will be used by management to provide meaningful product costs or extra information. If management is not going to use ABC information, an absorption costing system may be simpler to operate. The cost of implementing and maintaining an ABC system can exceed the benefits of improved accuracy. Implementing ABC is often problematic. Chapter Roundup • An alternative to absorption costing is activity based costing (ABC).
33 Study guide Intellectual level A2 Target costing (a) Derive a target cost in manufacturing and service industries 2 (b) Explain the difficulties of using target costing in service industries 2 (c) Suggest how a target cost gap might be closed 2 Exam guide Target costing may form part of a question comparing its use to other costing techniques or it may form an entire question including calculation of a target cost. 1 What is target costing? FAST FORWARD 12/07 Target costing involves setting a target cost by subtracting a desired profit margin from a competitive market price.
ABC uses many cost drivers as absorption bases (eg number of orders or despatches). Absorption rates under ABC should therefore be more closely linked to the causes of overhead costs. 3 Cost drivers The principal idea of ABC is to focus attention on what causes costs to increase, ie the cost drivers. (a) The costs that vary with production volume, such as power costs, should be traced to products using production volume-related cost drivers, such as direct labour hours or direct machine hours. Overheads which do not vary with output but with some other activity should be traced to products using transaction-based cost drivers, such as number of production runs and number of orders received.
Accounting Theory by Eldon S. Hendriksen