Managing Unused Capacity Concept in Cost Accounting by Myhomeworkhelp.com is Very Effective
We, at myhomeworkhelp.com have devised a strategy to study how activity-based cost systems are more efficient than traditional cost systems. Traditional cost systems do not take into account unused capacity for overhead costs. Managing unused capacity homework help holds much significance in studying cost accounting.
The critical analysis will enable you to:
- Discuss concept of financial performance including said elements.
- Describe limitations and underlying assumptions.
- Explain difference between activities based cost approach and traditional cost approaches.
An activity-based costing evaluates cost of resources required to produce outputs.The below equation explains relationship in managing unused capacity assignment help.
Activity availability = activity usage + unused capacity
- In a firm there are 10 employees who work in supply chain team earning a salary of $2500/month.
- This leads to a total expense of $25000 incurred every month towards salary of the employees.
- Each employee processes 125 purchase orders in a month. Thus total number of purchase order processed in a month is 1250.
- Requirement of processing purchase order is 1000 a month given scale of production of firm.
- If we go by traditional cost approach, we will allocate entire salary of $25000 towards cost.
- However, in a modern approach using activity based system, $(25000/125) =$20 is cost allocated towards processing of a single purchase order.
- With total 1000 purchase orders getting processed in a month, firm incurs only $20000 worth of expense and remaining $5000 disbursed towards the salary is the unused capacity.
The above example clarifies the basic idea of managing unused capacity homework help.
Rewriting the formula
$25000 (cost supplied) = $20000 (cost used) + $5000 (unused capacity)
A financial statement reveals the total cost as $25000 while the cost incurred by activity-based approach is $20000.
Many firms consider the cost of resources i.e. $25000 a fixed cost. Although it does hold good in short-run, the logic fails to impress in the long-run. Relevant factors is at a risk of undergoing changes like increase or decrease in the number of resources and in the total number of purchase orders processed.
Some experts of accountancy term managing unused capacity assignment help as volume of variance. Counter-arguments are provided by the other segment is as follows:
- Volume variance uses aggregate amounts ignoring the quantity supplied or put to use.
- Volume variance takes into cognizance a set standard capacity instead of a practical capacity.
- Traditional approach of overhead allocation does not provide management information.
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