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8.1Traditional costing systems apply manufacturing overhead costs to products using a volume-based cost driver such as direct labour hours.

8.2What do we mean by the term volume-based cost driver? What problems can arise with this approach to product costing in a modern manufacturing environment?

Class Activity 1

Traditional costing systems apply manufacturing overhead costs to products using a volume-based cost driver such as direct labour hours.

Class Activity 2

Side Example- Cost cross-subsidisation 20 Assume 3 couples eat out at a restaurant together: The record of each couple's consumption of resources for the evening are as follows: Couple A Couple B Couple C Entree $ 12.00 $ 24.00 Main Course 50.00 52.00 50.00 Drinks 2 beers 14.00 Wine 30.00 1 beer 14.00 2 squash 7.00 Champagne 24.00 Wine 30.00 Pudding 18.00 Desert Tart 15.00 Meringue 16.50 Coffee. 2 cappuccino's 7.00 2 cappuccino's 7.00 short black 3.00 Cafe late 4.50 105.00 171.50 101.50 The table decides to split the final bill equally ( smoothing ) 3 ways: In this way, each couple pays $ 126.00: However, Couple C subsidizes Couples A & B by $ 24.50 and couple A subsidizes couple B by $ 21.00 The smoothing has distorted the real costs of the evening out.Batty company has identied the following overhead activities, costs and cost drivers for the coming year: Activity Expected Cost driver cost Setup costs $30 000 Number of setups Ordering costs 13 500 Number of orders Machine costs 30 000 Machine hours Receiving 10 000 Number of parts The following two jobs were completed (hiring the year (amongst other jobs): Job 100 Job 200 Direct material $75 $85 Direct labour (5 not\": 10 hours @ $20 By) s 100 $200 Units completed 200 150 Number of setups 10 5 Number of orders 50 22 Machine hours 25 30 The company's normal activityis 2000 direct labour hours (DLH)