Management Accounting- Cost allocation. Case Study Material: Pond Accessories Ltd manufactures a variety of accessory equipment for farm effluent ponds and irrigation water races. For many years the company has used a conventional product costing system with direct labour hours as the only cost driver for overhead application. The firm is organised into five departments as follows: Production Support Machinery Cutting Fabrication Assembly The firm has altered its accounting system to get a more accurate picture of product costs. The aim is to enable management to price products more competitively. The most significant change in the accounting system is the introduction of departmental overhead rates. The cost drivers for the three production departments are as follows: Cutting (machine hours) Fabrication (number of parts processed) Assembly (direct labour hours) So far, the new accounting system seems to be effective. Management feel that the reported product costs are more in line with their intuition about what various products cost to manufacture. The accounting manager, however, is considering further improvement in the accounting system through the introduction of activity-based costing. Source: Adapted from Langfield-Smith, K., Thorne, H., Smith, D., & Hilton, R.W. (2015). Management accounting: Information for managing and creating value (7th ed.) (p. 314). NSW, Australia: McGraw Hill Australia Pty Ltd. Questions: 1. Describe the process of two-stage cost allocation in the development of departmental overhead rates, with specific reference to Pond Accessories Ltds information. 2. Explain whether the actual or budgeted support department costs should be allocated. 3. Draw a diagram that depicts the current system, which uses three departmental overhead rates. 4. Draw a diagram that depicts the contemplated system, which will use activity-based costing to assign manufacturing overhead costs to products.