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7.2What are cost objects, cost pools and allocation bases? What role do they play in cost allocation?

What is the difference between cost allocation bases and cost drivers?

7.19What is the key difference between variable and absorption costing?

Class Activity 1

What is the key difference between variable and absorption costing?

Class Activity 2

Imagine a business which makes handmade tables and chairs Each table has the following direct costs (easy to calculate):

Direct material: 4 sq. metres of wood @ $10 per sq. metre = $40

Direct labour: 1.5 hrs @ $30 per hr = $45

It also budgets for manufacturing overhead costs per month of $5,000

How do we include these overhead costs in the cost of each table (using one plant-wide rate)?

Think about what information you would need and how you would use it

We need more information to allocate the overhead costs of $5,000 to tables (and chairs)

We need to know what drives / causes the costs before we can allocate them

For the moment, we will assume that labour hours cause the overhead costs, so that the products that take the most labour hours to make will have the most overhead allocated to them

Assume that 200 labour hours per month are budgeted for and that 100 tables are expected to be made in the month

Now calculate the overhead costs and the total manufacturing costs per table