What is costing system$$refinement$?$ What are the three guidelines for$$refinement$?$

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Part $1$

Costing system refinement

A$.$

describes a costing approach that uses broad averages for assigning the cost of resources uniformly to cost objects when the individual products or$$services$,$ in$$fact$,$ use those resources in$$non$-$uniform ways.

B$.$

is a process used to categorize various activity cost pools on the basis of the different types of cost$$drivers$,$ or$$cost$-$allocation bases, or different degrees of difficulty in determining$$cause$-$and$-$effect $($or$$benefits$-$received$)$ relationships.

C$.$

describes an$$event$,$ task, or unit of work with a specified purpose. Consistent with its more strategic$$focus$,$ costing system refinement identifies activities in all functions of the value chain. Costing system refinement first calculates the costs of individual activities and then assigns costs to cost objects such as products and services on the basis of the mix of activities needed to produce each product or service.

D$.$

means making changes to a simple costing system that reduces the use of broad averages for assigning the cost of resources to cost objects and provides better measurement of the costs of overhead resources used by different cost objects.

Part $2$

The three guidelines for refinement$$include:

A$.$

Identify the products that are the chosen cost objects.

Identify the direct and indirect costs of the products.

Compute the total cost of the products by adding all direct and indirect costs assigned to the products.

B$.$

Set cost reduction targets in terms of reducing the cost per unit of a$$cost$-$allocation base in different activity areas.

Perform an analysis of the factors that cause costs to be incurred$($cost drivers$)$ in order to identify opportunities for improving the way work is done.

Evaluate whether particular$$nonvalue$-$added activities can be reduced or eliminated.

C$.$

Select the activities and$$cost$-$allocation bases to use for allocating indirect costs to the products.

Identify the indirect costs associated with each$$cost$-$allocation base.

Compute the rate per unit of each$$cost$-$allocation base.

D$.$

Classify as many of the total costs as direct costs as is economically feasible.

Expand the number of indirect cost pools until each of these pools is more homogenous.

Use the$$cause$-$and$-$effect criterion, when$$possible$,$ to identify the$$cost$-$allocation base for each$$indirect$-$cost pool.