Essay Example on Income and cash flow differ as they are Calculated

This basis assumed that indirect costs incurred had a direct impact on the production of the product Floor area was another basis used to apportion both heating and rent overheads relating to the area occupied by each department or cost center Machine value was used as the basis of apportioning machine depreciation and insurance overheads Machine hours were used as the basis of apportionment for machine power and re apportionment maintenance since both machine power and maintenance influence the number of hours a machine will run Lastly number of employees is the basis used for the apportionment of re apportionment administration since this overhead is determined by the number of employees in the company In conclusion apart from the indirect labor apportioned on the basis of number of employees the apportionment of the other overheads was well reasoned in the original costing method In the proposed costing method indirect labor was apportioned on the basis of the number of employees since the amount of indirect labor cost was related to the number of employees Further rent and heating were also apportioned on the basis of number of employees The reasoning was that the rent and heating overheads paid were dependent on the number of employees per cost center Machine insurance depreciation and power were apportioned on the basis of machine hours the reasoning was that all these overheads determined the machine hours 

Reapportion maintenance was apportioned on the basis of machine value the reasoning was that reapportion maintenance affected the value of the machine while reapportion administration was apportioned on the basis of floor area In a nutshell the apportionment of rent and heat on basis of employees machine insurance and depreciation on basis of machine hours and reapportion administration on basis of floor were based on poor reasoning in the proposed costing method b The Sales Director s view that the proposed costing method is superior because it reduces the overheads chargeable to the Sports Clothing and Sports Equipment cost centers is biased and myopic in nature This is because although the overheads chargeable to these two cost centers reduced from 687 423 to 657 735 for Sports Clothing cost center and from 711 452 to 664 209 for Sports Equipment cost center this made the total reduction in costs in these two cost centers amount to 76 931 However the same amount of 76 931was transferred to the Sports Shoe cost center whose cost increased from 531 125 to 608 056 making the overall total overhead cost in the proposed costing method remain 1 930 000 as in the original costing method Hence the Sales Director s view that the proposed costing method was superior was not right since the proposed costing method did not reduce the total overhead costs incurred by the company instead the costs were shifted from one cost center to another A new costing method should ideally lead to overall decrease in costs increase in efficiency and productivity and hence a more cost effective use of the available resources