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First in, first out (FIFO) vs. last in, first out (LIFO)
FIFO: first item received in stock was the first issued- the earlier purchase price.
LIFO: last item received, the first issued- the later purchase prices.
Average cost – materials are issued at the average cost of materials in stock
Relevant cost in Q models (EQQ): HOLDING AND ORDERING
ABC method: categories of importance
10 %- A items, very relevant to control
20 %- B items, relevant
70%- C items. Not relevant
A items can account for over 70 % of the total purchase cost for a period. Most sophisticated procedures
for planning and controlling stocks are applied to the A items.
Just-in-time approach: eliminate non-value added activities.
- More frequent deliveries;
- Stocks can be cut to a minimum
- Ordering costs substantially reduced
- EQQ declines

Cause-and-effect and arbitrary allocations
Allocations with significant determinants of cost are cause-and-effect allocations
Arbitrary allocations- not significant determinants of the cost.
Cost of resources used by cost objects- cause-and-effect should be used.
Different cost information-different purposes
Manufacturing organizations assign cost for:
1. For external profit measurement and inventory valuation;
2. To provide useful information for managerial decision-making
Manufacturing and non-manufacturing cost may be relevant for decision-making.
Not all costs assigned to products for inventory valuation and profit measurement –relevant for
Cost not affected by a decision (depreciation)- not relevant.
Simplistic systems:
- Inexpensive to operate;
- Extensive use of arbitrary allocations;
- High likelihood of reporting inaccurate product costs and generally result in a high cost of errors;
- Small number of first-stage cost centres/pools
- Use single second-stage cost driver

Sophisticated systems:

- More expensive to operate;

- More extensively on cause-and-effect allocations;
- Report more accurate product costs;
- Low cost of errors
- Use many first–stage cost centres/pools;
- many different types of second-stage drivers

Optimal costing system:

Is different for different organizations and should be determined on a costs versus benefits basis.

Simplistic system – in organizations with low proportion of indirect costs; standardized product range.
Sophisticated system - companies with high proportion of indirect cost

Departmental overhead rates in preference to a single blanket overhead rate

Blanket: single overhead rate for the organization as a whole
Departmental: indirect cost , separate overhead for each department
Cost centre allocation rates

First stage:
1. allocate overheads to production and service centres or departments
2. to reallocate the total service department overheads to production departments
Second stage:
1. calculation of appropriate departmental overhead rates
2. the allocation of overheads to products passing through each department.
Budgeted overhead rates vs Actual overhead rates
Budgeted recommended to use
Actuals cause:
- delay in the calculation;
- Fluctuations
Drury and Tayles(2005): survey on 170 companies
Cost Centres
- 35 % of companies use up to 10 cost centres
- 65% of companies use up to 20 cost centres
Allocation Base
- More than 50 % respondents use dir. Labour hours as cost as allocation base
- 50 % of companies use up to 2 cost drivers
Only 10 % use more than 10 different cost drivers