Costing Systems
Costing Systems
Match the system to production
| System | Best fit | Unit-cost logic |
|---|---|---|
| Job costing | Distinct jobs, contracts or batches | Trace to job; allocate support cost |
| Process costing | Homogeneous continuous output | Average cost across equivalent units |
| Activity-based costing | Products consume support activities differently | Activity rate × driver consumption |
| Time-driven ABC | Time and practical capacity explain resource use | Capacity cost rate × required time |
No allocation is economic truth. It is a model whose usefulness depends on purpose, causality and cost of measurement.
Northstar: traditional allocation
Northstar makes:
| Model | Units | Machine hours per unit | Total machine hours |
|---|---|---|---|
| City | 1,000 | 2 | 2,000 |
| Cargo | 500 | 4 | 2,000 |
Factory support cost is £240,000. A machine-hour rate is £60:
| Model | Allocated overhead | Overhead per unit |
|---|---|---|
| City | 2,000 × £60 = £120,000 | £120 |
| Cargo | 2,000 × £60 = £120,000 | £240 |
The method assumes machine hours cause all support work.
Activity-based view
Northstar separates support resources:
| Activity pool | Cost | Driver volume | Rate |
|---|---|---|---|
| Setups | £120,000 | 60 setups | £2,000 per setup |
| Inspections | £72,000 | 240 inspections | £300 per inspection |
| Material handling | £48,000 | 1,200 moves | £40 per move |
Driver use:
| Model | Setups | Inspections | Moves | ABC overhead | Per unit |
|---|---|---|---|---|---|
| City | 10 | 30 | 200 | £37,000 | £37 |
| Cargo | 50 | 210 | 1,000 | £203,000 | £406 |
| Total | 60 | 240 | 1,200 | £240,000 |
Traditional costing overcosted the high-volume, simple City model and undercosted the low-volume, complex Cargo model. Before changing price, verify that setup and inspection counts are stable causal drivers rather than convenient data.
Time-driven ABC
Suppose order support costs £180,000 and provides 9,000 practical staff hours:
- standard order uses 0.25 hour: £5;
- custom order adds 0.50 hour: total 0.75 hour, £15.
Time equations can add complexity without creating a separate activity for every variation. Keep unused capacity visible rather than forcing it into product costs.
Model audit
Ask:
- Is the driver causal and controllable?
- Is practical capacity used rather than an unattainable maximum?
- Are idle resources separated?
- Would a different driver change pricing or product decisions?
- Does the benefit of precision exceed data and maintenance cost?
Quick check
If Northstar eliminates ten Cargo setups but resource spending does not fall, has it saved £20,000?
Answer
Research foundation
- Kaplan and Anderson, Time-Driven Activity-Based Costing, explains the capacity-rate and time-equation model.