Mayers Tap, Inc. Designing a Cost System
LeFevre, Robert J., Jr.
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Increased foreign competition, automation, and deregulation have caused American companies to question the efficiency of their cost accounting systems. The Cost accounting topic receiving the most attention is allocation of overhead to products. This paper and case analysis examine several methods of improving the accuracy of overhead allocation. First, the effect of changing the number of cost centers from 1 to 2 and then to 31 was examined. Second, the effect of using "activity" overhead bases rather than direct labor hours was investigated. Third, the assignment of costs to various cost centers was studied. In all three cases, the use of sophisticated cost allocation procedures resulted in substantially different product costs. If companies continue to use the outdated, traditional techniques, they risk discontinuing production of profitable products and selling new products that are unprofitable.