Costing System

1. Costing System

1.1 Illustrate the costing system currently used by Devon Quality in Cost Centre 3

The costing system currently used by Devon Quality Dairy in the Cost Centre 3 is a traditional costing system this is because in this case study Devon Quality Dairy are allocating there expenses to products using volume based drivers. In this case study, the resources consumed by Devon’s Cost Centre 3 are depreciation, labour, utilities and other, which are all of the costs that have been incurred in production that cannot be traced directly to the products.

The traditional costing system uses a single plantwide overhead rate based on output volume to allocate factory overhead costs to the products. The factory overhead rate is total factory overhead divided by the cost driver. In this case the cost driver is pounds of butterfat. The pounds of butterfat sold are chosen as the cost driver for Devon’s because the pounds of butterfat are attributed to Devon’s purchase costs, which were indicated in the information in the article.

1.2 Comment on the appropriateness of “pounds of butterfat” as an allocation base for the overhead costs in Cost Centre 3. Would you suggest a different allocation base?

Pounds of Butterfat as an allocation base for the overhead costs in Cost Centre 3 aren’t very appropriate. This is because the costs in Cost Centre 3 don’t actually reflect the specific activities that are performed or costs in this cost centre. In Cost Centre 3, the overhead costs are depreciation, labour and utilities. These overhead costs have absolutely no correlation with the amount of pounds of butterfat used per product. Depreciation expense is incurred from the devaluation of the factories machinery, labour is used to operate and maintain this machinery, and utilities are all of the utility costs that are incurred by the factory within