colorscope in

Topics: Cost accounting, Costs, Variable cost Pages: 12 (655 words) Published: October 29, 2013

Spring 2007

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15.963 Managerial Accounting and Control

Spring 2007

MIT Sloan School of Management

Colorscope, Inc.
What is the external environment that
Colorscope currently faces?

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Cheaper technology is lowering entry barriers.
Better technology is eroding quality-based
competitive advantage.
Intense competition from
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„
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small stand-alones,
large national chains, and
backward (vertical) integration by large printers.

15.963 [Spring 2007]

Managerial Accounting & Control

2

Colorscope, Inc.
„

Intense price pressures, and erosion of rents (high
margins).

What has Colorscope’s competitive advantage
been, and why?

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Reputation for quality - poor quality is extremely
costly because
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pre-press is the last stage at which an error can be detected, mistakes in advertised price can be expensive for content
provider to honor, and
merchandisers take great pride in their catalogs.

15.963 [Spring 2007]

Managerial Accounting & Control

3

Colorscope, Inc.

„

Fast turnaround – this is very valuable to the content
provider because it gives them more time to decide,
for example, how much to discount which items (i.e.,
it gives them more time to observe their competitors
actions in a fluid environment).

Actual costing differs from normal costing in
that overhead allocation rate = actual overhead /
actual volume of base.

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This is ex post allocation rate – if actual overhead
will not be known till year-end, then cost can only be
determined then.

15.963 [Spring 2007]

Managerial Accounting & Control

4

Colorscope, Inc.

For Colorscope, we have actual, as opposed to budgeted data, so this is an illustration of actual costing.
How many overhead cost pools are appropriate for Colorscope?

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The five departments – prep, scanning, assembly, output, QC. These are the major stages in the production process, and hours are not clocked in these departments in fixed proportions (Ex.9).

How do we determine the amount of overhead in each overhead
pool?

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„

„

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In the California Bikes example, we were given the amount of overhead in each cost pool (machining and finishing), and the only task was to assign the overhead from the cost pools to the jobs.
In this case, we have to first allocate overhead to the cost pools (the five depts), and then allocate overhead from the pools to the jobs. This is called a two-stage allocation system.

15.963 [Spring 2007]

Managerial Accounting & Control

5

Two Stage Cost Allocation

System
Wages

Cost of Resources

Depreciation

Rent

Others

Resources Drivers
Cost Pools

Job Preparation

Scanning

Assembly

Output

Quality Control

Cost Drivers
Materials

Cost Objects
15.963 [Spring 2007]

J 61001

J 61002

Managerial Accounting & Control

J 62001
6

Colorscope, Inc.

Let us begin with the first stage allocation.

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Wages are already tracked by dept (Ex. 11)
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Equipment depreciation is also tracked by dept.
Rent has to be allocated to the depts.
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Why is labor overhead here?

Using floor space as the allocation base makes sense

“other” overhead has to be allocated to the depts.
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We could use labor hours as the allocation base, since this is available.

15.963 [Spring 2007]

Managerial Accounting & Control

7

First Stage Allocation

Description

Prep

Scanning

Assembly

Output

QC

$8,000

$32,000

$64,000

$10,000

$11,000

$125,000

$500

$25,000

$10,000

$14,000

$500

$50,000

$2,000

$2,000

$8,000

$4,000

$1,000

Others (from exhibit 11)

$1,311

$5,246

$10,492

$1,639

$1,311

(1) Total Overhead

$11,811

$64,246

$92,492

$29,639

$13,811...
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