(b) The cost of furniture packs and other materials is assumed to vary in proportion to the number of
assembly hours worked. As a result the variable costs have been flexed in relation to the number
of assembly hours worked.
This, however, may not result in the most appropriate allocation of costs as we are told that the
furniture 'varies considerably in size, complexity and value'. It would therefore follow that the
assembly would also vary significantly between products.
The fact that the variable cost allocation may not reflect the true cost of assembly it may be
evidenced by the fact that there is a substantial favourable variance in the cost of furniture
assembled but a significant adverse one in terms of variable costs.
The company may consider using activity based budgeting as a more effective way of
determining what causes the variations in costs. |
