From the course: Accounting Foundations: Cost-Based Pricing Strategies
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The potential consequences of poor overhead assignment
From the course: Accounting Foundations: Cost-Based Pricing Strategies
The potential consequences of poor overhead assignment
- Okay, who pays for the overhead cost caused by a design change that's requested by a customer? Imagine that we have two companies that make passenger airplanes, we'll call them plane maker X and plane maker Y. Plane maker X has a terrible accounting system. Under plane maker X's poor accounting system, the additional overhead cost created by a design change is spread evenly across all the planes, both the standard generic right hand planes and the customized, one of a kind left handed plane. Here are the business mistakes that plane maker X will make because the company doesn't carefully identify what events caused overhead costs. At plane maker X a highly customized aircraft like the left handed plane are sold at a price that is too low. The customers who order these design changes that create the additional overhead don't have to pay for the overhead that they caused. At plane maker X, generic aircraft like…
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