2nd ICAI 2022

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International Conference on Automotive Industry 2022

Mladá Boleslav, Czech Republic

The comparison of both described methods in the second chapter of this paper can be demonstrated on following the example. The company operating in the automotive industry needs to find its own cost of production based on absorption costing described by formula (1):

direct costs (material) + dicrect costs (wages) + other direct costs

+ production overhead costs own costs of production

(1)

Related to the allocation of all overhead costs (environmental and other costs), the company uses the method called overhead rates costing that is described by formula (2):

We can consider that the analysed company produces 3 products (A, B and C) and uses the total sum of direct material as the overhead rates costing base. The company reported total production overhead cost in the amount of 300,000 EUR (from which 286,000 EUR represent environmental costs incurred only on the production of the product C) and knows the following information about direct cost as shown in Table 1.

Table 1: Direct costs incurred on production Costs Product A

Product B

Product C

Direct material (EUR / piece) Direct wages (EUR / piece)

55.00 27.00 20.00

180.00

25.00 96.00 30.00

32.00 18.00

Other direct costs Planned quantity of production (pcs)

6,000

3,000

2,200

Source: own elaboration (2022) The data reported by the analysed company that uses the outdated and incorrect method of allocation of environmental costs on its production are shown in Table 2. All calculations and their results were processed and based on formulas (1) and (2).

Table 2: Incorrect allocation of environmental costs on production based on Figure 1

Costs

Product A