Chapter 5, Problem 5.1Q

What is broad averaging, and what consequences can it have on costs?

To determine

Broad Averaging:

Broad averaging is also known as peanut butter cost is a costing approach of distributing the overall overhead cost of resources on the average basis to the associate cost of product.

Indirect Cost or Overheads:

Indirect cost is that cost which cannot be directly identified with the manufacturing of a particular product.

To explain: Broad averaging and consequences of broad averaging on cost.

Answer to Problem 5.1Q

• Broad averaging is the costing approach of allocating the overall indirect cost of manufacture to the associated product cost. The use of this costing approach is to find out the estimate cost of a particular product.
• The consequence of broad averaging is that it does not tell the actual estimation cost of a product, it leads to over estimation or under estimation cost of a product.

Explanation of Solution

• Broad averaging helps to allocate the indirect cost or overhead cost of manufacture on the basis of percentage of total cost or on average basis to the associate cost of a product.
• A manufacture cannot determine the actual estimation cost of a product. The broad averaging costing approach leads to undervalued or overvalued the cost of a product.

Conclusion

Broad averaging helps to distribute the overhear cost and the consequences of broad averaging is that the cost of a product leads to over costing or under costing.