Ch 5 Flashcards
Product overcosting, strategic cosequence?
Product consumes a low level of resources but is reported
To have a high cost per unit
Over costed products lead to overpricing, causing these
Products to lose market share to competitors
Product undercosting, strategic cosequence?
Product consumes a high level of resources but is
Reported to have a low cost per unit
Under costed products will be underprice and lead
To losses from revenues
Product-cost cross-subsidization
If a company undercosts one of its products, it will
Overcost at least one of its products and vice versa
Broad averaging is less accurate when?
increases in both product diversity and indirect costs
When is it advantageous to use broad averaging?
This system of allocating costs is easy, inexpensive
And reasonably accurate with limited variety of products
And indirect costs
7 step simple costing system using single indirect-cost pool?
Step 1 identify products that are chosen cost objects
Step 2 identify direct costs of products
Step 3 select cost allocation bases for allocating indirect
costs to products
Step 4 identify indirect costs associated w/ each cost
Allocation base
Step 5 compute rate per unit of each cost allocation base
Step 6 compute indirect costs allocated to products
Step 7 compute total costs of products by adding all
Direct and indirect costs
In step 5 of the single costing system, how do you compute the rate per unit of each cost-allocation base?
Budgeted indirect-cost rate =
Budgeted total costs in indirect-cost pool/
Budgeted total quantity of cost allocation base
What’s the 5 step decision making process?
Step 1 identify the problem and uncertainties
Step 2 obtain info
Step 3 make predictions of future
Step 4 make decision among alternatives
Step 5 implement decision, evaluate performance and learn
Refined costing system
Reduces use of broad averages for assigning
Cost of resources to cost objects
Provides better measurement of costs of indirect
resources used by different cost objects
3 reasons for refining cost system?
1 increase in product diversity
2 increase in indirect costs
3 competition in product markets
3 main guidelines for refining a costing system
1 Direct-cost tracing
2 Indirect-cost pools
3 Cost-allocation bases
Direct-cost tracing
Identify as many Direct costs as economically feasible
Indirect cost pools
Expand # of indirect cost pools until each pool is
More homogeneous
All costs have similar cause-and-effect relationship with
Single cost driver used as cost allocation base
Cost allocation bases
Use the cost driver (cause of indirect costs) as the
cost-Allocation base for each homogenous
indirect-cost pool (the effect)
Cost driver
Cause of indirect costs
Homogenous indirect-cost pool
The effect
Activity-based costing (ABC) system, define, 2 advantages?
Refines costing system by identifying individual activities
As fundamental cost objects
Structures activity cost pools more finely with their
cost drivers
More accurate product costs are achieved by measuring
Cost-allocation bases for different activities used by different products
Activity, ex?
Event, task or unit of work with specified purpose
Ex. Designing products, operating machines, distributing products
First stage allocation of indirect cost pools? Example?
assigning and reassigning costs accumulated in support departments
Ex. Assigning and reassigning costs in departments
like HR and information systems
Second stage allocation?
Allocation of costs of activity cost pools to products
Main difference between activity based costing system and simple costing system?
ABC system assigns more precise allocation
bases to activities
The Cost hierarchy Categorizes various activity cost pools on basis of (3 ways)?
1 Different types of cost drivers
2 cost-allocation bases,
3 different degrees of difficulty in determining cause and effect
4 levels of cost hierarchy in ABC system?
1 output unit-level costs
2 batch-level costs
3 product(service)-sustaining costs
4 facility structuring costs
Output unit level costs
Costs of activities performed on each unit of product or
Service
In Output unit-level costs ,overtime, the cost of activity
Increases with additional units of output produced
Batch-level costs, examples
Costs of activities related to group of unit of product
Or service rather than individual unit of product or service
Ex. Material handling, quality inspection
Product sustaining costs (service sustaining costs), examples?
Costs of activities undertaken to support individual
Products or services regardless of # of units or batches
Produced
Ex. Design costs, R&D costs, marketing costs to launch new products, engineering changes
Facility sustaining costs, examples?
Costs of activities that can’t be traced to individual products
Or services but support organization as whole
Ex. Management compensation, rent, building security
What is difficult to find for Facility-sustaining costs?
Good cause and effect relationship btw costs and cost
Allocation base
5 tell tale signs when Activity Based Costing system is likely to provide the most benefits?
1 significant amounts indirect costs using only 1 or 2
Cost pools
2 all or most indirect costs are identified as output
Unit level costs
3 products make diverse demands on resources due to
Differences in volume, process steps, batch size, complexity
4 products company is well suited to make show small profits
Whereas products company is less suited to make and sell
Show large profits
5 operations staff disagree substantially about reported
Costs of manufacturing and marketing products + services
Activity based management (ABM)
Method of management decision making that uses
Activity-based costing info to improve customer
Satisfaction and profitability
6 major Decision types made under Activity Based Management (ABM)?
1 pricing
2 product mix decisions
3 cost reduction
4 process improvement decisions
5 design decisions
6 planning and managing activities
