chapter 11

Question 1

cost smoothing

Answer 1

describes a costing approach that uses broad averages to uniformly assign the cost of resources to cost objects when the individual products, services, or customers in fact use those resources in a nonuniform way. it can lead to under-costing or over-costing of products or services.

Question 2

product under-costing

Answer 2

occurs when a product consumes a relatively high level of resources but is reported to have a relatively low total cost. companies that use under-cost products may actually make sales that result in losses under the erroneous impression that these sales are profitable.

Question 3

product over-costing

Answer 3

occurs when a product consumes a relatively low level of resources but is reported to have a relatively high level of total cost. companies that over-cost products run the risk of losing market share to existing or new competitors.

Question 4

product-cost cross-subsidisation

Answer 4

means that at least one mis-costed product is resulting in the mis-costing of other products in the organisation.

Question 5

refined costing system

Answer 5

a costing system that results in a better measure of the non-uniformity in the use of resources by jobs, products, and customers. so, it provides a better measurement of the costs of indirect resources used by different cost objects no matter how differently the different cost objects use indirect resources.

Question 6

principal reasons for using refined costing systems

Answer 6

1. increase in product diversity (because of demand of customised products)
2. increase in indirect costs (more complex technology and increasing amount of resources for support functions)
3. competition in product markets (need for more accurate cost information to help make strategic decisions)

Question 7

guidelines for refining the costing system

Answer 7

1. direct-cost tracing
2. indirect-cost pools
3. cost-allocation base

Question 8

activity-based costing (ABC) systems

Answer 8

refine costing systems by focusing on individual activities as the fundamental cost objects. it calculates the costs of individual activities and assigns costs to cost objects such as products and services based on the activities undertaken to produce each product or service. it focuses on indirect costs and seeks a greater level of detail.

Question 9

activity

Answer 9

an event, task, or unit of work with a specified purpose, eg. designing products, setting up machines, etc.

Question 10

ABC systems’ features

Answer 10

1. ABC systems create smaller cost pools linked to the different activities
2. for each activity-cost pool, a measure of the activity performed serves as the cost-allocation base
3. in some cases, costs can be traced directly to products, which improves cost accuracy.

Question 11

time-driven activity-based costing (TDABC) systems

Answer 11

use available time to calculate the cost of a resource and to allocate costs to cost objects.

Question 12

cost hierarchy

Answer 12

categorises costs into different cost pools based on the different types of cost driver (or cost-allocation base) or different degrees of difficulty in determining cause-and-effect (or benefits-received) relationships.

Question 13

output-unit-level costs

Answer 13

resources sacrificed on activities performed on each individual unit of a product or service.

Question 14

batch-level costs

Answer 14

resources sacrificed on activities that are related to a group of units of product(s) or service(s) rather than to each individual unit of product or service.

Question 15

procurement costs

Answer 15

include costs of placing purchase orders, receiving materials, and paying suppliers. they are batch-level costs because they are related to the number of purchase orders placed rather than to the quantity or value of materials purchased.

Question 16

product-sustaining (or service sustaining) costs

Answer 16

resources sacrificed on activities undertaken to support individual products or services.

Question 17

facility-sustaining costs

Answer 17

resources sacrificed on activities that cannot be traced to individual products or services, but which support the whole organisation.

Question 18

four-part cost hierarchy

Answer 18

used to identify cost-allocation bases that are preferably cost drivers of costs in activity cost pools
1. output-unit-level costs
2. batch-level costs
3. product-sustaining/service-sustaining costs
4. facility-sustaining costs

Question 19

seven-step approach to costing

Answer 19

1. identify the chosen cost object
2. identify the direct costs of the products
3. select the cost-allocation bases to use for allocating indirect costs to products
4. identify the indirect costs associated with each cost-allocation base
5. compute the rate per unit of each cost-allocation base
6. compute the indirect costs allocated to the products
7. compute the total costs of the products by adding all direct and indirect costs assigned to them

Question 20

single indirect-cost pool system and ABC system differences

Answer 20

1. ABC system traces more costs as direct costs
2. ABC system creates more cost pools linked to different activities
3. for each activity-cost pool, ABC system seeks a cost-allocation base that has a cause-and-effect relationship

Question 21

activity-based management (ABM)

Answer 21

describes management decisions that use activity-based costing information to satisfy customers and manage profitability. ABM broadly includes pricing and product-mix decisions, cost reduction, and process improvement decisions, and product design decisions.

Question 22

department indirect-cost rates lead to the same product costs as activity cost rates if

Answer 22

1. a single activity accounts for a sizable fraction of the department’s costs
2. significant costs are incurred on different activities within a department but each activity has the same cost-allocation base
3. significant costs are incurred on different activities with different cost-allocation bases within a department but different products use resources from the different activity areas in the same proportions.
   when these conditions hold, using department indirect-cost rates rather than activity rates is adequate.

Question 23

‘tell-tale’ signs that ABC systems are likely to provide benefits

Answer 23

1. significant amounts of indirect costs are allocated using only one or two cost pools
2. all or most indirect costs are identified as output-unit-level costs
3. products make diverse demands on resources because of differences in volume, process steps, batch size, or complexity
4. products that a company is well suited to make show small profits, whereas products that a company is less suited to make, show large profits
5. complex products appear profitable, and simple products appear to be losing money
6. operations staff have significant disagreements with the accounting staff about costs of manufacturing and marketing

Question 24

behavioural issues that a management accountant should be sensitive to

Answer 24

1. gain support of top management
2. create a coalition of supportive managers through the value chain (best information about activities and cost drivers)
3. disseminate information about ABC throughout the organisation
4. look for small improvements initially
5. do not oversell ABC

Question 25

gain support of top management

Answer 25

this requires management accountants to lay out the vision for the ABC project and clearly communicate its strategic benefits, sell the idea to end-users, and work with members of other departments as business partners of the managers in the various areas affected by the ABC project.

Question 26

customer profiling and targeted pricing

Answer 26

used to refine product offerings to match individual customers’ price sensitivities.