Chapter 2

Question 1

What are the key trends in production?

Answer 1

1. More machines and computerised manufacturing
2. Smaller batch sizes
3. Reduced direct labour cost (less use of direct labour) and more indirect overheads

Question 2

CIMA definition of ABC

Answer 2

An approach to the costing and monitoring of activities which involves tracing resource consumption and losing final outputs.

Resources are assigned to activities and activities to cost objects based on consumption estimates. The latter utilise cost drivers to attach activity costs to outputs

Question 3

Cost Pool

Answer 3

An activity that consumes resources for which overhead costs are identified and allocated - each has a cost driver

Question 4

Cost Driver

Answer 4

A unit of activity level that consumes resources aka a factor influencing the level of cost/

ABC reduces the incidence of arbitrary apportionments.

Question 5

Selecting cost pools

Answer 5

Only select a few even if there are many to avoid it getting too complex

Question 6

What are the types of activities/cost pools?

Answer 6

1. logistical transactions
2. balancing transactions
3. quality transactions
4. change transactions

Question 7

Logistical Transactions

Answer 7

Concerned with moving materials or people, and tracking the progress of materials or work through the system

Question 8

Balancing Transactions

Answer 8

Concerned with ensuring resources required for an operation are available e.g. raw material

Question 9

Quality Transactions

Answer 9

Concerned with ensuring that output or service levels meet quality requirements and customer expectations e.g. inspections

Question 10

Change Transactions

Answer 10

Activities required to respond to change in customer demand, design specifications, scheduling changes, a change in delivery methods etc

Question 11

Selecting cost drivers

Answer 11

Only select one per cost pool - they must be relevant and easy to measure.

Usually the number of transactions relating to the activity

Question 12

What are types of cost drivers?

Answer 12

1. Transaction drivers
2. Duration drivers
3. Intensity drivers

Question 13

Transaction Drivers

Answer 13

The cost of an activity is affected by the number of times a particular action is undertaken e.g. batches of material

Question 14

Duration Drivers

Answer 14

The cost of an activity is affected by the length of time it takes to perform the activity e.g. set up time

Question 15

Intensity Drivers

Answer 15

Efforts are directed to determining what resources were used in the making of the product e.g. applying an additional weighting to o/s deliveries over home.

Question 16

When it ABC relevant and useful?

Answer 16

1. Indirect costs > direct costs
2. Complex products/services
3. Products/services are tailored to customer specifications
4. Some products/services are sold in large numbers and others in small

Question 17

What is the hierarchy of costs? (cooper)

Answer 17

1. Unit level activities
2. Batch level activities
3. Product level activities
4. Facility level activities

Question 18

Unit Level

Answer 18

The consumption of resources is very strongly correlated with the number of units produced (all direct costs)

Question 19

Batch Level

Answer 19

Resources are consumed in proportion to the number to batches produced - easier to visualise the changing cost that will come about in the long term by changing a product mix or production schedule. e.g. material inspection

Question 20

Production Level

Answer 20

Consumption of resources may be related to the existence of particular products i.e. if the activity is performed to sustain the existence of a product line (such as admin, product specification or purchasing)

Question 21

Facility Level

Answer 21

Accepted that some costs that related simply to being in business and can not in any way be related to the production line
e.g. ground maintenance, security, property taxes

Question 22

Deficiencies of ABC in decisions making

Answer 22

1. Historical
2. Based on current methods of organisation and operation
3. At product level contain allocation of joint/common costs

Question 23

Importance of ABC in decision making

Answer 23

Good for drawing attention to the likely impact on long-run variable costs of short-term decisions

Question 24

Advantages of ABC

Answer 24

CARDIAS

Control over overheads by managing cost drivers

Accuracy of cost per uni it better - improves pricing/strategy/decisions

Recognises that o/h’s are not all related to production and sales volume

Derive realistic costs in a complex business environment

Insight into what drives o\h’s

Services can you ABC

Question 25

Disadvantages of ABC

Answer 25

BASIL

Benefit may not justify the costs
Arbitrary choice of cost drivers and activities
Stakeholders may find complex to understand
Impossible to allocate all o/h costs to specific activities
Limited benefit if o/h’s are primarily volume related or in a small proportion.

Question 26

Implications of moving to ABC

Answer 26

1. Pricing based on more realistic cost data
2. Sales strategy more accurate - target those who are more profitable using ABC
3. Improve decision making - products with highest sales margins
4. Improve performance management: ABC used for budgeting and long term forward planning.