Chapter 5 Flashcards
What are the problems with Traditional Costing?
Some resources will not be consumed in proportion to the activity of the cost driver and therefore Products will be over or underpriced
How does ABC Costing work?
- Identify activity cost pools and assign OH: cost pools associated with significant activities that cause rather homogenous costs
- Identify cost drivers allocate costs: choose different cost-allocation base for each cost pool and allocate cost to products
Benefits of ABC
Benefits of ABC
Identification of products that were overcosted or undercosted by traditional methods
Traditional, volume-based costing systems overcost high-volume products and undercost complex, low-volume lines
It is also more accurate
Critique of ABC?
Critique ABC
Requires a significant amount of time and cost to implement Portion of OH still allocated to products by means of some arbitrary base (observations/subjective assessments of capacity & activities)
Considerations to switch to ABC
- Direct Labor is a Small Percentage of Total Costs
- Sales are Increasing, but Profits are Declining
- See more accurate Cost allocation
What is Customer-Profitability Analysis
It is quite possible for a company to have profitable products and, at the same time, incur customer-related costs that make certain customer relationships unprofitable
Customers that:
order in small quantities
order frequently
often change their orders
require special packaging or handling demand faster delivery
need special parts or engineering design
are generally less profitable than customers who demand less in terms of customized services
Comparing ABC and TBC cost
Overcosting or undercosting can show if products cost too much in TBC therefore the Profit could be higher or if they cost not enough, therefore, making loss or the option to be more profitable is not used.
DM + DL + OH = Product Cost
+ arkup = Target price which we can also compare in both methods
How can the Customer Profitability be analysed
Operating Income + Customer-Related Costs
