Chapter 5 lecture Flashcards
direct costs are
traced
indirect costs are
allocated
Trade-offs to allocation methods
- less costly/ time effort
- less prone to error
- but not very precise/accurate
which method is this?
simplified methods
Trade-offs to allocation methods
- more costly/time effort
- more prone to error
- but more precise/accurate
which method is this?
complex methods
plant wide overhead rate equation
total estimated overhead
/
total estimated base
department-wide overhead rate equation
department total estimated overhead
/
department total estimated base
occurs when a prodct consumes a low level of resources but is allocated high costs per unit
overcosting
occurs when a product consumes a high level of resources but is allocated low costs per unit
undercosting
if a company undercosts one of its products, it will overcost at least one of its other products
product cost cross subsidization
- the overcosted product absorbs too much cost, making it seem less profitable that is really is
- the undercosted product is left with too little cost, making it seem more profitable than it really is
this occurs during what
product cost crooss subsidization
“peanute butter costing” wherby management uses broad averages for assigning the cost of resources uniformly to cost objects
broad averaging
a system that reduces reliance on broad averages for assigning costs and provides better measurement of the resources used by different cost object
refined costing system
3 principal reasons have accelerated the demand for refinements to the costing system
(reasons for refining a costing system)
- increase in product diversity
- increase in indirect costs with different cost drivers
- competition in product markets
there are 3 main guidelines for refining a costing system
- direct cost tracing - the more the better
- indirect costs pools - the more the better
- cost-allocation bases - the more unique the better
refines a costing system by identifying individual activites as the fundamental cost objects
(an activity is an event, task, or unit of work with a specific purpose
activity based costing (ABC)
categorizes various activity cost pools on the basis of the different types of cost drivers, cost-allocation bases, or different degrees of difficulty in an effort to more accurately identify determining cause and effect reltaionship
cost hierarchy
cost hierarchies that ABC systems use to identify cost allocation bases
- output unit level
- batch level
- product (or service)- sustaining
costs (related to the individual units of a product or service)
(which cost hierarchy is this?)
output unit level
costs (related to a group of output units)
(which cost hierarchy is this?)
batch level
costs (related to support a particular product or service without regard to the number of output units or batches)
(which cost hierarchy is this?)
product (or service) - sustaining
costs (related to costs of activites that cannot be traced to individual products or services)
(which cost hierarchy is this?)
facility sustaining
- significant amounts of indirect costs are allocated using only one or two cost pools
- all or most indirect costs are identified as output unit level costs
- products make diverse demands on resources because of volume, process steps, batch size or complexity
- 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
- operations staff has substantial disagreement with the reported costs of manufacturing and marketing products or services
signals that suggest that ABC implementation could help a firm
a method of management decision making that uses ABC information to improve customer satisfaction and profitability
activty based management (ABM)
a broad description of a process that includes decisions about pricing and product mix, cost reduction, process improvemnent and product and process design
ABM
