Exam 2 Flashcards
activity
any action that an organization undetakes to make or deliver a good or service
Technology and increased productivity place emphasis on
cost measurement and control
Activity based cost system costs
- Significantly more info required
- Increased measurement and processing cost
- Resistance to change is hard to overcome
Variable costs involve changes in ___; fixed costs involve changes in _____
volume
buildings and equipment
Automated processes have relatively _____ overhead from _____ so inaccuracies can lead to____
high
machine setups
questionable cost info
Costs fluctuate per month and we want to provide customers with ______, so we use the ____
steady prices
predetermined overhead rate
Fixed costs are related to #units produced, T/F
F
indirect costs
costs that cannot be traced to a department in a cost-effective manner
Activity-based cost system benefits
- Overhead more traceable, allocation is activity- rather than volume- based.
- Product costs more accurate
- Management makes better decisions with more accurate info
Activity based cost systems
- assign costs to pools according to causal activity
- allocation rate
- allocate
Information is relevant if it is:
1) Future oriented
2) different between choices`
Automation produces more ____ costs
utilities
Estimated costs are used to make decisions about _____. Fact or relevant? Use if it _____.
the future, relevant, adds value
Avoidable costs are
costs that can be eliminated by making certain choices
Cost object
what you want to know the cost of
Cost driver
what causes a cost for an activity
Relevant costs can be avoided by____ at the unit level? Batch level? Product? Facility?
Eliminating one unit of product
Not producing another batch
Design of product/not producing product
Some can be avoided by segment elimination
unit-level activities
overhead increases if one additional unit is produced
Direct costs consist of ____ and can or cannot be _______
direct materials, direct labor, overhead
traced to departments
ABM Activity Based Management
Managing organization’s activities to add the greatest value by developing products that satisfy needs of an organizations’ customers
If relevant revenue is greater than avoidable cost _____, and if less, _____
eliminate, continue operating
Predetermined overhead rate
estimated overhead of the year/estimated allocation base per year
Segment elimination considerations
employee lives disrupted
sales of diff products frequently interdependent
what to do with space freed?
Special order decision considerations
Can avoid unit and batch costs
Will we profit?
build a new relationship? regular customers could demand a lower price
consider capacity
batch-level activities
overhead increases if you create one more batch, setup costs
Actual cost
fact or relevant?
past or future?
fact
past, after costs have already been incurred
product level activities
relates to entire product
facility level activities
utilities, factory-wide
Past manufacturing processes were ____ and used a ______ overhead rate based on ______ to allocate costs
labor intensive
single companywide
direct labor hours
opportunity costs
what you give up by choosing an option
target pricing
customer’s WTP?
Adjust cost to meet margin
target costing
Desired cost set before product is designed
cost-reduction a focus
Benefits of a traditional cost system
less expensive
requires less time, effort, and data
good for companies with little automation and low overhead
Traditional cost system costs
provides only estimates
increased overhead, increased inaccuracies
can lead to poor managerial decisions
Managers used reliable cost estimates to
- price products
- evaluate performance
- control operations
- prepare finanial statements
TQM total quality management
continuous strategic/systematic problem-solving by personnel at all levels of organization to eliminate waste, defects, and non-value added activities
managing quality costs to garner highest level of customer satisfaction
capacity
max amounts of product with resources on hand
allocation rate
total cost/cost driver activity
allocated cost
allocation rate x weight of cost driver activity
segment elimination decision considerations
- determine relevant revenue
- determine avoidable cost
- compare
quantitative
consider costs, increase in profits, or other numerical aspects
qualitative
non-quantitative, like the impact of a decision
Lowered costs ____ profit, ____ bonuses
Why good/bad?
increase, increase
Inaccuracies are demotivating either way because people get more or less than they deserve
Past manufacturing overhead costs were relatively _____ so allocations were ____ but relatively _____
small
inaccurate, insignificant
Outsourcing
how much does it actually cost?
unit, batch, and many product level costs avoided
core competency, control, jobs, etc.
cost allocation
assigning indirect costs to cost objects
Equipment replacement decisions
irrelevant: original cost, current book value, accumulated depreciation, annual depreciation, sunk costs
relevant: opportunity cost, market value of old machine, operating expenses, cost of new machine
