Lecture 6

Question 1

Activity Based Costing

Answer 1

Attributes costs based on activities performed. Products consuming more activities incur higher costs and selling prices.

Question 2

Designing an ABC system step 1

Answer 2

Identify activities that take place in the organisation and assign overhead costs to the activity cost pools/activities

Question 3

Designing an ABC system step 2

Answer 3

Determine cost drivers for each activity

Question 4

Designing an ABC system step 3

Answer 4

Calculate an OAR per cost driver

Question 5

Designing an ABC system step 4

Answer 5

Absorb into the product by multiplying number of drivers for product by OAR per cots driver

Question 6

Designing an ABC system step 5

Answer 6

Divide by product units to get OAR per unit

Question 7

ABC in practice: Reported benefits

Answer 7

• A more accurate method of costing
• Enables a fuller understanding of what causes overheads to occur
• Makes non-value-adding activities more visible so allowing managers to take action
• Makes better decisions on Sales price and product choices
• Supports continuous improvement efforts and performance management

Question 8

ABC in practice: Reported drawbacks

Answer 8

• Difficult and time-consuming to collect data about activities and cost drivers
• Costly to implement and maintain
• Some costs are difficult to assign to products (can still be arbitrary)

Question 9

What is price skimming ?

Answer 9

Charging a very high price at the beginning and then cutting it down as it continues selling

Question 10

What is price penetration?

Answer 10

Charing a low price and then letting it go up slowly

Question 11

What is premium pricing ?

Answer 11

Setting price high and keeping price high to create a luxury product

Question 12

What is bundle pricing ?

Answer 12

Attaching low price products to high priced products