Module 4 Flashcards
Unit activities
performed for each unit of product (quality control testing of wings)
Batch activities
performed once per group of products, regardless of # of units in batch
Product activities
performed for entire product line, regardless of units or batches produced (product design)
Customer activities
performed for specific customers (creating the paint template)
Organization activities
performed to provide ability to manufacture product (pay rent for warehouse)
Steps to activity-based product costs
- Identify activities
- Develop activity cost pools
- Calculate activity cost pool rates
(Total costs in $ of activity pool / total volume of cost driver or activity pool) - Allocate costs to products or services
(actual use of cost driver * activity cost pool rate) - Calculate unit product costs
(total costs allocated / units produced)
Calculate activity cost pool rates =
(Total costs in $ of activity pool / total volume of cost driver or activity pool)
Allocate costs to products or services =
actual use of cost driver * activity cost pool rate)
Calculate unit product costs =
(total costs allocated / units produced) = MOH/unit
Total product cost per unit =
MOH/unit + DM + DL
What are some ways we can identify non-value-added costs
- Is the activity necessary to production process?
2. Is the activity efficiently performed?
What are some common non-value-added costs for a manufacturing company?
- Storage and handling
- Inspecting
- Testing
* Note that some non value added costs cannot be eliminated. We should be able to manufacture w/o inspecting it, but we still should inspect for liability
To be useful in decision making, information must be
- Relevant
- Accurate
- Timely
Relevant def
Pertains to the future and differs between alternatives
Avoidable cost def
Costs that can be avoided if you stop a particular activity –Relevant
Sunk cost def
costs incurred in the past that cannot be changed regardless of future actions
–Irrelevant
Relevant cost decision model
- What is the decision to be made?
- What are the available alternatives?
- What are the relevant revenues and costs?
- Which alternative offers the greatest benefit or least cost?
- What are the qualitative issues that must be considered?
Should we accept or reject the special order?
Relevant info:
Decision Rule:
Watch out for:
Relevant info: -Costs to produce and sell the special order that would not be incurred without the special order
-Contribution margin lost on regular sales forfeited because of the special order
Decision Rule: -If we do have excess capacity, accept the special order if the lower special order sales price is enough to cover the relevant costs of filling the order
-If we do not have the excess capacity, accept the special order if the lower special order sales price is enough to cover both the relevant costs of filling the order and the reduction of normal sales
Watch out for: Unavoidable fixed costs
Should we outsource certain operations or produce internally?
Relevant info:
Decision Rule:
Watch out for:
Relevant info: -Costs that would not be incurred if operations are outsourced
-Purchase price from external supplier
-Alternative use of resources
Decision Rule: -If purchase price is less than avoidable costs to produce, outsource
-If purchase price is more than avoidable costs to produce, continue to make the product in-house
Watch out for: Allocated or per unit fixed costs
How should we allocate constrained resources among our product lines?
Relevant info:
Decision Rule:
Watch out for:
Relevant info: -Contribution margin per unit of constrained resources
-Demand for our various products
Decision Rule: -Maximize the contribution margin per unit of the constrained resource, not per unit of finished product
-Produce the product with the highest contribution margin per unit of constrained resource first, up to the quantity demanded by customers. Then produce the product with the second highest, and so on until the scarce resource is completely used up
Watch out for: Contribution margin per unit of product
Should we keep or eliminate a losing segment or product?
Relevant info:
Decision Rule:
Watch out for:
Relevant info: -Segment contribution margin (what we would be losing if we eliminated)
-Direct fixed expenses (what we would be gaining if we eliminated)
-Contribution margin of complimentary operations or products (could go either way)
Decision Rule: Calculate what would be gained or lost by eliminating the segment
-If we’d have an overall loss by eliminating, keep the segment until a better use of resources is found
-If we’d have an overall gain by eliminating, then eliminate the segment
Watch out for: The effect os this decision on other operations or products and allocated common fixed coasts
Advantages to decentralization
- Empowerment = Job satisfaction
- Executive team can focus on strategic, high-level decision
- Allows management to utilize internal experts
- More focused customer relations
- Training ground for future top management
Disadvantages to decentralization
- Duplication of efforts and costs like HR, Finance, legal, etc
- -Solution: centralized services - Self-serving segments might fail to see the big picture/long-term strategic plan
- -Solution: balanced score-card
Investment center
responsible for revenues, costs and capital (long term assets like stores or machinery) improvements
Profit center
Responsible for profit only (revenue - cost)
Cost center
Responsible for costs only
Return on Investment (ROI) =
operating income / average total assets
Residual Income (RI) =
Operating income - (average total assets * management’s target rate of return)
