Module 4: Advanced Costing Systems (Chp 5)

Question 1

when can traditional manufacturing cost systems lead to product cost distortion

Answer 1

They underestimate the cost of resources required for speciality, low-volume products and overestimate the resource cost of producing high-volume standard products for firms with high product variety. More resources are required for specialty, low-volume products.

Question 2

4 steps for traditional manufacturing cost systems

Answer 2

1) Uses actual departments or cost centers for accumulating and redistributing costs
2) Asks how much of an allocation basis (usually based on volume) is used by the production department
3) service department expenses are allocated to a production department based on the ratio of the allocation basis used by the production department
4) uses predetermined overhead rates to allocate indirect costs to products

Question 3

3 common volume based cost drivers

Answer 3

DL dollars, DL hours, MH

Question 4

when is traditional manufacturing cost systems adequate?

Answer 4

adequate for companies with high-volume products with similar production volumes and batch sizes

Question 5

does traditional costing overcost high-volume or low-volume products

Answer 5

high-volume

Question 6

does traditional costing undercost high-volume or low-volume products

Answer 6

low-volume

Question 7

when does traditional cost over cost high-volume products and undercost low-volume products

Answer 7

when 2 situations exist:

1) indirect and support expenses are high, especially when they exceed the cost of the allocation base itself (like DL cost)
2) product diversity is high

Question 8

what happens to profitability if traditional cost systems undercost low-volume products?

Answer 8

they may be least profitable when in traditional costing they said they were most profitable

Question 9

define ABC

Answer 9

establishes a base price for a proposed customer order based on the estimated cost of producing and delivering the order

Question 10

define TDABC

Answer 10

a new ABC variant that is simple and more powerful since it requires estimating only 2 parameters.

Question 11

how does TDABC assign indirect costs?

Answer 11

TDABC assigns indirect costs similar to the way direct costs are assigned

Question 12

what is first parameter in TDABC?

Answer 12

capacity cost rate for each indirect resource

Question 13

how to find capacity cost rate?

Answer 13

1) Identify all costs incurred to supply resource
2) Identify practical capacity supplied by resource
3) Capacity cost rate = cost of capacity supplied / practical capacity of resources supplied

Question 14

what is second parameter in TDABC

Answer 14

Estimation of how much of each resource’s capacity is used by the activities performed to produce the products and services

Question 15

how to find cost of using resource i by product j

Answer 15

capacity cost rate of resource i * quantity of capacity of resource i used by product j

Question 16

define capacity cost rate

Answer 16

cost of supplying resource capacity.

Question 17

how is practical capacity commonly measured?

Answer 17

by time available to perform productive work

Question 18

6 actions managers can take from TDABC to increase profitability

Answer 18

1) Raise prices for unprofitable products to cover higher production costs
2) Impose min order sizes so specialty products would be produced in larger production runs to decrease quantity of indirect resource required
3) Reduce setup times (to reduce resources required)
4) Reduce time required for purchasing (to reduce resources required)
5) Reduce time required for scheduling production orders (to reduce resource required)
6) Make decisions on desired product mix

Question 19

6 actions managers can take from TDABC to increase profitability

Answer 19

1) Raise prices for unprofitable products to cover higher production costs
2) Impose min order sizes so specialty products would be produced in larger production runs to decrease quantity of indirect resource required
3) Reduce setup times
4) Reduce time required for purchasing
5) Reduce time required for scheduling production orders
6) Make decisions on desired product mix

Question 20

with TDABC, what happens to cost of unused resource capacity

Answer 20

not assigned to products

Question 21

should cost of unused capacity be ignored?

Answer 21

no

Question 22

who is responsible for unused capacity?

Answer 22

a person or department

Question 23

how to assign cost of unused capacity to someone

Answer 23

You can assign cost of unused capacity after analyzing the decision that authorized the level of capacity supplied

Question 24

how is unused capacity assigned?

Answer 24

done on lump-sum basis - not assigned to individual products

Question 25

what happens if unused capacity relates to particular product line?

Answer 25

then cost of unused capacity is assigned to that product line where demand failed to materialize

Question 26

how does lump sum assignment benefit managers?

Answer 26

provides feedback to managers on their supply and demand decisions

Question 27

how can we refer to indirect and support costs?

Answer 27

as committed, not fixed

Question 28

2 steps for committed costs to become variable

Answer 28

1) Demand for resources change either because of change in quantity of activities performed or because of changes in the efficiency of performing activities
2) Managers make decisions to change the supply of committed resources to meet new level of demand for the activities performed by these resources

Question 29

when facing shortages, what do companies do?

Answer 29

Facing shortages, companies typically increase committed costs, which is why many indirect costs increase over time

Question 30

explain reduced demand and reduced spending

Answer 30

Reduced demands for work does not immediately lead to spending decreases. The reduced demand for org resources lowers cost of resources used but this decrease is offset by an equivalent increase in cost of unused capacity

Question 31

after unused capacity has been created, what is the only way committed costs will vary downward?

Answer 31

After unused capacity has been created, committed costs will vary downward only if managers actively reduce the supply of unused resources via (1. Reducing demand for resource or 2. Lowers spending on it)

Question 32

how do org often create unused capacity?

Answer 32

AB management actions

Question 33

how managers make costs fixed

Answer 33

1) They keep existing resources in place, when demands for the activities performed by the resources have diminished
2) They also fail to find new activities that could be done by the unused resources already in place

Question 34

when are costs of resources fixed?

Answer 34

if managers do not exploit the opportunities from the unused capacity they helped to create

Question 35

how do we use ABC model to forecast budgeting and resource capacity

Answer 35

it guides:

1) Key process improvements
2) Min order sizes
3) Price changes
4) increases/decreases in resource capacity

Question 36

what causes changes in capacity cost rates

Answer 36

Changes in costs of resources supplied or resources required

Question 37

what causes changes in unit time estimates

Answer 37

Shifts in efficiency of activities

Question 38

what are time equations?

Answer 38

A feature that enables the model to reflect how particular order and activity characteristics cause processing time to vary

Question 39

where is data for time equations

Answer 39

Data for time equations are typically already in the company’s enterprise resource planning system

Question 40

what does time equations allow

Answer 40

Allow the time-driven ABC model to accurately and simply reflect the variety and complexity of orders, products and customers

Question 41

define time equation

Answer 41

an algebraic representation that predicts the quantity of processing time based on specific order and activity characteristics