Production costs and cost management

Question 1

two main cost systems

Answer 1

• the allocation method (based on the notion of cost centers)
• the activity-based costing method (based on the notions of processes and activities)

Question 2

cost center

Answer 2

physical location where activities take place

Question 3

allocation

Answer 3

• consists of attributing a fraction of the MOH to each product using a single allocation rate without necessarily a logical link between the two
• in order to assist decision-making, the purpose of allocation is to split the MOH consistently (over time, between products, between responsibility centers)

Question 4

allocation method (4 steps)

Answer 4

1. evaluate the potential allocation basis
2. select an allocation basis in order to attribute the MOH costs to the various products
3. calculate the allocation rate
4. allocate indirect costs using the allocation rate

Question 5

1. evaluate the potential allocation bases

Answer 5

the indirect costs are attribute to the various products according to a volume-link basis

Question 6

criteria to select the best allocation basis for MOH

Answer 6

1. importance of the basis as a production factor
2. significant link between the cost to allocate the basis considered
3. availability of data
4. base common among products
5. little sensitivity to external factors

Question 7

equation allocation rate

Answer 7

total MOH (for the period) / total volume of the allocation basis (for the period)

Question 8

advantages of the attribution of MOH to products using the allocation method

Answer 8

• simple and easy to implement (most popular approach)
• helps attribute to each unit produced a fair share of the indirect costs incurred
• allows the calculation of a cost that is constant throughout a given period
• allows to make decisions based on manufacturing costs

Question 9

advantages of calculating an allocation rate by cost center

Answer 9

• allows the use of multiple allocation bases (could generate a more accurate cost)
• this method is useful to: facilitate cost control through cost centers, allows to assess performance of each of the cost center individually, improved decision-making
• this method can be used when the link between the cost to allocate and the allocation base is different for each cost center, allows better allocation of MOH products

Question 10

basic steps of allocation using cost centers

Answer 10

1. identify cost centers
2. attribute resources (MOH) among the cost centers using resource drivers
3. determine allocation basis
4. calculate the overhead allocation rate of each centers
5. attribute ressource costs (MOH) to cost objects using allocation rates

Question 11

resource drivers represent…

Answer 11

the variable that best explain the variation in the consumption of resources (what generates or causes the consumption of resources)

Question 12

specific fixed costs

Answer 12

• are considered specific fixed costs only the fixed costs that an be related to specific cost object, cost center or organizational entity
• if the resource is consumed by only one cost center, the resource is then fully allocated to that cost center

Question 13

common costs

Answer 13

• cost shared by multiple entities, cost centers or cost object
• there are resources that share multiple cost objects

Question 14

methods to determine selling prices

Answer 14

cost plus pricing

gross profit margin required (%)

Question 15

equation cost plus pricing

Answer 15

selling price = production cost x (1 + markup)

Question 16

gross profit margin required (%)

Answer 16

selling price = manufacturing cost / (1 - unit gross profit margin %)

Question 17

cost reduction strategy

Answer 17

• reorganize workshops to reduce movements (linear work organization and cellular work organization)
• improve production processes
• reduce DM, DL and overhead costs (organize employee training sessions to reduce DL time or DM waste, purchase DM at a lower price without compromising quality)

Question 18

improvement of cost management allows to…

Answer 18

• obtain a more accurate cost
• determine a more adequate selling price
• better determine which products are profitable
• make better management decisions
• etc.