Quiz #3 Flashcards
Why are Traditional Cost Systems used
Manufacturing processes were mainly labor intensive
Allocated through company-wide overhead rate
Labor Intensive Process
Overhead costs are small
Overhead allocations may be inaccurate, but the amounts are relatively insignificant
Automated Process
Overhead costs are large
Inaccurate overhead allocation can lead to misleading product cost information
Activity Based Costing
Taking a closer look at the manufacturing process to understand what exactly drives OH costs
Activity
a specific task or action of work done
Ex: machine operation, machine setup, advertising products
Cost pool
cost of economic resources needed or consumed in performing an activity
Ex: personnel, supplies, salaries
Cost driver
a unit of activity that causes the change of an activity cost
Ex: labor/machine hours, # of setups, # of inspections, # of products
Cost object
any product, service, customer, activity, or organizational unit to which costs are accumulated for some management purposes
Ex: any item for which you are separately measuring costs
ABC Stage 1
Assign cost pools according to activities that caused costs to be incurred
Identify essential activities and costs required to perform activities
ABC Stage 2
Allocate costs in the activity pool to products
Types of Production Activities
Unit Level
Batch Level
Facility Level
Product Level
Unit Level
Performed for each unit
Inserting a component
Labeling each unit produced
Batch level
Performed for each batch of product
Setting up equipment
Inspecting a batch
Facility Level
Required for the entire manufacturing process to occur
Factory Utilities, Rent, Security
Product Level
Performed to support each type of product Ex: Fitbit, iPhone, Caramel Frappuccino Designing the product Engineering the product Marketing or advertising the product
ABC effects on Employees
May lead to cost-cutting, which could be lay-offs
Impacts employee personal lives and morale
Could lead to employees being less cooperative which leads to inaccurate data
ABC effects on Management
They seek to use ABC to improve the value of products and increase the firm’s competitiveness and profitability
Two types of ABM
Operational
Strategic
Operational ABM
Performing activities more efficiently to lower costs
Use techniques like business engineering, total quality management, performance measurement, and activity analysis
Strategic ABM
Increase demand for certain activities and increase profitability
Achieved by eliminating non-essential activities and selecting the most profitable customers
Value-Added Analysis
Eliminating activities that add little to no value reduces resource consumption and allows the firm to focus on activities that will increase customer satisfaction
High-value added
Low-value added
High-Value Added
Significantly increases the value of the product or service to customers
Essential to the process
Accuracy or effectiveness would be effected if eliminated
Contribute to customer satisfaction
Ex: Designing a product, Order Processing, Delivering product
Low-Value Added
Consumes time, resources, or space but adds little to no value and does not contribute to satisfying the customer
Duplicates work
Produces an unnecessary or unwanted output
Performed by request of an unhappy customer
Ex: Setting up Machines, Moving Inventory, Storing, Inspecting
Customer Profitability Analysis
ABC is useful for satisfying customers (advertising, sales calls, delivery, billing, and other customer services)
Customers are the cost objects
Activities are the customer services needed to complete the sale and satisfy the customer
CPA helps identify most profitable customers and market towards them and away from unprofitable customers
