Ch 5

Question 0

Product overcosting, strategic cosequence?

Answer 0

Product consumes a low level of resources but is reported
To have a high cost per unit

Over costed products lead to overpricing, causing these
Products to lose market share to competitors

Question 1

Product undercosting, strategic cosequence?

Answer 1

Product consumes a high level of resources but is
Reported to have a low cost per unit

Under costed products will be underprice and lead
To losses from revenues

Question 2

Product-cost cross-subsidization

Answer 2

If a company undercosts one of its products, it will

Overcost at least one of its products and vice versa

Question 3

Broad averaging is less accurate when?

Answer 3

increases in both product diversity and indirect costs

Question 4

When is it advantageous to use broad averaging?

Answer 4

This system of allocating costs is easy, inexpensive
And reasonably accurate with limited variety of products
And indirect costs

Question 5

7 step simple costing system using single indirect-cost pool?

Answer 5

Step 1 identify products that are chosen cost objects

Step 2 identify direct costs of products

Step 3 select cost allocation bases for allocating indirect
costs to products

Step 4 identify indirect costs associated w/ each cost
Allocation base

Step 5 compute rate per unit of each cost allocation base

Step 6 compute indirect costs allocated to products

Step 7 compute total costs of products by adding all
Direct and indirect costs

Question 6

In step 5 of the single costing system, how do you compute the rate per unit of each cost-allocation base?

Answer 6

Budgeted indirect-cost rate =
Budgeted total costs in indirect-cost pool/
Budgeted total quantity of cost allocation base

Question 7

What’s the 5 step decision making process?

Answer 7

Step 1 identify the problem and uncertainties

Step 2 obtain info

Step 3 make predictions of future

Step 4 make decision among alternatives

Step 5 implement decision, evaluate performance and learn

Question 8

Refined costing system

Answer 8

Reduces use of broad averages for assigning
Cost of resources to cost objects

Provides better measurement of costs of indirect
resources used by different cost objects

Question 9

3 reasons for refining cost system?

Answer 9

1 increase in product diversity

2 increase in indirect costs

3 competition in product markets

Question 10

3 main guidelines for refining a costing system

Answer 10

1 Direct-cost tracing
2 Indirect-cost pools
3 Cost-allocation bases

Question 11

Direct-cost tracing

Answer 11

Identify as many Direct costs as economically feasible

Question 12

Indirect cost pools

Answer 12

Expand # of indirect cost pools until each pool is
More homogeneous

All costs have similar cause-and-effect relationship with
Single cost driver used as cost allocation base

Question 13

Cost allocation bases

Answer 13

Use the cost driver (cause of indirect costs) as the
cost-Allocation base for each homogenous
indirect-cost pool (the effect)

Question 14

Cost driver

Answer 14

Cause of indirect costs

Question 15

Homogenous indirect-cost pool

Answer 15

The effect

Question 16

Activity-based costing (ABC) system, define, 2 advantages?

Answer 16

Refines costing system by identifying individual activities
As fundamental cost objects

Structures activity cost pools more finely with their
cost drivers
More accurate product costs are achieved by measuring
Cost-allocation bases for different activities used by different products

Question 17

Activity, ex?

Answer 17

Event, task or unit of work with specified purpose

Ex. Designing products, operating machines, distributing products

Question 18

First stage allocation of indirect cost pools? Example?

Answer 18

assigning and reassigning costs accumulated in support departments

Ex. Assigning and reassigning costs in departments
like HR and information systems

Question 19

Second stage allocation?

Answer 19

Allocation of costs of activity cost pools to products

Question 20

Main difference between activity based costing system and simple costing system?

Answer 20

ABC system assigns more precise allocation

bases to activities

Question 21

The Cost hierarchy Categorizes various activity cost pools on basis of (3 ways)?

Answer 21

1 Different types of cost drivers
2 cost-allocation bases,
3 different degrees of difficulty in determining cause and effect

Question 22

4 levels of cost hierarchy in ABC system?

Answer 22

1 output unit-level costs

2 batch-level costs

3 product(service)-sustaining costs

4 facility structuring costs

Question 23

Output unit level costs

Answer 23

Costs of activities performed on each unit of product or
Service

In Output unit-level costs ,overtime, the cost of activity
Increases with additional units of output produced

Question 24

Batch-level costs, examples

Answer 24

Costs of activities related to group of unit of product Or service rather than individual unit of product or service Ex. Material handling, quality inspection

Question 25

Product sustaining costs (service sustaining costs), examples?

Answer 25

Costs of activities undertaken to support individual Products or services regardless of # of units or batches Produced Ex. Design costs, R&D costs, marketing costs to launch new products, engineering changes

Question 26

Facility sustaining costs, examples?

Answer 26

Costs of activities that can't be traced to individual products Or services but support organization as whole Ex. Management compensation, rent, building security

Question 27

What is difficult to find for Facility-sustaining costs?

Answer 27

Good cause and effect relationship btw costs and cost | Allocation base

Question 28

5 tell tale signs when Activity Based Costing system is likely to provide the most benefits?

Answer 28

1 significant amounts indirect costs using only 1 or 2 Cost pools 2 all or most indirect costs are identified as output Unit level costs 3 products make diverse demands on resources due to Differences in volume, process steps, batch size, complexity 4 products company is well suited to make show small profits Whereas products company is less suited to make and sell Show large profits 5 operations staff disagree substantially about reported Costs of manufacturing and marketing products + services

Question 29

Activity based management (ABM)

Answer 29

Method of management decision making that uses Activity-based costing info to improve customer Satisfaction and profitability

Question 30

6 major Decision types made under Activity Based Management (ABM)?

Answer 30

1 pricing 2 product mix decisions 3 cost reduction 4 process improvement decisions 5 design decisions 6 planning and managing activities