Lecture 5 Flashcards
Unit costs
Truly variable costs. Additional cost incurred for each additional unit produced
Batch cost
Cost incurred anytime we start a new batch, but fixed for any additional units within the batch
Product-level costs
Costs associated with maintaining a product line. Adding new product lines adds more costs, but fixed for any additional units within the product line
Facility costs
CCcosts associated with having any operations running at all. Will occur regardless of how many products/batches/units we produced
Problems with the old approach (overcosting)
A product consumes a low level of resources but is allocated high cost per unit
Problems with the old approach (undercosting)
A product consumes a high level of resources but is allocated low costs per unit
Problems with the old approach (cross subsidization)
One product subsidizes another
The overcosted product absorbs too much costs
Making it seem less profitable than it really is
The undercosted product is left with too little cost
Making it seem more profitable than it really is
ABC allows fledxibility
With activity based costing we can account for costs the way they really occur
E.g.
Unit costs: direct labor, direct materials, unit level overhead
Batch costs: setup, cleanup, test runs, ordering
Product line costs: designing patent licenses
How do I find the cost/unit
We dont erally thing cost/unit anymore
We are thinking cost to produce the entire product line
People order in different quantities. The price per unit may change depending on the quantity they order
Then sometimes we might try to figure out the average cost per unit, recognizing that its not the marginal cost per unit
Average cost
total cost/units produced
Marginal cost
Cost of making one more unit. Usually equal to the variable cost, as long as its withing an existing batch
ABC vs simple costing
ABC is more complicated
ABC is usually more accurate
ABC is only as good as the drivers selected
Are changes in the driver closely related to changes in costs in that pool
Poorly chosen drivers will produce inaccurate costs even with ABC
When to implement ABC
Losts of overhead
Products of different complexity
Different volume levels
Production does not happen “one unit at a time”
E.g. production in batches
Low reported profits on main products, high reported profits on low-volume products
Drivers
For the unit, batch, and product levels we generally try to choose a driver that is causally related to the cost:
Unit - DLH, MH, etc.
Batch - Number of batches, setup time, etc.
Notes about ABC
We no longer think of “cost per unit”
Instead we think of “cost per activity”
-Cost per design
-Cost per batch
-Cost per unit
We can make everyone happier if we reduce unnecessary activities
