Module 4: Advanced Costing Systems (Chp 5) Flashcards
(41 cards)
when can traditional manufacturing cost systems lead to product cost distortion
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.
4 steps for traditional manufacturing cost systems
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
3 common volume based cost drivers
DL dollars, DL hours, MH
when is traditional manufacturing cost systems adequate?
adequate for companies with high-volume products with similar production volumes and batch sizes
does traditional costing overcost high-volume or low-volume products
high-volume
does traditional costing undercost high-volume or low-volume products
low-volume
when does traditional cost over cost high-volume products and undercost low-volume products
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
what happens to profitability if traditional cost systems undercost low-volume products?
they may be least profitable when in traditional costing they said they were most profitable
define ABC
establishes a base price for a proposed customer order based on the estimated cost of producing and delivering the order
define TDABC
a new ABC variant that is simple and more powerful since it requires estimating only 2 parameters.
how does TDABC assign indirect costs?
TDABC assigns indirect costs similar to the way direct costs are assigned
what is first parameter in TDABC?
capacity cost rate for each indirect resource
how to find capacity cost rate?
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
what is second parameter in TDABC
Estimation of how much of each resource’s capacity is used by the activities performed to produce the products and services
how to find cost of using resource i by product j
capacity cost rate of resource i * quantity of capacity of resource i used by product j
define capacity cost rate
cost of supplying resource capacity.
how is practical capacity commonly measured?
by time available to perform productive work
6 actions managers can take from TDABC to increase profitability
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
6 actions managers can take from TDABC to increase profitability
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
with TDABC, what happens to cost of unused resource capacity
not assigned to products
should cost of unused capacity be ignored?
no
who is responsible for unused capacity?
a person or department
how to assign cost of unused capacity to someone
You can assign cost of unused capacity after analyzing the decision that authorized the level of capacity supplied
how is unused capacity assigned?
done on lump-sum basis - not assigned to individual products
