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Chapter 5 - Resumos

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6 views

Chapter 5 - Resumos

Uploaded by

Diana Pereira
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 5 - Activity-Based Costing and Activity-Based Management

5.1 Explain how broad averaging undercosts and overcosts products or services

Plantwide Overhead Rate (Budgeted Manufacturing Overhead Rate):


Total Estimated Overhead - Obtain total of all overhead costs to be allocated.
Total Estimated Base - Determine the best “base” – direct labor hours, machine hours, etc.
This rate is used to allocate overhead costs to all products

Department Overhead Rate:


Similar except overhead cost pools and selected base are obtained by department rather than plantwide.

Broad Averaging:
• Historically, firms produced a limited variety of goods and at the same time, their indirect costs were relatively small.
• Allocating overhead costs was simple: Use broad averages to allocate costs uniformly regardless of how they are actually
incurred. Generally known as “Peanut-butter costing”

OVERCOSTING occurs when the cost measurement system reports a cost for a product that is above the cost of the
resources the product consumes.
UNDERCOSTING occurs when the cost measurement system reports a cost for a product that is below the cost of the
resources the product consumes.

Product Cost Cross-Subsidization


• If a company undercosts one of its products, it will overcost at least one of its other products.
• The overcosted product absorbs too much cost, 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.
Managers use product costs to make decisions. If the cost is wrong, so will be the decisions made.

The Five-Step Decision-Making Process:


1. Identify the problems and uncertainties.
2. Obtain information (analyze and evaluate the design, manufacturing, and distribution operations)
3. Make predictions about the future.
4. Make decisions by choosing among alternatives.
5. Implement the decision, evaluate performance, and learn.

5.2 Present three guidelines for refining a costing system

Reasons for Refining a Costing System


Three principal reasons have accelerated the demand for refinements to the costing system:
1. Increase in product diversity
2. Increase in indirect costs with different cost drivers
3. Competition in product markets

Guidelines for Refining a Costing System


There are three main guidelines for refining a costing system:
1. Direct-cost tracing
2. Indirect-cost pools
3. Cost-allocation bases

5.3 Distinguish between simple and activity-based costing systems

Activity-based costing: Refines a costing system by identifying individual activities as the fundamental source
of indirect costs. An activity is an event, task, or unit of work with a specified purpose: for example, designing
products, setting up machines or operating machines. These are often referred to as cost drivers.

ABC Versus Simple Costing


• ABC generally produce superior costing figures due to the use of multiple drivers across multiple levels.
• ABC is only as good as the drivers selected and their actual relationship to costs. Poorly chosen drivers
will produce inaccurate costs, even with ABC.
• Using ABC does not guarantee more accurate costs!
• ABC is an alternate way to allocate costs. It is generally considered to be more accurate and more costly
to implement.
A company should consider refining its cost system when evidence begins to suggest that the existing is flawed.
Critical decisions, such as pricing, whether one product should be “pushed” over another, whether a product
should be dropped will be made using cost information. Therefore, efforts should be used to arrive a cost that is
fair and reasonable for each product. This is an imprecise science, and different opinions are likely to occur.
5.4 Describe a four-part cost hierarchy

A cost hierarchy categorizes various activity cost pools based on the different types of cost drivers, cost-
allocation bases, or different degrees of difficulty in determining cause-and-effect relationships.
ABC systems commonly use a cost hierarchy with four levels to identify cost-allocation bases that are cost
drivers of the activity cost pools.

There are four levels of the cost hierarchy:


1. Output unit-level costs (related to the individual units of a product or service)
2. Batch-level costs (related to a group of units)
3. Product (or service)-sustaining costs (related to support a particular product or service without regard
to the number of units or batches)
4. Facility-sustaining costs (related to costs of activities that cannot be traced to individual products or
services)

5.5 Cost products or services using activity-based costing

ABC and Service/Merchandising Firms:


ABC implementation is widespread in a variety of applications outside manufacturing:
• Health Care
• Banking
• Telecommunications
• Retailing
• Transportation

5.6 Evaluate the benefits and costs of implementing activity-based costing systems

Signals That Suggest That ABC Implementation May Be Helpful:


1. Significant amounts of indirect costs are allocated using only one or two cost pools.
2. All or most indirect costs are identified as output unit-level costs.
3. Products make diverse demands on resources because of volume, process steps, batch size, or
complexity.
4. Products that a company is well-suited to make show small profits whereas products that a company is
less suited to make show large profits.
5. Operations staff has substantial disagreement with the reported costs of manufacturing and marketing
products or services.

5.7 Explain how managers use activity-based costing systems in activity-based management

Behavioral Issues to Consider When Implementing ABC


• Gain the support of top management and create a sense of urgency.
• Create a guiding coalition of managers throughout the value chain for the A B C effort.
• Educate and train employees in A B C as a basis for employee empowerment.
• Seek small, short-run success as proof that the A B C implementation is yielding results.
• Recognize that A B C is not perfect (better costs but complex system).

Activity-Based Management
• A method of management decision-making that uses A B C information to improve customer satisfaction
and profitability.
• We define ABM broadly to include decisions about pricing and product mix, cost reduction, process
improvement and product and process design.

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