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Lecture 4 - Bhimani - Chapter 11 - ABC Solution to questions 1-15

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1-1Bhimani et alChapter Eleven: ABCSuggested solutions to some of the questions11.1Cost smoothingdescribes a costing approach that uses broad averages uniformly to assign the cost ofresources to cost objects when the individual products, services or customers in fact use those resources in anon-uniform way.One way of determining if cost smoothing is occurring is to examine separately how individual products(services, customers, etc.) use the resources of the organisation and to compare the results with the way theaccounting system represents that usage.11.2Overcosting may result in competitors entering a market and taking a market share for products, when acompany erroneously believes those products to be profitable.Undercosting may result in competitors selling products on which they are in fact losing money, when theyerroneously believe them to be profitable.11.3Costing system refinement means making changes to an existing costing system that results in a bettermeasure of the way that jobs, products, customers and so on differentially use the resources of theorganisation.Three guidelines for refinement are:aClassify as many of the total costs as direct costs as is economically feasible.bSelect the number of indirect-cost pools on the basis of homogeneity.cUse cost drivers as the chosen allocation bases.11.4An activity-based approach focuses on activities as the fundamental cost objects. It uses the cost ofthese activities as the basis for assigning costs to other cost objects such as products, services or customers.11.5Increasing the number of indirect-cost pools does NOT guarantee increased accuracy of product,service or customer costs. If the existing cost pool is already homogeneous, increasing the number of costpools will not increase accuracy. If the existing cost pool is not homogeneous, accuracy will only increase ifthe increased cost pools themselves increase in homogeneityvis-à-visthe single cost pool.11.6The accountant faces a difficult challenge. The benefits of a better accounting system show up inimproved decisions by managers. It is important that the accountant has the support of these managers whenseeking increased investments in accounting systems.Statements by these managers showing how their decisions will be improved by a better accounting systemare the accountant’s best base when seeking increased funding.11.7The most frequently used allocation bases for manufacturing overhead costs are: (i) direct labour-hours,(ii) direct labour-euros, (iii) units of production, (iv) machine-hours and (v) direct materials euros. Thisranking is based on average usage in the five countries reported in the Surveys of Company Practice box inChapter 11.11.8Four levels of a manufacturing cost hierarchy are:1Output unit-level costs2Batch-level costs3Product-sustaining costs4Facility-sustaining costs.
211.9The purpose for computing a product cost will determine whether unit costs should be based on total

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