accy chap 7


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CHAPTER 7 ACTIVITY-BASED COSTING AND MANAGEMENT DISCUSSION QUESTIONS 1. For plantwide rates, overhead is first collec- ted in a plantwide pool, using direct tracing. Next, an overhead rate is computed and used to assign overhead to products. 2. First stage: Overhead is assigned to pro- duction department pools using direct tra- cing, driver tracing, and allocation. Second stage: Individual departmental rates are used to assign overhead to products as they pass through the departments. 3. Non-unit-level overhead activities are those overhead activities that are not highly correl- ated with production volume measures. Ex- amples include setups, materials handling, and inspection. Non-unit-based cost drivers are causal factors—factors that explain the consumption of non-unit-level overhead. Ex- amples include setup hours, number of moves, and hours of inspection. 4. Product diversity is present whenever products have different consumption ratios for different overhead activities. 5. An overhead consumption ratio measures the proportion of an overhead activity con- sumed by a product. 6. Activity-based product costing is an over- head costing approach that first assigns costs to activities and then to products. The assignment is made possible through the identification of activities, their costs, and the use of cost drivers. 7. An activity dictionary is a list of activities ac- companied by information that describes each activity (called attributes). 8. Costs are assigned using direct tracing and resource drivers. 9. Activity-based customer costing can identify what it is costing to service different custom- ers. Once known, a firm can then devise a strategy to increase its profitability by focus- ing more on profitable customers, converting unprofitable customers to profitable ones, where possible, and “firing” customers that cannot be made profitable. 10. Activity-based supplier costing traces all supplier-caused activity costs to suppliers. Often many costs are overlooked by tradi- tional costing. By assigning all costs that are caused by suppliers, a company may find that its low-cost supplier does not corres- pond to the one that has the lowest pur- chase price. 11. Driver analysis is concerned with identifying the root causes of activity costs. Knowing the root causes of activity costs is the key to improvement and innovation. Once a man- ager understands why costs are being in- curred, then efforts can be taken to improve cost efficiency. 12. Value-added activities are necessary activit- ies. Activities are necessary if they are man- dated or if they are not mandated and satis- fy three conditions: (1) they cause a change of state, (2) the change of state is not achievable by preceding activities, and (3) they enable other activities to be performed. Value-added costs are costs caused by
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