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Chapter+10+solutions - CHAPTER 10 ACTIVITY-BASED COSTING...

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C HAPTER 10 A CTIVITY - BASED COSTING AND MANAGEMENT SOLUTIONS R EVIEW Q UESTIONS 10.1 Unit profit margin equals a product’s unit contribution margin less the controllable cost of capacity resources. 10.2 (1) Determine how to form cost pools, (2) identify which cost pools to allocate, (3) identify the cost driver to use for allocating each cost pool, and (4) determine the appropriate denominator volume of each cost driver to calculate allocation rates. 10.3 A business process converts organizational inputs into a measurable output. Each business process is a collection of activities. 10.4 In ABC, we form cost pools by the activities that make up a business process. 10.5 An appropriate cost driver is one that has the strongest causal relation with the costs in the cost pool. 10.6 Practical capacity is an estimate of the maximum possible activity level. The advantage of a practical-capacity based allocation rate is that it does not change across periods. Practical capacity is higher than both actual- and budgeted capacity, which reflect realized and planned activity usage. 10.7 Because, ultimately, ABC is just another allocation system. Changing the method for allocating costs does not change total cost. 10.8 Allocating lower amounts to some products and higher amounts to other products. In such instances, products receiving higher allocations are said to cross-subsidize products receiving lower allocations. 10.9 By better managing products, customers, and resources. 10.10 Decisions related to individual customers and market segments, including decisions regarding who to sell to and the prices to charge. 10.11 Product-level profit analysis groups revenues, variable costs, and capacity costs by product whereas customer-level profit analysis does so by customer. 10.12 “High cost to serve” customers (1) place small order sizes, (2) have rigid requirements, (2) don’t pay on time, (4) require more customization, and (5) make frequent order change requests. “Low cost to serve customers” (1) have larger order sizes, (2) pay on time, (3) have minimal order change requests, (4) require less pre-sales support, and (5)
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require less after-sales support. Please see exhibit 10.13 for 11 characteristics of each type of customer. 10.13 A whale curve plots customer profitability, after ranking customers in order of their profitability. It has the appearance of a “whale” because for many firms, the top 20% of customers account for the bulk of the profit, whereas the remaining customers actually are unprofitable. 10.14 To improve the efficiency and effectiveness of organizational processes. 10.15 Non-value adding activities are those that cost money but do not provide commensurate benefits. Firms can identify non-value adding activities by asking, “if we eliminate this activity, would the customer notice?” D ISCUSSION QUESTIONS 10. 16 No. The costs of developing a product are sunk at the time the product goes into production. These costs are not controllable. Proponents of activity based costing express
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