Solutions_CH 02 - CHAPTER 2 BASIC MANAGEMENT ACCOUNTING...

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CHAPTER 2 BASIC MANAGEMENT ACCOUNTING CONCEPTS QUESTIONS FOR WRITING AND DISCUSSION 1. Product costing accuracy means assigning the cost of the resources consumed by a cost object to that cost object. 2. A cost object is any item for which costs are measured and assigned, including such things as products, plants, projects, depart- ments, and activities. 3. An activity is a basic unit of work performed within an organization. Examples include material handling, inspection, purchasing, billing, and maintenance. 4. A direct cost is a cost that can be traced to a cost object. An indirect cost is a cost that cannot be traced to cost objects. 5. Traceability is the ability to assign a cost dir- ectly to a cost object in an economically feasible way using a causal relationship. Tracing is the assignment of costs to cost objects using either an observable measure of the cost object’s resource consumption or factors that allegedly capture the causal re- lationship. 6. Allocation is the assignment of indirect costs to cost objects based on convenience or as- sumed linkages. 7. Drivers are factors that cause changes in re- source usage, activity usage, costs, and revenues. Resource drivers measure the demands placed on resources by activities and are used to assign the cost of resources to activities. Example: time used to assign the cost of supervision to individual activit- ies. Activity drivers measure the demands placed on activities by cost objects and are used to assign the cost of activities to cost objects. Example: number of inspection hours used to assign the cost of inspection to individual products. 8. Direct tracing is the process of assigning costs to cost objects based on physically observable causal relationships. Driver tra- cing is assigning costs using drivers, which are causal factors. The driver approach re- lies on identification of factors that allegedly capture the causal relationship. Direct tra- cing relies on physical observation of the causal relationship and, therefore, is more reliable. 9. Driver tracing is the use of drivers to trace costs to cost objects. Often, this means that costs are first traced to activities using re- source drivers and then to cost objects us- ing activity drivers. 10. A tangible product is a good that is made by converting raw materials through the use of labor and capital inputs. 11. A service is a task or activity performed for a customer or an activity performed by a customer using an organization’s products or facilities. 12. Services differ from tangible products on four important dimensions: intangibility, per- ishability, inseparability, and heterogeneity. Intangibility means that buyers of services cannot see, feel, taste, or hear a service be- fore it is bought. Perishability means that services cannot be stored. Inseparability means that producers of services and buy- ers of services must be in direct contact (not true for tangible products). Heterogeneity means that there is a greater chance of vari-
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Solutions_CH 02 - CHAPTER 2 BASIC MANAGEMENT ACCOUNTING...

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