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CHAPTER 4 ACTIVITY-BASED PRODUCT COSTING QUESTIONS FOR WRITING AND DISCUSSION 1. Unit costs provide essential information needed for inventory valuation and prepara- tion of income statements. Knowing unit costs is also critical for many decisions such as bidding decisions and accept-or-reject special order decisions. 2. Cost measurement is determining the dollar amounts associated with resources used in production. Cost assignment is associating the dollar amounts, once measured, with units produced. 3. An actual overhead rate is rarely used be- cause of problems with accuracy and timeli- ness. Waiting until the end of the year to en- sure accuracy is rejected because of the need to have timely information. Timeliness of information based on actual overhead costs runs into difficulty (accuracy problems) because overhead is incurred nonuniformly and because production also may be nonuniform. 4. 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. 5. First stage: Overhead is assigned to produc- tion department pools using direct tracing, driver tracing, and allocation. Second stage: Individual departmental rates are used to assign overhead to products as they pass through the departments. 6. Departmental rates would be chosen over plantwide rates whenever some depart- ments are more overhead intensive than others and if certain products spend more time in some departments than they do in others. 7. Plantwide overhead rates assign overhead to products in proportion to the amount of the unit-level cost driver used. If the products consume some overhead activit- ies in different proportions than those as- signed by the unit-level cost driver, then cost distortions can occur (the product di- versity factor). These distortions can be significant if the nonunit-level overhead costs represent a significant proportion of total overhead costs. 8. Low-volume products may consume nonunit-level overhead activities in much greater proportions than indicated by a unit- level cost driver and vice versa for high- volume products. If so, then the low-volume products will receive too little overhead and the high-volume products too much. 9. If some products are undercosted and oth- ers are overcosted, a firm can make a num- ber of competitively bad decisions. For ex- ample, the firm might select the wrong product mix or submit distorted bids. 10. Nonunit-level overhead activities are those overhead activities that are not highly correl- ated with production volume measures. Ex- amples include setups, material handling, and inspection. Nonunit-level cost drivers are causal factors—factors that explain the consumption of nonunit-level overhead. Ex- amples include setup hours, number of moves, and hours of inspection. 11.
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This note was uploaded on 09/26/2010 for the course ACCT 1401 taught by Professor Tram during the Spring '10 term at University of Houston-Victoria.

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