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Unformatted text preview: 5-1CHAPTER 5ACTIVITY-BASED COSTING AND ACTIVITY-BASED MANAGEMENT5-1Cost smoothing or peanut-butter costingdescribes a costing approach that uses broadaverages to uniformly assign the cost of resources to cost objects when the individual products,services, or customers in fact use those resources in a nonuniform way.One way of determining if peanut-butter costing is occurring is to separately examine howindividual products (services, customers, etc.) use the resources of the organization and to comparethe results with the way the accounting system represents that usage.5-2Overcosting may result in competitors entering a market and taking market share forproducts that a company erroneously believes are low-margin or even unprofitable.Undercosting may result in companies selling products on which they are in fact losingmoney, when they erroneously believe them to be profitable.5-3Costing system refinementmeans making changes to an existing costing system that resultsin a better measure of the way that jobs, products, customers, and so on differentially use theresources of the organization.Three guidelines for refinement are:a.Classify as many of the total costs as direct costs as is economically feasible.b.Select the number of indirect cost pools on the basis of homogeneity.c.Use cost drivers as the chosen allocation bases.5-4An activity-based approach focuses on activities as the fundamental cost objects. It uses thecost of these activities as the basis for assigning costs to other cost objects such as products,services, or customers.5-5Four levels of a manufacturing cost hierarchy are:(i)Output unit-level costs(ii)Batch-level costs(iii)Product-sustaining costs(iv)Facility-sustaining costs5-6The purpose for computing a product cost will determine whether unit costs should bebased on total manufacturing costs in all or only some levels of the cost hierarchy. Inventoryvaluation for financial reporting requires totalor only some manufacturing costs (all levels of thehierarchy) to be expressed on a per output-unit basis. In contrast, for cost management purposes,the cost hierarchy need not be unitized, as the units of output is not the cost driver at each level inthe hierarchy.5-25-7An ABC approach focuses on activities as the fundamental cost objects. The costs of theseactivities are built up to compute the costs of products, services and customers, and so on. Thetraditional approach seeks to have one or a few indirect cost pools, irrespective of theheterogeneity in the facility. An ABC approach attempts to use cost drivers as the allocation base,whereas the traditional approach is less clear on this issue.5-8Four decisions for which ABC information is useful are:(1)pricing and product mix decisions,(2)cost reduction and process improvement decisions,(3)design decisions, and(4)planning and managing activities5-9No. Department indirect-cost rates are similar to activity-cost rates if (1) a single activityaccounts for a sizable fraction of the department’s costs, or (2) significant costs are incurred on...
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This note was uploaded on 11/09/2010 for the course ACC 3313 taught by Professor Ann during the Spring '10 term at Nanyang Technological University.

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