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Accounting study guide 2

Accounting study guide 2 - Why do companies use...

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Why do companies use departmental overhead rates in place of a traditional plantwide rate? Companies face competition from all over the world so need more competitive prices and to identify most profitable products. Total MOH and DL costs are the same, but the cots are now identified with the production department in which they occur. To obtain an even more accurate estimate of the resources each product uses, managers analyze the indirect costs of each activity in a department. Causes the least amount of cost distortion b/c indirect costs are allocated to the products based on: 1. type of activities used 2. extent to which the activity is used What is Activity Based Costing (ABC)? Focuses on activities as the fundamental cost objects (separately estimates indirect costs of each activity and then allocating the costs based on what caused them). Each activity has its own unique cost driver – separate indirect cost allocation rates for each activity: 1. Indentify the activities 2. Estimate the total indirect costs associated with each activity 3. Indentify allocation base (primary cost driver) for each activity’s indirect costs 4. Estimate total quantity of each allocation base 5. Compute the cost allocation rate for each activity: Activity cost allocation rate = estimated total indirect costs/estimated total quantity of allocation base 6. Obtain actual quantity of each allocation base used by cost object 7. Allocate the costs to the cost object: Allocated activity cost = Activity cost allocation rate X actual quantity of cost allocation *overcosting of one activity = undercosting of the other Low-volume products are undercosted, so ABC increases unit cost Activity-Based Management uses ABC – increase profits while satisfying customer’s needs When does ABC pass the cost-benefit test? Benefits higher when ABC reports different product costs: many different products, has high indirect costs, different volumes of products. “it will not reduce costs; it will only help you better understand costs to know what to correct” What is a Just-in-Time production system? Buy raw materials just in time for production and complete finished goods just in time for delivery to customers. Eliminate waste: 1. Production activities in self-contained cells 2. Short setup times (on machines used for more than products) 3. Broad employee roles greater satisfaction 4. Small batches produced just in time, “demand-pull” system, free floor space to be more productive
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5. Shortened manufacturing cycle times, protect form foreign firms who have to ship 6. Emphasis on quality, right the first time b/c no back up 7. Supply-chain management 8. JIT costing, better reflect production, backflush costing Adopt total quality management (TQM) What are the costs of quality?
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