Test2StudyGuide - Chapter 5 Activity based costing focuses...

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Chapter 5 Activity based costing – focuses on activities as the fundamental cost objects. Developing an ABC System: 1) Identify activities 2) Estimate the total indirect costs associated with each activity 3) Identify the allocation vase for each activity’s indirect costs – this is the primary cost driver 4) Estimate the total quantity of each allocaion base 5) Compute the cost allocation rate for each activity: Activity Cost Allocation Rate = ____Estimated total indirect cost of activity_ Estimated total quantity of cost allocation base 6) Obtain the actual quantity of each allocation base used by the cost object (for example, the quantity used by a particular job). 7) Allocate the costs of the cost object: Allocate Activity Cost= Activity cost allocation rate X Actual quantity of cost allocation base used by the cost object Low Volume Products Traditional Systems: Undercost ABC systems: increase unit cost (specialty more expensive ) High Volume Products Traditional Systems: Overcost ABC systems: decrease unit cost (More common less expensive ) Managers use ABC data in ABM to make decisions on: 1) pricing and product mix, 2) cost cutting, and 3) routing planning and control Prevention Costs – costs incurred to avoid poor quality goods or services Appraisal Costs - costs incurred to detect poor quality goods or services Internal Failure Costs - costs incurred when the company detects and corrects poor quality goods or services before making delivery to customers External Failure Costs - costs incurred when the company does not detect poor quality goods or services after delivery is made to customers
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Chapter 6 Variable Costs – costs that change in total in direct proportions to changes in volume o Changes in direct proportion. Volume increase TVC Increase and visa versa o Total Variable Costs (TVC) = variable cost/unit of activity (v) X volume of activity ( x) o TVC always begins at origin (no people = no cost) …. y=vx Fixed Costs – costs that do not change in total despite wide changes in volume o Is fixed, looks like a flatline o Total fixed costs (y) = fixed amount over a period of time (f) o Higher volume the less the fixed cost/ unit of activity (person) o Lower volume the greater the fixed cost/ unit of activity Businesses like to operate at full capacity because it lowers fixed cost/unit Mixed Costs – costs that change in total, but not in direct proportions to changes in volume o Utilities An unoccupied room might cost $2000 and increase $8/guest Does not begin at the origin y=vx + f y = $8 x + $2000 o Total mixed cost increase as volume increases because of variable component o Mixed cost per unit decrease as volume increases because of fixed cost component Relevant Range – helps managers predict costs Step Costs – resemble stair steps. Fixed over a small range of activity and then jump to a new fixed level with moderate changes in volume. Deals with ratios (10 students: 1 teacher) Curvilinear costs – show approximate costs
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