ch22 - CHAPTER 22 DISCUSSION QUESTIONS 1 Except in special...

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CHAPTER 22 DISCUSSION QUESTIONS 1. Except in special circumstances, a company should charge its customers a price that is at least as much as the company’s cost to produce the product or service. Of course, as this chapter emphasizes, determining that cost can sometimes be difficult. 2. A product cost is a cost necessary to actu- ally create the product or service. A period cost is one that is not directly related to pro- duction but that is instead caused primarily by the passage of time. Nevertheless, peri- od costs are still essential costs of doing business. 3. Traditionally, measures based on units of production (such as direct labor hours or machine hours) have been used to allocate manufacturing overhead costs to products. This is sometimes referred to as unit-based costing (UBC). 4. If a cost accounting system allows cross- subsidization of product costs, then a product may look less profitable than it really is because that product is being charged with costs that are actually caused by anoth- er product or activity. In the worst case, the decision can be made to wrongly discontin- ue a product line because it looks unprofit- able, when in fact, without the cross-subsid- ization effect, the product line is profitable. 5. Disagree. Actually, given enough time, every cost is variable . If you look at a long enough planning or operating cycle, every cost can be viewed as being related to the level of activity. Thus, even though the fact- ory property tax cost might be fixed this year, it can vary in the future depending on how many factories are used, which is a high-level strategic decision. 6. A unit-based costing (UBC) system causes problems in an organization with multiple products and services and with complex op- erations. In this context, costs that should properly be assigned to one product can, when using a simple UBC system, be as- signed erroneously to another. This causes distorted costing information, leading to po- tentially bad decisions. 7. Under a Hierarchical Product Cost Model, the four classifications of production costs are facility support costs, product line costs, batch-level costs, and unit-level costs. 8. Some examples of batch-level activities are: Number of setups Setup hours Material movements Orders for nonstocked items Purchase orders Number of inspections Inspection hours Quality testing on a batch sample 9. An outlet selling hamburgers, pizza, and chicken would, in general, have higher over- head costs than an outlet selling just ham- burgers. This is due to the higher overhead costs associated with maintaining the three different product lines. For example, the equipment needed to grill a hamburger is completely different from that needed to bake a pizza, which is different from that needed to cook a chicken. Thus, the hamburger-pizza-chicken outlet would have to maintain three separate sets of equip- ment, compared to just one for the ham- burger outlet. 10.
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This note was uploaded on 06/20/2011 for the course ECON 123 taught by Professor Mrews during the Spring '11 term at Korea Advanced Institute of Science and Technology.

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ch22 - CHAPTER 22 DISCUSSION QUESTIONS 1 Except in special...

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