Sol chp 3 - Chapter 3 Traditional Cost Management Systems...

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Chapter 3 Traditional Cost Management Systems QUESTIONS 3-1 Direct and indirect costs are specified in relation to distinct cost objects. A direct cost is a cost of a resource or activity that is acquired for or used by a single cost object, while an indirect cost is the cost of a resource that was acquired to be used by more than one cost object. For example, if the cost object is a unit of product, direct material and direct labor are direct costs, and manufacturing overhead or support costs are indirect costs. However, if a department within a plant is the chosen cost object, then the department manager’s salary is a direct cost for the department (assuming the manager only manages that department) and the cost of utilities for the plant is an indirect cost. 3-2 Costs need to be estimated for individual jobs in order to bid for them and to price them competitively. Estimated costs are also useful for comparison with actual costs for management control purposes. Costs may differ across individual jobs because jobs may differ in their materials content, the hours of labor required to manufacture them and in the demand they place on support activity resources. 3-3 A typical job bid sheet has the following five distinct parts: 1. The name of the customer, product and quantity required. 2. Estimated quantity and current price for different materials. 3. The wage rate and hours required for direct labor. 4. Estimated manufacturing support cost. 5. Estimated total cost, bid price, unit cost and unit price. 3-4 Two types of information are required to estimate direct material cost for a job. The quantity required for each item of material is estimated based on – 65 –
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Atkinson, Solutions Manual t/a Management Accounting, 5E standard engineering specifications. Information on the price of each item of material is obtained from the purchasing department. 3-5 Two types of information are required to estimate direct labor cost. Direct labor hours are estimated based on industrial engineering specifications (e.g. work and motion studies) or by analogy with comparable standard products. Wage rates for each grade of labor required for the operations performed are obtained from personnel records. 3-6 Cost driver rates are determined by dividing the cost of the resources committed to the support activity, by the capacity made available by the resources committed to the activity. 3-7 Support cost for a job is estimated by multiplying the cost driver rate(s) by the number of units of the support cost driver(s) associated with the job. 3-8 Markup rate is the percentage addition to the estimated job cost to calculate the bid price. The markup rate depends on a variety of factors, including: Proportion of support costs excluded from the numerator in the computation of the cost driver rate Target rate of return desired by the firm Past bidding strategies of key competitors Demand conditions Overall product-market strategies Competitive intensity
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Sol chp 3 - Chapter 3 Traditional Cost Management Systems...

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