ch5 - Chapter5: , eachproduct

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Chapter 5: Activity-Based Costing and Activity-Based Management To measure the cost of producing each product, you must track activity costs for  each product. Activity-based costing systems help companies make better decisions about  pricing and product mix.  Broad averaging has resulted in greater inaccuracy of product costs.  The use of a single, plant-wide MOH rate to allocate costs to products often  produces unreliable cost data.  Peanut-butter costing means using  broad averages for assigning cost of  resources uniformly to cost objects, when products in fact, use those resources in  non-uniform ways.  Undercosting and Overcosting: Undercosted products will be underpriced and may even leads to sales that result  in losses. Overcosted products will be overpriced and lose market share to competitors. Product-Cost-Cross-Subsidization:
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If a company undercosts one of its products, it will overcost at least one of its  other products. Vice-versa Very common in situations where costs are uniformly spread; broadly averaged –  across multiple products without recognizing the amount of resources consumed by  each product Example Consider a bottle of wine for $40, the cost spread equally among 4 people at  dinner. Each diner would pay $10 ($40 / 4). Suppose Matthew drinks 2 glasses of wine, while Emma, James, and Jessica  drink one glass each for a total of 5 glasses.  Allocating the cost of the bottle of wine on the basis of the glasses of wine that each  diner drinks would result in Matthew paying $16 ($40 x 2/5) and each of the others  $8 ($40 x 1/5).  So, if costs were to be equally shared, Matthew is paying $6 ($16-$10) less for  the wine he consumes and each of the others are paying $2 ($10-$8) more. They are  cross-subsidizing since they are sharing the cost equally.  Job Costing Steps: 7 Steps in Job Costing: Step 1: Identify the products that are cost objects Step 2: Identify the direct (material and labor) costs of the products  Step 3: Select the cost-allocation bases to use for the allocating indirect (MOH) costs to  the product Step 4: Pool all indirect (MOH) costs for the cost objects Step 5: Compute the rate per unit of each cost-allocation base. Use the formula: BMOHR = Budgeted MOH Costs                Budgeted Quantity of Cost-Allocation Base Step 6: Compute the indirect (MOH) costs allocated for each cost objects  Applied MOH = BMOHR x  Actual  Quantity of cost allocation base used for each  product Step 7: Computer the total cost of the job by adding all direct and indirect costs assigned  to the job 
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