Chapter 3 Tutorial Solutions

Chapter 3 Tutorial Solutions - AFC2131 Cost Information for...

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AFC2131 Cost Information for Decision Making Week 4 (Chapter 3) Tutorial Solutions Semester 2, 2012 Note to students: Beware! These solutions are not necessarily model answers. In exams, you will not have demonstrated your understanding of the answers to these exercises if you seek only to memorise them. You are encouraged to use tutorial time to discuss issues that will test and clarify your understanding of these exercises, as well as expanding your analytical and critical-thinking skills. 3.3 Volume-based cost drivers are used in conventional management accounting systems. This assumes that variable costs vary in proportion to production volume and that fixed costs do not change with production volume. ABC allows a range of cost drivers such as unit level, batch level, product level, and facility level so that for these various types of cost there is a more realistic link between the cost and its cost driver. The conventional approach only examines variability with production volume that is, at the unit level. 3.8 (a) Variable cost, assuming that rubber is the only direct material used in the manufacturing process. (b) Unit-level cost. (c) The number of tyres produced determines the quantity of rubber used in production and therefore the total direct material cost. If only the quantity of rubber used is the cost driver, it ignores any abnormal wastage incurred in the process, or the effects of changing supply and/or demand on rubber prices. To identify the cost driver from a cost management perspective, it is necessary to identify the underlying causes of the direct material cost.
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