horngren_ima15_im 04.doc

5 the costs associated with bad decisions that result

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5. The costs associated with bad decisions that result from inaccurate cost determinations are substantial (e.g., lost bids and hidden losses from undercosted products). 6. Computer technology has reduced the costs of developing and operating ABC systems. VI. Appendix 4: Detailed Illustration of Traditional and Activity-Based Cost Accounting Systems The chapter presents an illustration of the use of activity-based costing to provide more accurate costing for the Billing Department of AT&T’s smaller customer care centers, with two major customer classes (i.e., account inquiry and bill-printing services). EXHIBIT 4-8 shows the traditional costing system that has been in use. All billing department costs are totaled and then divided by the total number of customer inquiries (residential + commercial) to arrive at a cost per inquiry. This amount is then multiplied by the number of inquiries from each type of customer and divided by the number of customers of each type to give the cost/customer. The amounts derived are $4.58 per residential customer and $6.88 per commercial customer. 50
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Not being satisfied with the accuracy of the amounts produced under their traditional costing system, AT&T developed an activity-based costing system. A. Design of an Activity-Based Cost Accounting System {L. O. 9} 1. Determine the key components (project scope, cost objectives, key activities, resources, and related cost drivers). 2. Determine the relationships among cost objects, activities, and resources (see EXHIBIT 4-9 ). 3. Collect relevant data concerning costs and the physical flow of cost-driver units among resources and activities (see EXHIBITS 4-10 and 4-11 ). 4. Calculate/interpret the new activity-based cost information (see EXHIBITS 4-12 and 4-13 ). The detailed application of these steps for AT&T is provided in the text. Of particular interest are the key results of the study – the actual determination of the activity-based costs. In the key results, the residential customer's cost is $3.98 compared to $4.58 with the traditional costing system, and the commercial customer's cost is $10.50 compared to $6.88 derived under the traditional system. This result is common when high-volume cost objects with simple processes are overcosted when only one volume-based cost driver is used. B. Strategic Decisions, Operational Cost Control, and ABM The conclusion of the AT&T chapter problem is summarized. 51
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CHAPTER 4: Quiz/Demonstration Exercises Learning Objective 1 1. The primary purposes of a cost-management system do not include _____. a. operational control b. cost allocation c. strategic management decisions d. inventory valuation 2. The cost accounting system typically involves two processes—cost allocation/assignment and _____. a. cost estimation b. optimal cost mix c. cost accumulation d. cost identification Learning Objective 2 3. The tracing or reassigning of costs to one or more cost objectives is referred to as _____. a. mixed-up costing b. cost allocation c. historical costing d. cost making 4. A sacrifice or giving up of resources of particular purpose is called _____.
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