Diode 24% inc. 3% inc. 28%
Seligram, Inc. 27 How much more accurate? ratios of costs under different designs 2-pool / 1-pool 3- pool / 2-pool 3-pool / 1-pool Absolute change 16.8% inc. 4.6% inc. 20.3% inc.
Seligram, Inc. 28 Activity-based costing • One-pool: “Plant” overhead rate (see p.331 [ 317 ]) • 2- and 3-pool: “Department” rate (see p.331-332 [ 317-318 ]) – These systems are both “volume related” (see p.337 [ 323 ]) ✓
Seligram, Inc. 29 Strategy • A firm whose strategy is to support a full-line of products will face the threat of cross-subsidization with associated pricing distortions that can drive away customers. • A single-line producer of simple tests, or a “niche” player, will be much less subject to cross- subsidization.
Seligram, Inc. 30 Strategy • A tester which sells its product in a market where price is a primary factor in the purchase decision must worry much more about cross- subsidization than ... • A tester who sells testing services to customers who value highly: – Responsiveness (develop new software, etc.) – Speed – Quality
Seligram, Inc. 31 “Accounting” summary • Indirect resources should be assigned by the cost system to the activities that create a demand for them. • The “cost driver” is the event that consumes indirect resources. • Cross-subsidization occurs when costs are assigned by the cost system to products that did not consume them.
Seligram, Inc. 32 “Business” summary • Cost systems can become obsolete due to changes in technology. • Cost system failure can cause subtle, unintended shifts in strategy. • Symptoms of cost system failure are not obvious or easy to detect.
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