ACFM 330 Chapter 9

why do companies care about the cost/unit rate?

to know how much to sell it to customer for

more specific cost equates to more…and better…

efficient operations, decisions made

dropping a product only reduces

some OH

what are the 2 effects of dropping a product

1. raise price of remaining product

2. customer will either need product/continue to buy or goes into death spiral

what is a death spiral

when the prices increase to cover cost but demand is decreases

death spiral can also occur in firms with

increasing demand

how can death spiral occur for companies with increasing demands

added capacity (increasing fixed oh) without a similar increase in output

alternative to pohr is

two stage allocation

what is the first and second stage of a two stage allocation

first stage: allocate oh cost to department

second stage: allocate department oh cost to product/services

in two stage allocation cost, each department has…, making it more…

unique rate, detailed

what are the cost pools in a two stage cost allocation

dm, dl, manufacturing oh

if the salary of someone is the solely fix the machine, this cost is allocated to

machine related cost

assembly is usually based on

machine hours

packaging is usually based on

labor cost or hours

what are the 2 things managers need to think about related to cost

1. why a product is not selling

2. why competitor prices are so low

what is plantwide allocation method

all oh cost recorded in one cost pool and applied to product using 1 oh allocation rate

in plant wide allocation method, one set of…allocate oh for product for all department

rates

when is plantwide allocation method used

when products being made is similar and the department does similar work

what is department allocation method

oh cost traced to separate department and applied to products using the department allocation rate

in department allocation method, there is one…for each department

cost pool

when do we use department allocation method

if each department has specialized and individualized work, multiple products using resources differently

we assign oh cost based on how

incurred

why would we not opt for a more detail cost breakdown

it is more costly, cost may not outweigh the benefits

what is ABC

assigns cost to activities then assigns them to products based o n products consumption of activities

describe stage 1 and 2 in ABC

stage 1: assign cost to activities

stage 2: assign cost to products based on use of each activities

how do we define activity in abc

how product is actually made

why do we use ABC (2)

1. any products can be broken into activity

2. every activity consumes resources

abc is the most…product costing

granular

what is a cost driver

factor that causes activity cost

for every activity there is a

rate

what is a production run

how many run can be done before need to refill materials (running through one cycle)

what are cost hierarchies

classification of cost drivers

what is volume related in cost hierarchies

based on dl cost, machine hours, number of units

what is batch related in cost hierarchies

set up hours, production runs, number of shipments

what is product related in cost hierarchies

number of products

what is facility related in cost hierarchies

direct cost, value added

what are the 4 hierarchy levels

1. volume related

2. batch related

3. product related

4. facility related

for abc, dm and dl debited to

respective activity in WIP which is split based on product line

for abc every activity has its own

rate that is assigned to wip

we have seen a shift away from labor cost towards…

machine hours or cost

if we allocate oh based on labor now,…

oh will be high

abc can be used in the service industry as we assign based on

service engagement

why would we not use abc (2)

1. costly, cost may exceed benefit

2. if not updated based on activity, could be worse than other cost allocating method

abc can also be used towards

clients