chap 5

Allocation rate per cost driver formula

Cost object/Cost driver= Allocation rate per cost driver

What is cost allocation?

Activity Based Costing (ABC)

uses many activity based cost drivers

activity

any event or action incurred in making a product or performing a service.

Activity based cost drivers

are measures of activity that cause costs to be incurred, such as number of machine setups, number of product design changes, etc.

CHAP 4 AR

Cost object/Cost Driver= one allocation rate 4 COD

Traditional

CHAP 5 ABC AR

Cost Pools/ABC Drivers= many allocation rates

Steps to use the ABC method

1. Divide Cost object into different pools based on their activity.

2. Select Cost drivers that cause the cost

3. Divide the cost pools by the cost drivers to het your multiple allocation rates

How many levels of production are there?

There are 4 levels of production

Unit level

a MO cost that occurs each time a unit is made

ex. inspection cost, machine utility cost, etc.

Batch level

a MO cost regardless of the number of units produced

ex> setup costs, costs to move materials to a department etc.

Product level

increases or decreases each time you add or delete a product line

ex: patent, copyright, legal fees, etc.

Facility level

increases or decreases each time you add or delete a facility (factory)

ex. insurance, security, landscaping, property taxes, etc.

What are examples of batch levels of production?

ex> setup costs, costs to move materials to a department etc.

What are examples of unit level production?

ex. inspection cost, machine utility cost, etc.

What are examples of Facility levels of production?

ex. insurance, security, landscaping, property taxes, etc.

What are examples of Product level production?

ex: patent, copyright, legal fees, etc.

What are the advantages of ABC?

normally more accurate and thus improved decision making, better controls

What are the disadvantages of ABC?

more expensive, costs can exceed benefits

What is Total Quality Management (TQM)?

Management approach based on participation of all members with the goal of customer satisfaction.

For most businesses, quality means the degree to which products or services conform to design specifications.

What are the two aspects of quality

quality design and conformance quality

What is quality design?

original specifications that are designed into a product

Ex. Gauge of the steel used in car, life span of the product \*

The design of the product or service should be based on meeting the needs and wants of a customer.

What is conformance quality?

how effectively a company is in conforming production or service to the design specification

Quality Control

Activities in a company designed to control the quality of their product or service

Statistical Process Control Techniques

Used by companies to analyze when fluctuations or variances occur in the process

Types of Quality Costs:

Two Voluntary Costs (Prevention and Appraisal) and Two Failure Costs (Internal and External)

Types of voluntary costs

prevention and apraisal

Appraisal costs

to identify any nonconforming products

1. Inspection of products or inventory to determine if meet standards

2. Reliability testing - to determine overall reliability of product

3. Testing equipment - used to check products, ex. scales

4. Supplies used - ex. taste testing samples of the product

Prevention costs

Costs incurred to avoid production of nonconforming products 1. Product design - build in quality, prototypes 2. Preventive equipment - ex. gauges, equipment calibration, etc. 3. Training costs

4\. Promotion and awards - incentives)(“v

Types of failure costs

internal failure, external failure costs

Internet failure

correct units before being sold to customers 1. Scrap- can’t fixed the product 2. Repair and rework - can fix the product 3. Downtime - shut down assembly-line to fix the problem 4. Re-inspection - check quality of reworked units

External failure cosgs

\- correct goods in customer hands 1. Warranty repairs and replacement 2. Freight costs to pick up defective units and deliver replacements 3. Customer relations 4. Restocking and packaging - reconditioned units

zero defects

Some companies strive for “Zero defects” which means that all products produced will be perfect.

Minimizing Total Quality Costs:

minimize costs of voluntary costs (prevention and appraisal) with failure costs (internal and external)