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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
Divide Cost object into different pools based on their activity.
Select Cost drivers that cause the cost
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
Inspection of products or inventory to determine if meet standards
Reliability testing - to determine overall reliability of product
Testing equipment - used to check products, ex. scales
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)
Note 
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