Advanced Management: Exam 1

Why do we calculate product costs?

for pricing, production planning, entry/exit decisions, and financial accounting (valuing inventory)

When should common costs be allocated?

GAAP costing, long-term pricing decisions, to remind managers that resources aren’t free, and government contracts

When should traditional product costing be used?

labor intensive operations because it assumes that the product of products creates costs and that direct labor drives indirect costs

What are the steps for traditional product costing?

1. identify the cost of the object

2. identify the direct costs

3. select cost allocation bases for the indirect costs

4. develop predetermined overhead rates

5. compute indirect costs allocated to the cost object

6. compute the total cost of the product

Formula for predetermined overhead rate

Budgeted annual overhead/ budgeted annual driver level

What causes cross-subsidization?

the existence of indirect costs, diverse products, and an over aggregated cost system

What is the goal of a product costing system?

allocate indirect costs in proportion in which they are consumed

What is a cost object?

something we want a separate measurement of cost for

What is operating leverage?

the extent to which there are fixed costs in the cost structure

What are period costs?

nonmanufacturing costs

What does ABC assign?

resources to activities and activities to cost objects based on their use

What is a non-value-added activity?

activities that, if eliminated, would not reduce the utility received by the customer

What are the benefits of ABC?

1. more accurate product costs

2. possible cost reduction

3. more responsive costing of new products or services

Steps for ABC costing?

1. identify the activities that consume resources and assign costs to them

2. identify cost drivers

3. compute a cost rate per cost driver

4. assign costs to products, based on the number of activities that product uses

What questions does quality costs answer?

1. How good does a company’s product or service have to be?

2. How can accountants help make quality decisions?

What are the two types of quality?

1. quality of design - how closely does the product meet the needs and wants of the customer

2. conformance quality - how well the product does the job

What are prevention costs?

precludes non-conformance

What are appraisal costs?

detecting units during production that don’t conform

What are internal failure costs?

non-conformance detected at the plant

What are external failure costs?

non-conformance detected after shipment

What is customer response time?

the time from when a customer places an order until the delivery of the product/service

What is manufacturing lead time?

the time from when an order is received by manufacturing until the finished good is produced