Chapter 5 lecture

Question 1

direct costs are

Answer 1

traced

Question 2

indirect costs are

Answer 2

allocated

Question 3

Trade-offs to allocation methods
- less costly/ time effort
- less prone to error
- but not very precise/accurate
which method is this?

Answer 3

simplified methods

Question 4

Trade-offs to allocation methods
- more costly/time effort
- more prone to error
- but more precise/accurate
which method is this?

Answer 4

complex methods

Question 5

plant wide overhead rate equation

Answer 5

total estimated overhead
/
total estimated base

Question 6

department-wide overhead rate equation

Answer 6

department total estimated overhead
/
department total estimated base

Question 7

occurs when a prodct consumes a low level of resources but is allocated high costs per unit

Answer 7

overcosting

Question 8

occurs when a product consumes a high level of resources but is allocated low costs per unit

Answer 8

undercosting

Question 9

if a company undercosts one of its products, it will overcost at least one of its other products

Answer 9

product cost cross subsidization

Question 10

• the overcosted product absorbs too much cost, making it seem less profitable that is really is
• the undercosted product is left with too little cost, making it seem more profitable than it really is
  this occurs during what

Answer 10

product cost crooss subsidization

Question 11

“peanute butter costing” wherby management uses broad averages for assigning the cost of resources uniformly to cost objects

Answer 11

broad averaging

Question 12

a system that reduces reliance on broad averages for assigning costs and provides better measurement of the resources used by different cost object

Answer 12

refined costing system

Question 13

3 principal reasons have accelerated the demand for refinements to the costing system
(reasons for refining a costing system)

Answer 13

1. increase in product diversity
2. increase in indirect costs with different cost drivers
3. competition in product markets

Question 14

there are 3 main guidelines for refining a costing system

Answer 14

1. direct cost tracing - the more the better
2. indirect costs pools - the more the better
3. cost-allocation bases - the more unique the better

Question 15

refines a costing system by identifying individual activites as the fundamental cost objects
(an activity is an event, task, or unit of work with a specific purpose

Answer 15

activity based costing (ABC)

Question 16

categorizes various activity cost pools on the basis of the different types of cost drivers, cost-allocation bases, or different degrees of difficulty in an effort to more accurately identify determining cause and effect reltaionship

Answer 16

cost hierarchy

Question 17

cost hierarchies that ABC systems use to identify cost allocation bases

Answer 17

1. output unit level
2. batch level
3. product (or service)- sustaining

Question 18

costs (related to the individual units of a product or service)
(which cost hierarchy is this?)

Answer 18

output unit level

Question 19

costs (related to a group of output units)
(which cost hierarchy is this?)

Answer 19

batch level

Question 20

costs (related to support a particular product or service without regard to the number of output units or batches)
(which cost hierarchy is this?)

Answer 20

product (or service) - sustaining

Question 21

costs (related to costs of activites that cannot be traced to individual products or services)
(which cost hierarchy is this?)

Answer 21

facility sustaining

Question 22

1. significant amounts of indirect costs are allocated using only one or two cost pools
2. all or most indirect costs are identified as output unit level costs
3. products make diverse demands on resources because of volume, process steps, batch size or complexity
4. products that a company is well suited to make show small profits whereas products that a company is less suited to make show large profits
5. operations staff has substantial disagreement with the reported costs of manufacturing and marketing products or services

Answer 22

signals that suggest that ABC implementation could help a firm

Question 23

a method of management decision making that uses ABC information to improve customer satisfaction and profitability

Answer 23

activty based management (ABM)

Question 24

a broad description of a process that includes decisions about pricing and product mix, cost reduction, process improvemnent and product and process design

Answer 24

ABM