Accounting for Decision Making Exam 2

Activity Based Costing - correct answer ABC will allocate overhead and give us much more detail based on how much each product uses of each activity. Multiple drivers for each pool. Advantages of ABC - correct answer 1) More accurate product costing 2) Better control over overhead costs 3) Better management decisions Disadvantages of ABC - correct answer It can be expensive • It can be complex • It's not perfect. Some allocations are still arbitrary. • i.e. Allocating insurance costs and property taxes based on square footage ABC compared to traditional methods - correct answer Should we use DL hours as the sole allocation base? • Many companies use more machinery, technology, etc. • Maybe we should use multiple allocation bases that look closely at how the overhead (i.e. indirect materials, indirect labor, depreciation, factory rent, etc.) is used in each product) - compared from one pool to multiple pools Four steps of ABC - correct answer 1. Identify Activities 2. Identify cost drivers 3. Compute OH rates 4. Allocate costs *Will have a problem with parts 3 and 4 Value-added activities - correct answer Increase the perceived value of the product or service (design, assembly, etc.) Direct labor Non-Value-Added Activities - correct answer If eliminated, would not decrease the perceived value of the product or service (storage, internal moving costs, etc.) Indirect labor Unit activity level - correct answer costs incurred on a per-unit basis (production costs) costs go up per unit Batch activity level - correct answer costs incurred on a per batch basis (setup costs, sales orders) costs go up per setup/batch Product activity level - correct answer costs incurred on a product basis (product testing) Facility activity level - correct answer costs incurred on a facility basis (insurance, rent) fixed costs - correct answer Costs stay the same in total with each unit produced (i.e. rent, taxes, etc.) • Cost per unit will decrease with each unit produced variable costs - correct answer Costs change in total with each unit produced (i.e. DM, DL, etc.) • Cost per unit will stay the same with each unit produced relavent range - correct answer The range in which a company expects to operate • Costs are linear within the relevant range, but may not be outside the relevant range • i.e. if we produce very little, or a lot, our costs may be higher mixed costs - correct answer Part Fixed and Part Variable• U-Haul Rental ($50 per day - fixed, .50 per mile - variable) high-low method - correct answer change in total costs at high versus low activity level/high minus low activity level=unit variable costs cost behavior - correct answer Why is it important to understand cost behavior?• Sometimes costs will increase (i.e. DM costs if we produce more)• Sometimes costs will not increase (i.e. Rent if we produce more)• We need to understand how these costs will affect profitability CVP analysis - correct answer 1) Costs are linear throughout the relevant range 2) Costs are either fixed or variable (mixed are classified appropriately) 3) Changes in activity are only thing that can change costs 4) All units produced are sold 5) Sales mix will remain constant **will be a problem on exam! in units and dollars. Should be able to do all, and be able to PROVE it using contribution style income statement Contribution margin income statement - correct answer same as CVP income statement unit contribution margin