Managerial Accounting Ch 6 Flashcards
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It will help to give a competitive edge to the company in the market and hence, increase its sales and profitability. These activities relate to specific products and must be carried out regardless QuickBooks of how many batches or units of product are produced or sold. For example, designing a product, advertising a product, and maintaining a product manager and staff are all product-level activities.
- These competitive advantages were obtained by following the communitarian concepts, attitudes and practices outlined in Chapter 1.
- Manufacturing is limited to a single product flowing through identical departments in a fixed sequence.
- It is not surprising that the method’s popularity is inversely related to data processing costs.
- Cost drivers are the actual activities that cause the total cost in an activity cost pool to increase.
- In assigning cost to products, traditional costing treats all manufacturing costs as unit level costs, therefore they are referred to as production volume based , or unit based allocations.
Perhaps this driver can be identified and used to trace the costs more accurately to the products or services that ultimately consume the resource through activities. Generally, all costs are driven by something, even if the driver appears to be inactive. This chapter contains two relatively long sections and three fairly short sections. The first section places emphasis on the conceptual material underlying activity based costing and addresses the first nine learning objectives listed above. The second section outlines the steps involved in using the ABC technique and provides two related examples that illustrate and compare ABC with traditional costing.
Multiple Choice Questions
The purpose of the JMI is to contribute to the advancement of knowledge directly related to the theory of organizations and the practice of management. It publishes and disseminates the results of new and original scholarly research to a broad audience consisting of university faculty and administrators, business executives, consultants, employees, and government managers. The JMI acts as a bridge between the academic and business communities. Which of the four activities is a product-level activity? Machine setups activity •Product design activity •Machining activity •General factory activity Explanation 8.
Designing components of a product so they can fit together only in the correct manner – This can reduce defects as well as assembly time and cost. Create a chart of revenue and fixed, variable, and total costs. The Cola Company produces two products, regular cola, RC and clear cola, CC. RC is Cola Company’s main product and CC is a specialty product. List and define the cost categories in the ABC cost hierarchy.
This model assigns more indirect costs into direct costs compared to conventional costing. Companies that have embraced the communitarian concepts have not only been more focused than individualistic companies, they have also been able to obtain higher quality and greater responsiveness to customer demands. These competitive advantages were obtained by following the communitarian concepts, attitudes and practices outlined in Chapter 1. As we will see in the next chapter, teamwork and cooperation are the building blocks of a just-in-time continuous improvement system. One aspect of the activity based approach that we have only alluded to thus far is the potential link between activity based concepts and the just-in-time philosophy. This potential connection provides another motivation for developing the ABC methodology.
What Is Activity Level In Accounting?
The products consume all three non-production volume related activities in the same proportions. If V3 consumed ½ of the purchase orders, 1/3 of the engineering work orders and 1/5 of the setups, then we would not be able to combine these costs into a single homogeneous pool. Conceptually, an activity measure is not necessarily an activity, or a cost driver or an activity driver. An activity measure is instead a unit of measurement chosen to represent the activity volume and the primary driver. The activity measure provides the basis for tracing or linking the activity costs to the products that consume the activity.
The ABC cost classification scheme helps emphasize the difference between traditional costing and activity based costing. In assigning cost to products, traditional costing treats all manufacturing costs as unit level costs, therefore they are referred to as production volume online bookkeeping based , or unit based allocations. On the other hand, ABC recognizes that many of the support costs in a company are either related to activities associated with producing batches of products, or to other activities that are performed to support specific products.
Each of these activities was a significant consumer of resources and generated substantial costs. The robotics function related to the operation of the highly automated assembly line. A large part of the cost of robotics was tied directly to the number of units produced.
Which Of The Following Is A Value Added Activity?
Batch level costs are costs that are attributed to a batch or bunch of items. It is not possible to allocate the expenditure to a specific product or item. Such costs are generally the production costs incurred to produce a batch of products consisting of many or even a variety of items. Hence, expenditure on an individual unit of the product is not identifiable.
Purchasing and using resources causes costs to be incurred. Restated in reverse order, the ABC logic is that resources generate costs, activities consume resources and products consume activities. Thus, a company’s activities are identified, then costs are traced to these activities based on the resources that they require. Then, costs are assigned, or traced from each of these activity cost pools bookkeeping to the company’s products in proportion to the demands that each product places on each activity. In ABC, a measure of the relevant activity volume is used to trace each type of costs, rather than exclusively using measurements related to the volume of the products or services produced. Using this logic, ABC tends to solve the problems created by traditional cost or inventory valuation methods.
Which Is An Example Of A Product Level Activity?
Outline three additional steps required to obtain ABC product costs. CookieDurationDescriptionconsent16 years 8 months 24 days 6 hoursThese cookies are set by embedded which of the following is a batch-level activity? YouTube videos. They register anonymous statistical data on for example how many times the video is displayed and what settings are used for playback.
In Company B, it is the small product, but production volume is not an issue. Problem 7-2 reveals that the nature of the product cost distortions become impossible to predict as the number of products and product characteristics increase.
Predetermined overhead rates are used in first-stage cost allocations but not in second-stage cost allocations. Application of the cost of each activity to products based on its activity usage by the product. Providing employees with cost information and authorizing them to make decisions – This helps improve decision speed and reduce costs while making employees more customer oriented. Production employees may, for example, offer product design suggestions that reduce manufacturing costs or reduce defects.
It is reportedly much more expensive to produce than GLASSESong. Following is an analysis of GAME’s cost of production by product. A business might have dozens of cost objects, hundreds of activities, and numerous resource pools to evaluate. A diagram of the interconnectivity can reveal multiple cost objects feeding off of many shared activities that in turn use up various resources. The Journal of Managerial Issues is a management academic journal that is published quarterly and uses a double-blind, peer-reviewed process.
Which Would Be A Cost Driver For A Product Level Activity?
Therefore, purchasing is technically a secondary driver of purchasing costs. This terminology is summarized in the middle section of Exhibit 7-3. Cost distortions from product differences occur when there are variations in product size and product complexity.
The allocated cost from the catalog preparation pool was $2.50 per unit. This is not the total cost; this is just the allocated amount. The total cost would also include the directly traceable amounts (printing, postage, etc.).
Which of the following statements is false regarding first-stage and second-stage cost allocation methods? The basic difference between a first-stage cost allocation and a second-stage cost allocation is that cost pools are not used in first-stage cost allocations.
For example, batch-level activities should not be combined with unit-level activities. Which of the following would probably be the most accurate measure of activity to use for allocating the costs associated with a factory’s purchasing department? -is useful for allocating marketing and distribution costs. Facility level – the cost of an activity associated with maintaining the facility or plant. The generalizations in the previous paragraphs are summarized in Exhibit 7-1. The effects of product volume differences and product sized differences are illustrated in the examples below. The effects of differences in product complexity are illustrated in some of the problems at the end of this chapter.
What Are The Benefits Of Activity Based Costing Abc?
Calculate the unit costs of products V1, V2 and V3 using activity based costing. This problem extends the V product sequence illustrated in the chapter to a Company D that produces products V1, V2 and V3.
Multiple manufacturing overhead rates are considered preferable to a single overhead rate when various products are manufactured that do not pass through the same departments or use the same manufacturing techniques. The single or plant wide rate is related to several identified cost drivers. Individual cost drivers cannot accurately be determined with respect to cause-and-effect relationships.
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