Week 6 Chapter 4 - Accumulating and Assigning Costs to Products
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What is the over (managerial) goal of Cost-Management Systems?
To provide managers with information regarding "product cost," i.e., resource consumption of the firm's outputs (products/services produced by the firm).
What are Product Costs?
Resource demands or consumption of whatever is produced at the firm.
What is an example of Financial Accounting at the aggregate level?
How accurate are Financial Reports in regard to individual products?
Not very accurate.
Why is the notion of "resource consumption" a theoretical construct?
The existence of indirect/support costs complicates efforts to measure/determine the resource consumption of a firm's outputs (goods or services).
Over/under-costing of individual products is a balance between what?
- "Indicated Product Cost"
- The Product's "Resource Demands"
In regard to over/under-costing of individual products, why are the product's "resource demands" unobservable?
They are unobservable because of indirect costs.
When are products considered over-costed?
When the indicated cost is greater than the resource demands.
When are products considered under-costed?
When the resource demands are greater than the indicated costs.
The extent of Cost System Inaccuracy can lead to what?
Product Cost Cross-Subsidization
What is Cost System Inaccuracy?
The extent of product over or under-costing for a given cost object.
What is Product Cost Cross-Subsidization?
Compensating errors by balancing mis-costing across products.
How do direct and indirect costs differ in terms of traceability?
- Direct costs are traceable.
- Indirect costs are allocated, but can't be traced.
What is a cost object?
The thing to collect data on.
Indicated product costs are a function of what?
The cost structure.
There is a unique way to identify product costs with indirect costs. True or False?
What is actual costing?
Using the actual level of the cost driver to compute the cost driver rate results.
What is a death spiral?
When increasing prices cause demand to fall, which leads to further price increases as the cost driver rate increases the cost-plus price.
When estimating practical capacity, what proportion should it be to theoretical capacity?
In a manufacturing company, manufacturing overhead (support costs) would be considered what?
Indirect cost pool
How do you calculate Predetermined Overhead Rate?
- Predetermined Overhead Cost = Estimated total factory indirect cost / practical capacity in cost driver units
- Predetermined Overhead Cost = budgeted overhead ($) / cost allocation base, at practical capacity
In the Predetermined Overhead Rate calculation, how is the numerator (budgeted overhead) determined?
An estimation process like linear regression or some other method is used.
In the Predetermined Overhead Rate calculation, how is the cost allocation base chosen?
This is a design choice based on analysis.
What is the issue regarding the choice of the denominator volume level in the Predetermined Overhead Rate calculation?
There is more than one choice including Practical Capacity
Design choices have a greater affect on product costs when what?
Indirect costs are relatively high.
Why use a predetermined cost allocation rate?
System-design choice provides more timely data.
Why use annual data (and not, for example, monthly data)?
Output can change month to month because some overhead costs are seasonal/cyclical.
What choices are available for the denominator volume regarding the assignment of overhead to product costs?
- Practical capacity
- The actual level of operations
- The planned level of operations
- The average level of operations
How are cost-accounting systems determined?
They weigh the costs and benefits based on complexity and accuracy of the system.
What does cost system refinement mean?
It means increasing the accuracy of a cost system by adding more complexity.
Why is one cost allocation base chosen over another?
There is a higher correlation between the measurement and overhead incurred.
What is cost system accuracy?
How well the indicated costs approximate resource demands and consumption.
How are cost pools typically designed?
- By department
- By activities
What is a homogenous cost pool?
All the costs in a particular pool are related in a similar way.
What would you like to do?
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