Cost15EChapter05Solutions.docx
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Cost15EChapter05Solutions.docx
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Cost15EChapter05Solutions
CHAPTER5
ACTIVITY-BASEDCOSTINGANDACTIVITY-BASEDMANAGEMENT
5-1Broadaveraging(or“peanut-buttercosting”)describesacostingapproachthatusesbroadaveragesforassigning(orspreading,asinspreadingpeanutbutter)thecostofresourcesuniformlytocostobjectswhentheindividualproductsorservices,infact,usethoseresourcesinnon-uniformways.
Broadaveraging,byignoringthevariationintheconsumptionofresourcesbydifferentcostobjects,canleadtoinaccurateandmisleadingcostdata,whichinturncannegativelyimpactthemarketingandoperatingdecisionsmadebasedonthatinformation.
5-2Overcostingmayresultinoverpricingandcompetitorsenteringamarketandtakingmarketshareforproductsthatacompanyerroneouslybelievesarelow-marginorevenunprofitable.
Undercostingmayresultincompaniessellingproductsonwhichtheyareinfactlosingmoney,whentheyerroneouslybelievethemtobeprofitable.
5-3Costingsystemrefinementmeansmakingchangestoasimplecostingsystemthatreducestheuseofbroadaveragesforassigningthecostofresourcestocostobjectsandprovidesbettermeasurementofthecostsofoverheadresourcesusedbydifferentcostobjects.
Threeguidelinesforrefinementare
1.Classifyasmanyofthetotalcostsasdirectcostsasiseconomicallyfeasible.
2.Expandthenumberofindirectcostpoolsuntileachofthesepoolsismorehomogenous.
3.Usethecause-and-effectcriterion,whenpossible,toidentifythecost-allocationbaseforeachindirect-costpool.
5-4Anactivity-basedapproachrefinesacostingsystembyfocusingonindividualactivities(events,tasks,orunitsofworkwithaspecifiedpurpose)asthefundamentalcostobjects.Itusesthecostoftheseactivitiesasthebasisforassigningcoststoothercostobjectssuchasproductsorservices.
5-5Fourlevelsofacosthierarchyare
(i)Outputunit-levelcosts:
costsofactivitiesperformedoneachindividualunitofaproductorservice.
(ii)Batch-levelcosts:
costsofactivitiesrelatedtoagroupofunitsofproductsorservicesratherthantoeachindividualunitofproductorservice.
(iii)Product-sustainingcostsorservice-sustainingcosts:
costsofactivitiesundertakentosupportindividualproductsorservicesregardlessofthenumberofunitsorbatchesinwhichtheunitsareproduced.
(iv)Facility-sustainingcosts:
costsofactivitiesthatcannotbetracedtoindividualproductsorservicesbutsupporttheorganizationasawhole.
5-6Itisimportanttoclassifycostsintoacosthierarchybecausecostsindifferentcostpoolsrelatetodifferentcost-allocationbasesandnotallcost-allocationbasesareunitlevel.Forexample,anallocationbaselikesetuphoursisabatch-levelallocationbase,anddesignhoursisaproduct-sustainingbase,bothinsensitivetothenumberofunitsinabatchorthenumberofunitsofproductproduced.Ifcostswerenotclassifiedintoacosthierarchy,thealternativewouldbetoconsiderallcostsasunit-levelcosts,leadingtomisallocationofthosecoststhatarenotunit-levelcosts.
5-7AnABCapproachfocusesonactivitiesasthefundamentalcostobjects.Thecostsoftheseactivitiesarebuiltuptocomputethecostsofproducts,andservices,andsoon.Simplecostingsystemshaveoneorafewindirectcostpools,irrespectiveoftheheterogeneityinthefacilitywhileABCsystemshavemultipleindirectcostpools.AnABCapproachattemptstousecostdriversastheallocationbaseforindirectcosts,whereasasimplecostingsystemgenerallydoesnot.TheABCapproachclassifiesasmanyindirectcostsasdirectcostsaspossible.Asimplecostingsystemhasmoreindirectcosts.
5-8FourdecisionsforwhichABCinformationisusefulare
1.pricingandproductmixdecisions,
2.costreductionandprocessimprovementdecisions,
3.productdesigndecisions,and
4.decisionsforplanningandmanagingactivities.
5-9No.Departmentindirect-costratesaresimilartoactivity-costratesif
(1)asingleactivityaccountsforasizablefractionofthedepartment’scosts,or
(2)significantcostsareincurredondifferentactivitieswithinadepartmentbuteachactivityhasthesamecost-allocationbase,or(3)significantcostsareincurredondifferentactivitieswithdifferentcost-allocationbaseswithinadepartmentbutdifferentproductsuseresourcesfromthedifferentactivityareasinthesameproportions.
5-10“Tell-tale”signsthatindicatewhenABCsystemsarelikelytoprovidethemostbenefitsareasfollows:
1.Significantamountsofindirectcostsareallocatedusingonlyoneortwocostpools.
2.Allormostindirectcostsareidentifiedasoutput-unit-levelcosts(i.e.,fewindirectcostsaredescribedasbatch-level,product-sustaining,orfacility-sustainingcosts).
3.Productsmakediversedemandsonresourcesbecauseofdifferencesinvolume,processsteps,batchsize,orcomplexity.
4.Productsthatacompanyiswellsuitedtomakeandsellshowsmallprofits,whereasproductsthatacompanyislesssuitedtoproduceandsellshowlargeprofits.
5.Operationsstaffhassignificantdisagreementswiththeaccountingstaffaboutthecostsofmanufacturingandmarketingproductsandservices.
5-11ThemaincostsandlimitationsofABCarethemeasurementsnecessarytoimplementthesystems.EvenbasicABCsystemsrequiremanycalculationstodeterminecostsofproductsandservices.Activity-costratesoftenneedtobeupdatedregularly.VerydetailedABCsystemsarecostlytooperateanddifficulttounderstand.Sometimestheallocationsnecessarytocalculateactivitycostsoftenresultinactivity-costpoolsandquantitiesofcost-allocationbasesbeingmeasuredwitherror.Whenmeasurementerrorsarelarge,activity-costinformationcanbemisleading.
5-12No,ABCsystemsapplyequallywelltoservicecompaniessuchasbanks,railroads,hospitals,andaccountingfirms,aswellmerchandisingcompaniessuchasretailersanddistributorswhenproductsmakediversedemandsonresourcesbecauseofdifferencesinvolume,processsteps,batchsize,orcomplexity.
5-13No.Anactivity-basedapproachshouldbeadoptedonlyifitsexpectedbenefitsexceeditsexpectedcosts.Itisnotalwaysawiseinvestment.Ifthejobs,products,orservicesarealikeinthewaytheyconsumeindirectcostsofacompany,thenasimplecostingsystemwillsuffice.
5-14Increasingthenumberofindirect-costpoolsdoesNOTguaranteeincreasedaccuracyofproductorservicecosts.Iftheexistingcostpoolisalreadyhomogeneous,increasingthenumberofcostpoolswillnotincreaseaccuracy.Iftheexistingcostpoolisnothomogeneous,accuracywillincreaseonlyiftheincreasedcostpoolsthemselvesincreaseinhomogeneityvis-à-visthesinglecostpool.
5-15Thecontrollerfacesadifficultchallenge.Thebenefitsofabetteraccountingsystemshowupinimproveddecisionsbymanagers.Itisimportantthatthecontrollerhavethesupportofthesemanagerswhenseekingincreasedinvestmentsinaccountingsystems.Statementsbythesemanagersshowinghowtheirdecisionswillbeimprovedbyabetteraccountingsystemarethecontroller’sbestargumentswhenseekingincreasedfunding.Forexample,thenewsystemwillresultinmoreaccurateproductcosts,whichwillinfluencepricingandproductmixdecisions.Thenewsystemcanalsobeusedtoreduceproductcosts,whichwilllowersellingprices.Asaresult,thecustomerwillbenefitfromthenewsystem.
5-16(20min.)Costhierarchy.
1.a.Indirectmanufacturinglaborcostsof$825,000supportdirectmanufacturinglaborandareoutputunit-levelcosts.Directmanufacturinglaborgenerallyincreaseswithoutputunitsandsowilltheindirectcoststosupportit.
b.Batch-levelcostsarecostsofactivitiesthatarerelatedtoagroupofunitsofaproductratherthaneachindividualunitofaproduct.Purchaseorder-relatedcosts(includingcostsofreceivingmaterialsandpayingsuppliers)of$525,000relatetoagroupofunitsofproductandarebatch-levelcosts.
c.Costofindirectmaterialsof$160,000generallychangeswithlaborhoursormachinehourswhichareunit-levelcosts.Therefore,indirectmaterialcostsareoutputunit-levelcosts.
d.Setupcostsof$365,000arebatch-levelcostsbecausetheyrelatetoagroupofunitsofproductproducedafterthemachinesaresetup.
e.Costsofdesigningprocesses,drawingprocesscharts,andmakingengineeringchangesforindividualproducts,$287,500,areproductsustainingbecausetheyrelatetothecostsofactivitiesundertakentosupportindividualproductsregardlessofthenumberofunitsorbatchesinwhichtheproductisproduced.
f.Machine-relatedoverheadcosts(depreciationandmaintenance)of$950,000areoutputunit-levelcostsbecausetheychangewiththenumberofunitsproduced.
g.Plantmanagement,plantrent,andinsurancecostsof$512,000arefacility-sustainingcostsbecausethecostsoftheseactivitiescannotbetracedtoindividualproductsorservicesbutsupporttheorganizationasawhole.
2.Thecomplexkaraokemachinemadeinmanybatcheswillusesignificantlymorebatch-leveloverheadresourcescomparedtothesimplekaraokemachinethatismadeinafewbatches.Inaddition,thecomplexkaraokemachinewillusemoreproduct-sustainingoverheadresourcesbecauseitiscomplex.Becauseeachkaraokemachinerequiresthesameamountofmachine-hours,boththesimpleandthecomplexkaraokemachinewillbeallocatedthesameamountofoverheadcostsperkaraokemachineifForresterusesonlymachine-hourstoallocateoverheadcoststokaraokemachines.Asaresult,thecomplexkaraokemachinewillbeundercosted(itconsumesarelativelyhighlevelofresourcesbutisreportedtohavearelativelylowcost
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