1Product Undercosting
A product is reported to have a low cost per unit but consumers a higher level of resources per unit.
2Product Overcosting
A product is reported to have a high cost per unit but consumes a lower level of resources per unit.
3Product-Cost Cross-Subsidization
Means if a company undercosts one of its products, it will overcost at least one of its other products. And vice-versa. This is very common when a cost is uniformly spread-meaning it is broadly averaged-across multiple products without managers recognizing the amount of resources each product consumes.
4Budgeted Indirect-Cost Rate calculation
Budgeted total costs in indirect-cost pool / Budgeted total quantity of cost-allocation base
5Refined Costing SystemRe
Reduces the use of broad averages for assigning the cost of resources to cost objects (such as jobs, products, and services) and provides better measurement of the costs of indirect resources used by different cost objects, no matter how differently various cost objects use indirect resources.
6Three main guidelines for refining a costing system are:
- Direct-cost tracing
- Indirect-cost pools
- Cost-allocation bases
7Activity-Based Costing (ABC)
Refines a costing system by identifying individual activities as the fundamental cost objects. Activities are verbs; things that a firm does.
8Cost Hierarchy
Categorizes various activity cost pools on the basis of the different types of cost drivers, cost-allocation bases, or different degrees of difficulty in determining cause-and-effect (or benefits-received) relationships.
9Four levels of cost hierarchy are:
- Output unit-level costs
- Batch-level costs
- Product-sustaining costs
- Facility-sustaining costs
10Output Unit-Level Costs
The costs of activities performed on each individual unit of a product or service.
Example; machine operations costs (such as the cost of energy, machine depreciation, and repair) related to the activity of running the automated molding machines are this because, over time, the cost of this activity increases with additional units of output produced (or machine-hours used).
11Batch-Level Costs
Costs of activities related to a group of units of a product or service rather than each individual unit of product or service.
Example; set-up costs are this because, over time, the cost of this setup activity varies with the setup-hours needed to produce batches (groups) of lenses regardless of the total number of lenses produced.
12Product-Sustaining Costs (Service-Sustaining Costs)
Costs of activities undertaken to support individual products or services regardless of the number of units or batches in which the units are produced or services provided.
Example; design costs. Over time, design costs depend largely on the time designers spend on designing and modifying the product, mold, and process, not on the number of lenses subsequently produced or the number of bathces in which the lenses are produced using the mold.
13Facility-Sustaining Costs
Costs of activities that managers cannot trace to individual products or services but that support the organization as a whole.
Example; general administration costs (rent, building security) are this.
14Behavioral issues in implementing ABC systems are:
- Gaining support of top management and creating a sense of urgency for the ABC effort
- Creating a guiding coalition of managers throughout the value chain for the ABC affort
- Educating and training employees in ABC as a basis for employee empowerment
- Seeking small short-run successes as proof that the ABC implementation is yielding results
- Recognizing that ABC information is not perfect because it balances the need for better information against the costs of creating a complex system that few managers and employees can understand
15Activity-Based Management (ABM)
A method of management decision making that uses activity-based costing information to improve customer satisfaction and profitability. Includes decisions about pricing and product mix, cost reduction, process improvement, and product and process design