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(WIP) ACC 350 Exam 1 Study Material

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Pg. 17 Sarah Allison

Pg. 17 Sarah Allison Takash ACC 350, Spring 2018 Exam 1 Study Material i. Over-pricing ii. Low market share as competition with lower prices gains consumers 24. Product-cost cross-subsidization a. Common in a traditional/simple costing system b. Undercosting one item and overcosting one or more of its other products 25. Activity a. Verb b. Event, task, or unit of work with a specified purpose c. Examples i. Designing products/processes ii. Setting up machines iii. Operations of machines iv. Setting up shipments v. Distributing d. Are sources of indirect costs e. Are used to refine total indirect costs into pools f. To achieve an effective balance, ​focus on activities that account for a sizable fraction of indirect costs g. Individual ​tasks can be combined into single activities if they all have the same cost driver i. Example: 1. A firm decides to combine maintenance of molding machines, operations of molding machines, and process control into a single activity—molding machine operations—because all these activities have the same cost driver: molding machine-hours. 26. Indirect-cost pools a. A grouping of indirect costs caused by activities b. In ABC: i. should be ​homogenous 1. Have the same or similar cause-and-effect/benefits-received relationship with a ​single cost-driver

Pg. 18 Sarah Allison Takash ACC 350, Spring 2018 Exam 1 Study Material c. Examples: i. Distribution costs pool 1. Includes: a. all costs associated with distribution ii. Set-up costs pool 1. Includes: a. all costs associated with setting up a machine 27. Cost-allocation base a. The ​cost-driver​ that proportionally causes an indirect cost-pool to increase b. Examples: i. Cubic feet of packages 1. Cost pool associated: distribution costs ii. Setup hours 1. Cost pool associated: set-up costs 28. Activity Based Management (ABM) a. Uses ABC to improve customer satisfaction and profitability b. Critical decisions: i. Pricing & product mix ii. Cost reduction iii. Process improvement iv. Product & process design Traditional Costing Effects: Under- and Over-Costing Summary: Traditional costing, also known as “simple costing” or “peanut-butter costing,” often leads to under/over-costing​ of products/services when applied to modern businesses. Historically used ​when companies produced ​low variety​ products with ​minimal overhead costs. The ​strategic consequences​ of traditional costing include mis-pricing of products/services along with the effects mis-pricing can lead to [under-pricing → lost profits & Over-pricing → low market share]