accounting exam 1 - chapter 4

gross margin

if we subtract the total manufacturing cost per unit from the unit sales price, we get the ___ ___ for each product

1. product introduction 2. growth 3. maturity 4. eventual decline

in pursuing cost management, managers need to set their cost reduction goals across all stages of the product life cycle, including: (4 stages)

Just-in- time (JIT) inventory

in this kind of system, materials are purchased and units are made only as they are needed to satisfy customer demand

product introduction and growth

in what two stages of the product life cycle do costs tend to be higher?

growth and maturity

in what two stages of the product life cycle is the most revenue typically earned?

activity-based management (ABM)

includes all the actions that managers take to improve operations or reduce costs based on the ABC data. the first step in any improvement is to target areas that need improvement

assign indirect costs to activity cost pools assign indirect costs from activity cost pools to individual products or services

two stage allocation process using ABC stage 1: stage 2:

market; profit margin

with target costing, the price is set by the ___ based on what the company believes consumers will be willing to pay for the product or service. the desired ___ ___ is then subtracted from the market price to determine the target cost.

two-stage

activity-based costing is a ___-___ process

cost per unit = total manufacturing overhead / number of units for each product

formula to calculate cost per unit

unit selling - manufacturing cost per unit = gross profit per unit gross profit margin = % of sales

formula to calculate gross profit per unit and then how to use that to calculate gross profit margin

predetermined overhead rate = estimated total manufacturing overhead cost / estimated total cost driver

formula to calculate the predetermined overhead rate

manufacturing overhead (calculated using ABC) + direct materials + direct labor costs = total manufacturing cost per unit

formula to calculate total manufacturing cost per unit

unit sales price - manufacturing cost per unit

forumlate to calculate the gross margin

number of batches or setup time processing time per unit number of quality inspections number of design changes

give 4 examples of non-volume-based cost drivers

number of units produced number of direct labor hours number of machine hours total direct materials cost

give 4 examples of volume-based cost drivers

1. determine the cost driver (allocation base) 2. calculate the predetermined overhead rate 3. assign indirect costs to individual products or services using the predetermined overhead rate

recall from earlier chapters that there are three steps to assigning indirect costs in a volume-based cost system: (list three steps)

manufacturing cost

remember that gross margin only takes into account the manufacturing cost of the product, before selling and administrative costs such as distribution fees, advertising, dealer costs and profit, and corporate administration charges have been deducted.

product life cycle

represents the life of the product from its infancy (an idea), through design, development, product introduction, growth, maturity, and eventual decline

requirements

(activity-rate method) to assign the cost to the products, we multiply the activity rate by the activity ___ of each individual product

product-level activities

(identify and classify activities) activities that are performed to support a specific product line or service offering

facility-level activities

(identify and classify activities) also called company-wide activities; the most general category and support the entire company; activities that support the entire company (all products, all customers)

unit-level activities

(identify and classify activities) also called customer-level activities; activities performed for each unit or customer individually

batch-level activities

(identify and classify activities) also called group-level activities, performed for a batch (group of units or customers) all at once

cost driver; volume-based cost drivers; non-volume-based cost drivers

(select a cost driver for each activity cost pool) a ___ ___ is a measure of the underlying activity that occurs in each activity cost pool. the goal is to identify a driver that has a cause and effect relationship with the underlying activity. traditional cost systems use ___-___ ___ ___. ABC systems also include measures that capture something other than the sheer volume of units produced or customers sold. these measures are called ___-___-___ ___ ___

prevention costs

(types of costs in total quality management) costs incurred to prevent quality problems from occurring in the first place

appraisal or inspection costs

(types of costs in total quality management) costs that are incurred to identify defective products before products are shipped to the customer

external failure costs

(types of costs in total quality management) costs that occur when a defective product makes its way into the hands of the customer

internal failure costs

(types of costs in total quality management) costs that result from defects that are caught BEFORE the product is shipped to the customer

setting up machines, ordering rolls of steel, shipping a truckload of cars

3 examples of batch-level activities

company-wide advertising, plant supervision, human resources

3 examples of facility-level activities

research and development, product testing, designing a sales brochure for a specific product

3 examples of product-level activities

installing parts, painting final product, serving an individual customer

3 examples of unit-level activities

facility level;

For each of the following activities, indicate the appropriate category (unit, batch, product, customer, or facility level) and suggest a possible cost driver for each pool. 1. factory utilities

unit or batch

For each of the following activities, indicate the appropriate category (unit, batch, product, customer, or facility level) and suggest a possible cost driver for each pool. 10. quality control testing

batch

For each of the following activities, indicate the appropriate category (unit, batch, product, customer, or facility level) and suggest a possible cost driver for each pool. 2. machine setups

product

For each of the following activities, indicate the appropriate category (unit, batch, product, customer, or facility level) and suggest a possible cost driver for each pool. 3. research and development for a new product

unit

For each of the following activities, indicate the appropriate category (unit, batch, product, customer, or facility level) and suggest a possible cost driver for each pool. 4. sanding rough edges of the product

unit

For each of the following activities, indicate the appropriate category (unit, batch, product, customer, or facility level) and suggest a possible cost driver for each pool. 5. packaging the product for shipment

customer

For each of the following activities, indicate the appropriate category (unit, batch, product, customer, or facility level) and suggest a possible cost driver for each pool. 6. developing new packaging for a special order of 200 units

facility

For each of the following activities, indicate the appropriate category (unit, batch, product, customer, or facility level) and suggest a possible cost driver for each pool. 7. maintenance on equipment

unit

For each of the following activities, indicate the appropriate category (unit, batch, product, customer, or facility level) and suggest a possible cost driver for each pool. 8. assembling the products component parts

unit or batch

For each of the following activities, indicate the appropriate category (unit, batch, product, customer, or facility level) and suggest a possible cost driver for each pool. 9. material handling costs

demand pull pushed

JIT is a "___ ___" system, where materials and products are pulled through the manufacturing system based on customer demand. in a traditional manufacturing setting, products are ___ through the system and often end up sitting in inventory

indirect

a comparison of the unit manufacturing overhead per unit and the gross profit margin percentage of each product under a volume-based system to activity-based costing illustrates the different results from the two cost systems. remember that the only difference between the two methods is in how they assign ___ costs (overhead) to each product

total quality management

a management approach that aims to improve product quality by reducing and eliminating errors, streamlining activities, and continuously improving a production-process

activity-based costing (ABC)

a method of assigning indirect costs to products and services based on the activities they require

target costing

a proactive approach to cost management that managers can use to determine what costs should be in order for the company to earn an acceptable profit across a product's life cycle

activity rate = total activity cost / total cost driver

activity rate formula

what activities are preformed? how much does it cost to perform each activity? does the activity add value to the customer?

the 3 questions asked by ABM when identifying benefits and improvement possibilities

job order costing and process costing

the two systems that are used to track the total cost of products

activity rates; activity proportions

there are two methods that can be used to assign indirect costs to individual products or services based on their activity requirements: ___ ___ or ___ ___. the two methods are mathematically equivalent and will provide identical results as long as there are no rounding errors. the method used will depend on the type of information provided and whether you have complete information on all product or service lines.

manage or reduce

to gain the true benefits of activity-based costing, managers must move from simply measuring costs, to find ways to ___ or ___ costs. although ABC and ABM have many potential benefits, these benefits must be weighed against the costs of obtaining the more accurate information. implementing an ABC can be a difficult task.