Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
12 Cards in this Set
- Front
- Back
|
Direct & Indirect costs vs. Variable & Fixed
|
Direct cost is linked directly to the product itself (e.g. a shirt button, person who sews on the button)
Indirect cost (overhead) is not directly responsible for production (e.g. sales & finance teams, production overhead) Variable cost: linked directly to the production volume, so is inherently Direct Fixed cost: may be direct (e.g. direct labor) or may be indirect |
|
|
Full Cost is the summation of ___ & it works such that cost is evaluated at what level?
|
Commercial Overhead + Manufactured Cost (Direct Cost + Production Overhead)
Full Cost divides overheads (indirect costs) evenly among groups (typically products) in order to evaluate each on its per-unit cost |
|
|
5 Reasons that Full Cost is bad
Consider, if indirect Fixed costs (admin) could be reasonably allocated by volume alone, they'd already be direct fixed costs |
- Analyzes on a "per unit" basis
- Encourages volume chasing to "hide" overheads - People spend overheads without consequence - Complexity (marketing and finance "owe" each other) - Politics decide who gets stuck with overheads |
|
|
Why is "per unit" bad?
|
Encourages firms to cut the "expensive" product instead of considering the greater impact (total cost, total revenue, etc)
e.g. a less profitable product could only make up a small portion of the sales mix, and also be keeping an important client on board. e.g. a seemingly small inefficiency on a product could have significant ramifications if it's a large part of the product mix |
|
|
2 Reasons why volume chasing bad + "formula"
"Takes a big customer to lose big money" |
Volume discounts are often offered (could be costing you more than you're offering)
Increasing volume dramatically can actually increase "fixed" costs margin from products - cost to serve = realised margin |
|
|
Volume chasing in the short run vs. Full Cost volume changing - why is the former okay?
|
Volume is a useful focus for short run cash flows because "fixed" costs (which may include some direct costs) are not changeable, and therefore should not be considered.
Full Cost is not useful in because nothing is truly "fixed" in the long term |
|
|
Capacity cost drivers
|
Unused capacity should (initially) be separated out, not attributed to a particular product / group b/c:
- encourages the right question, "issue is that we are not at / could benefit from full capacity" - can identify additional resource available to other departments - may be needed to handle fluctuating demand |
|
|
Overall principle of ABC
|
Make long-term indirect (AND FIXED?) costs variable, so that they can be assessed and managed.
- note not all fixed/indirect costs can be managed this way. In which case, they should sit separately and not be applied to a unit / group |
|
|
2 Pitfalls of top-down ABC
|
Takes the cost of a resource and applies it to the percentage used. e.g. the finance department uses 20% of the building space.
- Does not allow for practical capacity (assumes all resources, including people, work 100% of the time) - Entire Accounting system must be adjusted when allocation percentage shifts... (working in percents is never a good idea, always use raw numbers) |
|
|
2 ways that Time Based (bottom up) ABC solves top-down problems
|
- estimates practical capacity (she works 35 of her 40 hours)
- identifies the "cost driver", which is the actual unit being used. e.g. miles driven, time spent, space used - estimates how much of the cost driver is needed for various *activities*. e.g. Logging a customer order takes 10 minutes B/C it is based on an (adjustable) rate, it allows for flexible time allocation Can help a firm identify when it's not using all of its resources (e.g. only 10 reports last week? but that should only have taken her 32 hours... ) |
|
|
ABC and cost pool hierarchy
|
Cost pool can be measured in various ways
- e.g. the group of people used on a surgery or "nurses" and "surgeons" So go to the level of granularity that still adds value (heart surgeons are far more expensive than nurses) |
|
|
Useful - ABC's hierarchy levels
|
Facility
Customer Product Batch Unit |
