Week 4: Discussion 1
How does activity-based costing differ from the traditional costing approach? When would it give more accurate costs than traditional costing systems? * Activity based costing (ABC) is a method for assigning costs to products, services, projects, tasks, or acquisitions, based on the activities that go into them and the resources consumed by these activities. ABC contrasts with traditional costing, which sometimes assigns costs using somewhat arbitrary allocation percentages for overhead costs or the so-called indirect costs. Think about when and if the cost of this additional information is beneficial? * The ABC approach will have more cost because of the cost to use the system but will be beneficial because of the three will be more precise data in which to make better informed decisions. This is reflected is this week’s lecture. Everyone, is ABC considered GAAP? Can it be used for external reporting? Why or why not? * ABC system does not conform to GAAP principles. According to these principles product cost calculated for external reports purpose must include all of the manufacturing costs; but in ABC system products costs product costs exclude some manufacturing costs, and include some non-manufacturing costs. Some companies do use ABC in their external reports and some do not for the following reasons:
1- external reports are less detailed than internal reports prepared for decision making 2- On external reports, individual product costs are not reported.
Week 4: Discussion 2
Only those costs that change need be included in the decision making process. Evaluate this statement and discuss its merits or shortcomings. * Incremental analysis is the process of identifying relevant revenue and costs under different assumptions to make the best possible decision on how much to produce and at what price. The decision process involves choosing between alternatives based on the differences. The three major components of incremental analysis are the revenue differences (often called benefits), costs differences and cost savings difference. If one assumption produces higher incremental benefits or revenue than all others, then the right choice is to select that alternative. * Sunk costs are costs that have already been incurred and will not be changed by any decision that is made. In the decision to sell a product or process it further, prior production costs are sunk costs. These production costs have already been incurred and cannot be changed regardless of whether the company decides to sell the product as it is or process it further. Therefore, they should not be included in the analysis. * Definition:
Opportunity cost is the potential benefit that is given up when one alternative is selected over another. To illustrate this important concept, consider the following examples: Example 1:
Vicki has a part-time job that pays her $200 per week while attending college. She would like to spend a week at the beach during spring break, and her employer has agreed to give her the time off, but without pay. The $200 in lost wages would be an opportunity cost of taking week off to be at the beach. Example 2:
Suppose that Neiman Marcus is considering investing a large sum of money in land that may be a site for future store. Rather than invest the funds in land, the company could invest the funds in high-grade securities. If the land is acquired, the opportunity cost will be the investment income that could have been realized if the securities had been purchased instead. Example 3:
You are employed in a company that pays you $30,000 per year. You are thinking about leaving the company and returning to school. Since returning to school would require that you give up $30,000 salary. The forgone salary would be an opportunity cost of seeking further education....