Read the summary and the most important questions on Financial Information and Decision Making

• Lecture 1

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• Indirect costs (overhead)

  Costs related to the particular cost object but cannot be traced to it in an economically feasible (cost effective) way.

• Why can't indirect costs be traced in an economically feasible way?

  - Cost element is share among cost objectives
  - Physically impossible to trace
  - Not cost effective to trace

• What are the steps to allocate the indirect costs to cost objects?

  1. Defining the cost objects (decide what departments/products/processes to cost)
  2. Accumulating the comment costs to be assigned to the cost objects (aka indirect cost pools)
  3. Allocating the accumulated costs to cost objects using an allocation base (cost driver) (usually based on how the cost objects consume common resources)

• Costs strictly proportional to activity:

  - a decision that reduces total activity by x% will result in a reduction of the associated costs by x%.
  
  - Stronger assumption than linearity. It requires that costs be strictly proportional to activity.
  
  - This implies that average costs should be constant and independent at the level of activity
  
  - Ci = P * Qi^b
  C = TC
  Qi = activity measure for a particular overhead account
  P = positive contstant
  b = quantifies how much of a given % of change in volume translates into a % change in costs

• Lecture 2

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• How do you calculate the prospective overhead rate?

  Prospective overhead rate = estimated annual overhead / estimated annual volume

• Process costing tracks

  - Direct materials
  - Conversion costs: labour + overhead

• Production consists of three batches:

  1. Beginning WIP
  2. Units startend and finished during the current period
  3. Ending WIP

• What are the four steps of process costing?

  1. Summarize physical flow of units and calculate equivalent units of work in the physical flow.
  2. Compute the costs per equivalent unit
  3. List all the costs to be assigned
  4. On the basis of costs per equivalent unit, costs are assigned to units in End WIP and units transferred out.

• Mitigating the incentive to overproduce

  - Remove manager's right to build inventory level greater than amount authorized by top management
  - Modify performance evaluation system, inventory holding charge against divisional profits.
  - Use just-in-time production systems
  - Change costing system: VC instead of AC

• Lecture 3

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• Rationale for allocation overhead

  - Inventory valuation rol (e.g. AC/VC, process costing)
  - Behavior modification rol (OHR works as internal tax system)
  - Product costing rol (because product costs are inputs to important decisions, firms care a great deal about getting their costs "right")