Quiz 10: Fundamentals of Cost Management

Business

Cost accounting system This is a system designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager. Activity based costing and activity-based management Under activity-based costing system, the overhead cost is allocated to various cost activity pools and then these cost pools are associated with products as cost drivers. An event, activity, work sequence etc. that causes cost to be incurred is called activity. Cost driver are the factors or activities having direct relationship with the resources consumed. The cost is allocated in two stages where firstly overhead cost is allocated to the cost pools and then cost is assigned to products using these cost pools in the proportion of their usage. Activity based costing provide cost driver rates i.e. predetermined overhead rate. Activity based cost management uses the activity-based costing data to assess the cost of value chains within the organization and further improves the same to reduce cost or delivery time. Activity based cost management is wider term and concept which is used by most of the organizations to improve their production processes and reduce costs. Managers uses ABCM to reduce the predetermined overhead rate or the number of setups used for predetermined rate. Hence, activity-based costing and activity-based management are common to some extent, but activity-based cost management is much wider concept where activity-based costing data and its framework is used to improve processes.

Cost accounting system This is a system designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager. Activity based costing and activity-based management Under activity-based costing system, the overhead cost is allocated to various cost activity pools and then these cost pools are associated with products as cost drivers. An event, activity, work sequence etc. that causes cost to be incurred is called activity. Cost driver are the factors or activities having direct relationship with the resources consumed. The cost is allocated in two stages where firstly overhead cost is allocated to the cost pools and then cost is assigned to products using these cost pools in the proportion of their usage. Activity based cost management uses the activity-based costing data to assess the cost of value chains within the organization and further improves the same to reduce cost or delivery time. Activity based cost management is wider term and concept which is used by most of the organizations to improve their production processes and reduce costs. Activity based costing provide cost driver rates which is predetermined overhead rate like $75 per setup cost. Managers uses ABCM to reduce the predetermined overhead rate or the number of set up used for predetermined rate. Hence, activity-based cost management is dependent on activity-based costing. Activity-based cost management cannot be implemented without activity-based costing.

Cost accounting system This is a system designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager. Value added activity These are part of manufacturing activity that increases the worth of a product or part of activity performed to deliver the services and increases the value of service. It involves consumption of resources which increases cost and customer is willing to pay for that additional cost. Examples includes additional packing done, features added to product, more refinement done to product like oil etc. Nonvalue-added activity These are not part of production or services related activities and increases the cost and time period to manufacture or deliver a product or service without doing any enhancement in its market value. It involves activities like, repairs or servicing of machines, waiting time for raw materials or labors, inventory storage, inspection or quality checking etc. Reason to identify value added and nonvalue added activities It is important for every organization to identify its activities performed for business operations as value added or nonvalue added ones. It helps managers to focus on key activities like value added ones and drive the resources towards them. Value added activities are important from customer perspective also as they are ready to pay for the same. Value added activities cannot be reduced as these are important for customers. Managers in the firm focus on nonvalue added activities to reduce cost and improve its turnaround time. All organization wants to minimize their non value added activities and tries to makes their processes automated or simple to maximize profits. Hence, it is important for managers to assess value added and nonvalue added activities of their business operations. Some of the nonvalue activities are as under: - •repairs or servicing of machines, •waiting time for raw materials or labors, •inventory storage, •inspection or quality checking etc.

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