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Mr… Lausanne is finding the allocation assignment a daunting task. He knows there have been disagreements among the product managers over the allocation of facility costs, and he fears being asked to defend his method of allocation. Why would the allocation of facility-level costs be subject to disagreements? Allocation costs can be argued based on how the managers perceive how the charges apply to his/her department. This possibly can be minimized by explaining the facility level costs are not directly associated with a specific reduce or service, but incurred to support the facility as a whole. 6. What is the relationship between activity-based management and just-in- time inventory? Of cost drivers. The BBC assigns costs to pools; and during the second stage the cost pools are allocated to products or cost objects by utilizing cost drivers that measure the object’s use of that activity. This activity based management helps identify costs, while just-in-time-inventory seeks to eliminate the non-value added activity by reducing inventory holdings and moving the activities associated with their maintenance.
The just-in-time systems inventory is made available just in time for customer consumption. Chapter 6 3. Identify the four hierarchical levels used to classify costs. When can each of these levels of costs be avoided? The four hierarchical levels used to classify costs described by (Edmonds, Tsar, & Olds, 201 1, pig. 257) (1) Unit level costs – costs that are incurred each time a company makes a product or performs a service. These costs can be avoided by eliminated the production of a single unit of product or service. ) Batch level costs – costs related to the production of more than one product or performance of more than one service that are organized into batch and completed at the same time. Bath level costs are eliminated when the batch of work is eliminated. When a batch is eliminated, a unit level costs associated with the units in a batch are also eliminated. (3) Product level costs – Costs that are incurred to support specific kinds of products or services. Product level costs are eliminated when the product line is discontinued. ) Facility level costs – costs that are incurred on behalf on the entire business. These costs are typically eliminated when the business is closed or they can be partially eliminated when a segment of the business that is in a separate facility is eliminated. 1 . Carbon Company invested $300,000 in the equity securities of Mann Corporation. The current market value of Carbon’s investment in Mann is $250,000. Carbon currently needs funds for operating purposes. Although interest rates are high, Carbon’s president has decided to borrow the needed ends instead of selling the investment in Mann.
He explains that his company cannot afford to take a $50,000 loss on the Mann stock. Evaluate the president’s decision based on this information. The president seems to not be taking into account the $50,000 loss the company has suffered. The total loss in the market value of the corporation cannot be sidestepped by borrowing the funds for operating activities within the corporation. The significant items to be questioned are whether Carbon should invest $250,000 by purchasing stock or should the funds be better utilized investing in operating activities.
If the president decides to invest then Carbon should sell the stock instead of borrowing money. 10. Are all fixed costs unavoidable? It is my opinion some fixed cost are avoidable, for instance a company might set aside money to produce advertisements. Management could make a decision to reduce the allocation towards this type of expense. The flip side of fixed costs are there isn’t a way to get around rent and utilities. 14. What level(s) of costs is (are) relevant in special order decisions?