Decision Points

Decision	Guidelines
1. When does product undercosting or overcosting occur?	Product undercosting (overcosting) occurs when the cost measurement system produces a cost for a product that is below (above) the cost of the resources that the product consumes. Broad averaging, or peanut-butter costing, a common cause of undercosting or overcosting, is the result of using broad averages that uniformly assign, or spread, the cost of resources to products when, in fact, the individual products use those resources in a nonuniform way. Productcost cross-subsidization means that one undercosted (overcosted) product results in at least one other product being overcosted (undercosted).
2. What are the main guidelines for refining a costing system?	Refining a costing system means making changes to better measure the costs of indirect resources used by different cost objects such as products or services. These changes can require classifying more costs as direct costs, increasing the number of indirect-cost pools so that each pool is fairly homogenous, or using cost drivers as cost-allocation bases.
3. What is the difference between the design of a simple costing system and an activity-based costing (ABC) system?	The ABC system differs from the simple system by its fundamental focus on activities. The ABC system typically has more homogeneous indirect-cost pools than the simple costing system, and more cost drivers are used as cost-allocation bases.
4. What is a cost hierarchy?	A cost hierarchy categorizes activity-cost pools on the basis of the different types of cost drivers, cost-allocation bases, or different degrees of difficulty in determining cause-and-effect (or benefitsreceived) relationships. ABC systems commonly use a cost hierarchy with the following four levels: output unit–level costs, batch-level costs, product-sustaining costs, and facility-sustaining costs.
5. How do managers cost products or services using ABC systems?	In ABC, costs of individual activities are identified and then assigned to the cost objects, such as products or services, based on the activities the products or services consume.
6. What are the main benefits and costs of implementing an ABC system?	The main benefit of an ABC system is more accurate cost information, particularly in situations where indirect costs are a high percentage of total costs and where products and services make diverse demands on indirect resources. The main costs of ABC systems are the difficulties of the measurements necessary to implement and update the systems.
7. How can ABC systems be used to manage better?	Activity-based management (ABM) is a management method of decision making that uses ABC information to satisfy customers and improve profits. ABC systems are used for such management decisions as pricing, product-mix, cost reduction, process improvement, product and process redesign, and planning and managing activities.