1. Example of activities best classified as unit-level, batch-level, product-lev
ID: 2479226 • Letter: 1
Question
1. Example of activities best classified as unit-level, batch-level, product-level, or organization-sustaining activities?
2. Definition and example of a duration and transaction driver.
3. What is the general rule in relevant cost analysis is?
4. What is the opportunity cost of making a component part in a factory with no excess capacity is the?
5. Freestone Company is considering renting Machine Y to replace Machine X. It is expected that Y will waste less direct materials than does X. If Y is rented, X will be sold on the open market. For this decision, what factors is (are) relevant?
Explanation / Answer
Product-level activities relate to specific products and must be carried out regardless of how many batches or units of product are produced or sold. For example, designing a product, advertising a product, and maintaining a product manager and staff are all product-level activities.
Organization sustaining activities that are not specifically associated with a specific product or customer. For example, the costs of an audit and filing information with government agencies are examples of organization-sustaining activities.
2. Duration drivers provide a more accurate basis for allocating costs than the number of transactions when there is a significant variation in the time required to complete an activity. For example, if all deliveries are completed in 10 minutes then it is simple (and accurate) to use the number of deliveries as a cost driver. If one delivery requires 10 minutes and another two hours, then using time for deliveries as the cost driver will improve the accuracy of the costing system. However, duration drivers are often seen as more expensive to measure and record than transaction drivers.
A transection drivers determines the number of times an activity is performed. Examples are number of set-ups, number of receipts and number of products supported. Transection drivers are the least expensive type of cost driveers, but they might provide inaccurate results.
3. A general rule in relevant cost analysis is variable cost are always relevant. Differential future costs and revenues are always relevant. Depreciation and fixed costs are always irrelevant.
4. Opportunity cost of making a component part in a factory is the difference between the price at which it is available in the market and cost of in house production.
5. Relevant factors for decision making are saving in case of less wastage from machine y, sale proceeds from the sale of X machine. And the overall saving from the wastage should be more or equal to the rent.
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