QUESTIONS cFOR cDISCUSSION
4-1. c c Anything cin cparticular cfor cwhich ca cmeasurement cof ccost cis cdesired.
cThis ccould cbe ca cunit cof cservice, ca cprogram, cdepartment, cor corganization.
cFor cexample, cone cmight cbe cinterested cin cthe ccost cof cplowing csnow
cfrom cthe croads cof cthe cTown cof cMillbridge. cThe cmost cbasic cpoint cin
ccosting cis cto cclearly cdefine cand ccommunicate cthe ccost cobjective.
cCommunication cis ccritical, cand cdata conly cbecome cuseful cinformation cif
cthey care ccommunicated cin ca cway cthat ceveryone cunderstands.
4-2. c c Full ccost crefers cto cthe ctotal cof call ccosts cassociated cwith ca ccost cobjective.
cThis cincludes cdirect cand cindirect ccosts. c Direct ccosts care cthe ccosts
cincurred cwithin cthe corganizational cunit cfor cwhich cthe cmanager chas
cresponsibility, cor cthe ccosts cof cresources cfor cdirect cproduction cof ca cgood
cor cservice. c Indirect ccosts care ccosts cthat care cassigned cto can
corganizational cunit cfrom celsewhere cin cthe corganization, cor ccosts cof
cresources cthat care cnot cused cfor cdirect cproduction cof ca cgood cor cservice.
c Direct cand cindirect ccosts care cparticularly cdifficult cto cunderstand cbecause
ctheir cdefinitions crelate cto cthe cobject cof cthe canalysis. cIf cone cis cinterested
cin cthe cdirect ccost cof cthe cpublic cworks cdepartment, cit cis cappropriate cto
cinclude cdepartment csupervisory cpersonnel cin cthat ccost. cIn ccontrast, cif
cone cis cinterested cin cthe cdirect ccost cper cmile cof croad cplowed, cthat cwould
cinclude cthe cplow, cthe cdriver, cand cthe ccost cof cthe csalt cspread con cthe
croad, cbut cnot cthe ccost cof csupervisory cpersonnel. cIn cthat cexample, cthe
csupervisors care cdirect ccosts cof cthe cpublic cworks cdepartment c(i.e., cwhat cit
ccosts cto coperate cthe cpublic cworks cdepartment) cbut cindirect ccosts cof
cplowing cthe croad c(i.e., cwhat cit ccosts cto cplow cthe croads). c The cvarious
cscheduling cand cother cadministrative cactivities ccarried cout cby csupervisory
cpersonnel care cessential cto crunning cthe cdepartment, cbut cthey care cnot ca
cdirect ccost cof cplowing csnow.
4-3. c c Average ccost cis cthe cfull ccost cof cany ccost cobjective cdivided cby cthe
cnumber cof cunits cof cservice cprovided. cFixed ccosts: cthose ccosts cthat cdo cnot
cchange cin ctotal cas cthe cvolume
,4-2 Instructor’s c Manual c for c Financial c Management c for c Public, c Health, c and c Not-for-Profit
c Organizations, c 4E
of cservice cunits cchanges cover ca crelevant crange cof cactivity. c Variable
ccosts: cthose ccosts cthat cvary cdirectly cwith cchanges cin cthe cvolume cof
cservice cunits cover ca crelevant crange cof cactivity. c If call cof cthe ccosts cof
cplowing csnow, cboth cdirect cand cindirect, care cadded cand cthe ctotal cis
cdivided cby cthe cnumber cof cunits, cthe cresult cis cthe ccost cper cunit cor cthe
caverage ccost. cSo, cthe ctotal ccost ccould cbe cdivided cby cthe cnumber cof
cmiles cto cfind cthe ccost cper cmile cplowed. cOnce cMeals cfor cthe cHomeless
c(Meals) crents cspace cfor ca csoup ckitchen, cthe crent cwill cnot cchange cfrom
cday cto cday, ceven cif cthe cnumber cof cmeals cprovided cvaries cby ca csubstantial
camount. cPerhaps cMeals cis cserving c300 cpeople c a cday cat ca cgiven csoup
ckitchen. cIf cMeals cwere cto cfeed canother cperson, cthe crent cwould cstay cthe
csame. cTherefore, cit cis ca cfixed ccost. cIn ccontrast, cthe camount cof cfood cthat
cMeals cmust cpurchase crepresents ca cvariable ccost. cIf cmore cpeople care
cserved, cmeals cwill cneed cmore cfood. cActivity crepresents cthe cvolume cof
cservices cprovided.
4-4. c c Marginal ccosts care cthe cextra ccosts cincurred cas ca cresult cof cproviding cone
cmore cservice cunit c(such cas cone cmore cmeal). cAt cfirst, cmarginal ccosts
cwould cappear cto cbe cidentical cto cvariable ccosts. cIn cboth ccases, cif cthere cis
cone cmore cunit cof cactivity, cthere cwill cbe can cincrease conly cin cvariable
ccosts. cMarginal ccosts, chowever, cmore cbroadly clook cat call ccosts c that
c might c change c as c a cresult c of c a c decision. c Suppose c that c HOS c has can c x-
ray
machine cthat ccan ctake c5,000 cx-rays cper cyear. cWhat cis cthe ccost cof cdoing
cone cmore cx- cray? c If cHOS chas cto cbuy canother cmachine cto cdo cthe c5,001st
cx-ray, cthen con cthe cmargin, cthe ccosts cof cthe cadditional cpatient care cthe
cvariable ccost cof cone cmore cpatient cplus cthe
cost cof cacquiring canother cmachine.
4-5. c c Cost cper cunit cdepends con cvolume. cIf cvolume cis clow, cthe ccost cper
cunit cis chigher cthan cif cvolume cis chigh. c This cis cbecause cas cvolume crises,
cfixed ccosts cget cshared cresulting cin cless cfixed ccost cper cunit. cFurthermore,
cfor chistorical cpurposes cmeasuring cthe caverage ccost cmay cbe cadequate.
cFor cprospective cdecision cmaking, cwe care coften cinterested cin cthe
cmarginal ccosts. cTherefore cthe cappropriate cmeasure cof ccost cdepends cin
cpart con cthe creason cwe cwant cto cknow cthe ccost.
4-6. c Suppose cthe cactivity cis cthe ccost cof ceducating cstudents. cOne ccould cargue
cthat cthe cteacher cand csupplies cused cin cthe cclassroom care cdirect ccosts
cand cthat cthe cprincipal cand csecretaries cin cthe cschool coffice cand cthe
csuperintendent cat cthe ccentral coffice care cindirect ccosts. cAlternatively, cif
cthe cactivity cis cthe ccost cof crunning ceach cof cthe cschool cdistrict’s
celementary cschools, cthen cthe cdirect ccosts cwould cinclude cthe cprincipal,
csecretary, cand cheat, cin caddition cto cthe cteacher cand cclassroom csupplies.
cHowever, cit cwould cnot cinclude cthe cdistrict csuperintendent, cwho cwould
cbe can cindirect, cor coverhead, ccost. cThe csuperintendent conly cbecomes ca
cdirect ccost cwhen cthe cactivity cis cthe ccost cof crunning cthe cschool cdistrict.
4-7. c For cchanges cin cactivity cvolume cwithin cthe crelevant crange, cmarginal
ccosts care cthe csame cas cvariable ccosts. cIf ca cproposed cchange cis cbeyond
cthe crelevant crange cof csome cfixed ccost, cthen cthe cmarginal ccosts cwill
cinclude cthe cchange cin cfixed ccost cas cwell cas cthe cvariable ccosts.
4-8. c In corder cto cassign ccosts cfrom cone cobjective cto canother, ca cbase cis
cneeded. cFor cexample, cwe ccould cchoose cto callocate ccosts cbased con
cpatient cdays. cIn cthat ccase, cthe cnumber cof cpatient cdays cwould cbe cthe
cbase. cAlternatively, ccosts ccould cbe callocated cbased con chours. cIt cis
ccommon cto callocate chousekeeping ccosts cbased con chours cof cservice
cprovided. cThe ctotal cnumber cof chours cof chousekeeping cservice cbecomes
cthe
, 4-3 Instructor’s c Manual c for c Financial c Management c for c Public, c Health, c and c Not-for-Profit
c Organizations, c 4E
base. cIf cthis cbase cis cdivided cinto cthe ctotal ccost cfor cproviding chousekeeping
cservices, cthe cresult cis can coverhead capplication crate, cin cthis ccase, ca ccost
cper chour cof cservice.
4-9. c Activity-based ccosting c(ABC) cconsiders cthat cvolume cis cnot cthe conly
cgenerator cof ccost. cOften cactivities cwith clow cvolume cmay cgenerate
csignificant camounts cof ccost. cIf cindirect ccosts care callocated cbased con
cvolume, cthey cwill cbe cover-assigned cto csome cunits cof cservice cand cunder-
assigned cto cothers. cA cmore caccurate capproach cwould cbe cto callocate
cindirect ccosts cbased con cthe cactivities cthat cdrive cthem.
c c INSTRUCTOR’S cNOTE c c c
Activity cBased cCosting
One ccould ccontend cthat cif cyou cperform ccost cmeasurement ccorrectly cto
cbegin cwith, cthere cis cno cneed cfor cABC. cThe cproblem cis cthat ca cmodel c T
cFord cwas cmostly cdirect ccost cand cvery clittle coverhead, cbut ca cmodern cFord
cis cmostly coverhead cand cvery clittle cdirect ccost. cWhy? cBecause cwe cgot
csloppy cand cstarted callocating cdirect ccosts cas cif cthey cwere cindirect cbecause
cit cis ceasier cto callocate con cbroad cbases crather cthan cto cactually ctry cto ctrack cthe
ccosts. cSo, cABC cis csold cas can capproach cto callocate cindirect ccosts cmore
caccurately. cBut cthat cis ca ccontradiction. cThere cis cno caccurate cway cto
callocate ccosts cthat care creally cindirect. cABC cis creally ca cmovement ctoward
ctreating cmore cof cour cdirect ccosts cas cbeing cdirect. cIf cthere cis ca ccause-and-
effect crelationship, cit ccan cbe chidden cby cbroad callocation capproaches. cCost
caccounting chas clong ctaught cthat cit cwas cnecessary cto cfocus con cdirect ccosts
cand cto cuse cmultiple ccost cbases cwhen cyou cdo chave cto callocate ccosts cin
corder cto cincorporate cas cmuch cof cthe ccause cand ceffect cas cpossible. cOn cthe
cother chand, cABC cdoes cserve ca crole cbecause corganizations chave cbecome cso
cconfused cby ctheir ccost callocations cthat cthey coften cdon’t cknow cwhich cof
ctheir ccosts care ctruly cdirect ccosts cnor cto cwhich cspecific ccost cobjective cthey
crelate.
4-10. c The cdecision cof cwhether cto c―make cor cbuy‖ cis cone cthat cis cbest
caddressed cusing can capproach ccalled cmarginal ccost canalysis. cThis
capproach cis csometimes creferred cto cas cincremental canalysis cor cout-of-
pocket canalysis. cThe cessence cof cthe capproach cis cthat cdecisions csuch cas
cwhether cto cprovide ca cservice cor cto cchange cthe cvolume cof ca cservice
cshould cbe cbased con cmarginal crather cthan caverage ccosts.
4-11. c If ca cparticular cprogram, cservice, cor cactivity cis cexpected cto chave ca
cvolume cof cactivity cthat cis ctoo clow cto cbreak ceven, cthe cactivity cmay cnot cbe
cfeasible. cHowever, csometimes cchanges cin cthe cactivity ccan cbe cmade cto
cachieve ca cbreak-even cstatus. cOne capproach cis cto clower cthe cvolume
cneeded cto cbreak ceven. cThere care cthree cways cto creduce cthe crequired
cbreak-even clevel. cOne ccan clower cthe cfixed ccosts cby cgetting cby cwith
cless cexpensive cor cfewer cfixed cresources. cThat cmay cor cmay cnot cbe
cpossible, cdepending con cthe cspecific ccircumstances. cA csecond cway cto
clower cthe cbreak-even cpoint cis cto cincrease c prices. c Price c increases c would
c increase c the c contribution c margin c per c unit.
