Exam alert

An assessment question could ask you to calculate differences in fees charged by a business using
activity based costing.

Solution
To calculate differences in fees charged by a business using Activity-Based Costing (ABC), you'll need to
understand how ABC allocates costs based on activities. Here's a step-by-step guide on how you might
approach such a calculation:

Assumptions:

Let's assume you have a business that provides different services, and you want to calculate the fees
charged for each service using Activity-Based Costing.

Steps:

1. Identify Activities:

- List the activities involved in providing each service. For example, if services involve setup, processing,
and delivery, these are your activities.

2. Allocate Costs to Activities:

- Identify the costs associated with each activity. This may include direct costs and indirect costs.

- Use cost drivers to allocate indirect costs to each activity. Cost drivers are factors that drive the
consumption of resources. For example, the number of setups might drive setup costs.

3. Determine Cost per Activity:

- Calculate the cost per unit of each activity by dividing the total cost of the activity by the total
quantity of the cost driver. This gives you the cost per setup, processing unit, etc.

4. Assign Costs to Services:

- Identify the cost drivers relevant to each service.

 - Multiply the quantity of each cost driver for a particular service by the cost per unit of the
corresponding activity.

5. Calculate Total Cost for Each Service:

- Sum up all the costs assigned to each service to get the total cost.

6. Determine Fees Charged:

- Decide on a pricing strategy. It could be cost-plus pricing, where you add a markup to cover costs and
profit.

- Add the desired profit margin to the total cost to determine the fees charged for each service.

Example:

Let's say you have Service A and Service B. Service A requires more setups, and Service B requires more
processing.

- Setup Costs: $10,000

- Processing Costs: $20,000

- Service A: 50 setups, 100 processing units

- Service B: 20 setups, 200 processing units

- Cost per setup = $10,000 / 50 = $200

- Cost per processing unit = $20,000 / 100 = $200

- Service A Cost = (50 setups $200) + (100 processing units $200) = $10,000

- Service B Cost = (20 setups $200) + (200 processing units $200) = $20,000

- If you want a 20% profit margin:

- Service A Fee = $10,000 + ($10,000 20%) = $12,000

- Service B Fee = $20,000 + ($20,000 20%) = $24,000

This is a simplified example, and in practice, there might be more complexities. Ensure you understand
the specific context and requirements of your exam question. If you have specific numbers or additional
details, I can tailor the example accordingly.

Exam alert
It is important that you learn the four classification levels (shown below) and that you understand their

applications to specific organisations.

Solution
Exam alert
An assessment question could ask you to discuss the importance of a TQM system within a just-in-time

environment.

Solution
Importance of TQM in a JIT Environment:

1. Quality Assurance:

- Explanation: TQM ensures high-quality standards in every step of the process, crucial for JIT's fast-
paced production where defects can disrupt flow.

2. Waste Reduction:

- Explanation: TQM's focus on minimizing waste aligns with JIT's goal of lean production, reducing
excess inventory and improving resource utilization.

3. Continuous Improvement:

- Explanation: TQM's culture of continuous improvement complements JIT's need for ongoing
enhancements in processes and workflows.

4. Employee Involvement and Training:

- Explanation: TQM's emphasis on employee involvement and training supports JIT's reliance on a
well-trained and engaged workforce for precise timing and coordination.

5. Supplier Relationships:

- Explanation: TQM's focus on strong supplier relationships aligns with JIT's need for a responsive and
reliable supply chain.

6. Customer Satisfaction:

- Explanation: TQM's commitment to customer satisfaction ensures the consistent delivery of high-
quality products in JIT, meeting customer demands promptly.
 Conclusion:

Integrating TQM principles into JIT enhances operational efficiency, reduces waste, and ensures the
delivery of high-quality products, contributing to the success of lean and responsive production
processes.

Exam alert
Ensure you are able to explain quality conformance costs and quality non-conformance costs and the
relationship between them.

Solution
Certainly! Let's break down the concepts of quality conformance costs and quality non-conformance
costs, along with their relationship:

Quality Conformance Costs:

1. Definition:

- Explanation: Quality conformance costs are the expenses associated with ensuring that products or
services meet specified quality standards. These costs occur during the production or service delivery
process to prevent defects and ensure adherence to quality requirements.

2. Components:

- Prevention Costs: Costs incurred to prevent defects from occurring in the first place. Examples
include training programs, quality planning, and process improvement initiatives.

- Appraisal Costs: Costs incurred to detect defects through inspections, testing, and quality control
measures.

Quality Non-Conformance Costs:

1. Definition:

- Explanation: Quality non-conformance costs are the expenses incurred when products or services do
not meet specified quality standards. These costs arise from defects or failures and include both internal
and external costs.
2. Components:

- Internal Failure Costs: Costs associated with defects found before the product reaches the customer.
Examples include rework, scrap, and downtime.

- External Failure Costs: Costs incurred when defects are discovered by customers. Examples include
warranty claims, returns, and the potential loss of customer goodwill.

Relationship Between Quality Conformance and Non-Conformance Costs:

1. Balancing Act:

- Explanation: Organizations balance spending on preventing and detecting defects. The goal is to
minimize overall costs while ensuring products meet quality standards.

2. Continuous Improvement:

- Explanation: Constantly improving processes that prevent defects is key. This ongoing improvement
reduces the costs associated with defects.

3. Cost of Poor Quality:

- Explanation: Non-conformance costs are like the "cost of poor quality." Managing these costs is
crucial for long-term success, emphasizing the importance of delivering high-quality products or
services.