Question

In: Accounting

Value chain and classification of costs, a computer company. Dell Computer incurs the following costs: a.   Utility...

Value chain and classification of costs, a computer company. Dell Computer incurs the following costs:

a.   Utility costs for the plant assembling the Latitude computer line of products

b.   Distribution costs for shipping the Latitude line of products to a retail chain

c.   Payment to David Newbury Designs for a design of the XPS 2-in-1 laptop

d.   Salary of computer scientist working on the next generation of servers

e.   Cost of Dell employees’ visit to a major customer to demonstrate Dell’s ability to interconnect with other computers

f.    Purchase of competitors’ products for testing against potential Dell products

g.   Payment to business magazine for running Dell advertisements

h.   Cost of cartridges purchased from outside supplier to be used with Dell printers

Required:

Classify each of the cost items (a–h) into one of the business functions of the value chain.

Why do managers consider direct costs to be more accurate than indirect costs?

Define variable cost and fixed cost. Give an example of each.

Solutions

Expert Solution

cost VALUE CHAIN BUSINESS FUNCTION
a production
b distribution
c design of products and processes
d reasearch and development
e customer service or marketing
f design of products and processes(or research and development)
g marketing
h production
Managers consider direct costs to be more accurate than indirect costs as direct costs
can be easily traced to a particular cost object and are more accurately assigned to that cost object than are indirect allocated costs
When costs are allocated,managers are less certain whether the cost allocation base accurately measures the resources demanded
by a cost object.
Variable costs are costs that vary with output.
Variable costs increase at a constant rate relative to labour and capital.
EXAMPLE-Variable costs may include wages, utilities, materials used in production, etc.
A fixed cost is a cost that does not change over the short-term, even if a business experiences changes in its sales volume or other activity levels.
This type of cost tends to instead be associated with a period of time.
EXAMPLE- Rent payment in exchange for a month of occupancy, Salary payment in exchange for two weeks of services by an employee.

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