ACC Chapter 17 Preparation

As the complexity of a product's manufacturing operation increases, the number of activities and cost drivers used in an activity-based cost system will likely

increase.

Activity-based costing

is a two-stage overhead cost allocation system that identifies activity cost pools and cost drivers.

What overhead allocation basis is used by many companies with automated manufacturing processes to reduce product cost distortions?

machine hours.

An activity that adds costs to the product but does not increase its market value is a

non-value-added activity.

Activity-based costing is used in service industries as well as manufacturing.

True

E-Flix rents DVDs that are mailed out to customers upon demand. E-Flix has identified three activities involved in getting the videos to its customers. Information on those activities for the month of July follows: During July, the Tucker family placed 17 orders consisting of 21 DVDs. Tucker required 7 minutes of tech support. Customers pay $9.00 per month to rent unlimited DVDs. Using ABC, how much overhead is applied to the Tucker family account for technology support?

$0.35 The rate per activity is calculated for technology support, and then multiplied by the actual number of minutes of support required by Tucker. Technology support: $11,700/234,000 minutes = $0.05 per minute Applied to Tucker: $0.05 × 7 = $0.35

In order to achieve the most accurate costing, the cost driver chosen for a given activity must show a ___________ between the cost driver and the actual consumption of overhead costs.

high degree of correlation.

Which of the following is the proper classification of activities according to activity level for a computer manufacturing company?

Assembly: Unit Maintenance: Facility

E-Flix rents DVDs that are mailed out to customers upon demand. E-Flix has identified three activities involved in getting the videos to its customers. Information on those activities for the month of July follows: During July, the Tucker family placed 17 orders consisting of 21 DVDs. Tucker required 7 minutes of tech support. Customers pay $9.00 per month to rent unlimited DVDs. Using ABC, how much overhead is applied to the Tucker family account for order taking costs?

$1.87 The rate per activity is calculated for order taking, and then multiplied by the actual number of orders incurred by Tucker. Order taking: $20,592/187,200 orders = $0.11 per order Applied to Tucker: $0.11 × 17 = $1.87

Petrie Financial Services provides finance and accounting consulting services to clients. Petrie incurred 110 hours of labor for Layline Corp. at a cost of $85 per hour, and billed Layline $165 per hour. Overhead is applied at 58% of professional labor cost. How much is the cost of the Layline client using traditional costing?

$14,773 The cost of the client includes both professional labor and overhead applied on the basis of professional labor cost: Professional labor: 110 hours × $85 = $9,350 Overhead: $9,350 × 58% = $5,423 Total cost = $9,350 + $5,423 = $14,773

Bangor Company manufactures two products, Velveeto and Fondant. Bangor has estimated overhead costs as follows: setting up machines ($160,000), machining ($300,000) and inspecting ($100,000). Information on the two products follows: If Bangor uses ABC, how much overhead will be applied to Velveeto?

$300,000 Using activity-based costing, overhead is applied using the related cost driver - machine step-ups, machine hours, and inspections, for each of the three cost pools. The rate is multiplied by the actual activity for each cost object. Setups: [$160,000/(2,400 + 1,600)] X 2,400 = $96,000 Machining: [$300,000/(96,000 + 104,000)] X 96,000 = $144,000 Inspecting: [$100,000/(3,000 + 2,000)] X 3,000 = $60,000 Total = $96,000 + $144,000 + $60,000 = $300,000

Bergeron Co. manufactures two printers, Pronto and Speedy. Total overhead of $1,260,000 is incurred by three departments: Setups $80,000; Machining $880,000; and Shipping $300,000. The company also incurs $40,000 of direct labor. Information concerning the two product lines is shown below: Using activity-based costing, how much overhead is assigned to Speedy?

$535,500 The rate per activity is calculated for each activity, setups, machining, and shipping, and each rate is multiplied by the actual activity: [(25/50) × $80,000] + [(3,500/10,000) × $880,000] + [(375/600) × $300,000] = $535,500.

The service company, Excellent Maids, cleans hotel rooms at resorts on Hilton Head Island. Excellent has identified three activities involved in cleaning. Information on those activities for the month of May follow: At the Calypso Resort, the company cleaned 900 rooms during March, 1,200 public spaces, changed 1,600 beds, and cleaned 900 bath rooms. Using ABC, how much overhead is applied to each hotel room cleaned?

$9,450 The rate per activity is calculated for each activity (changing bed linens, cleaning bathrooms, and other cleaning), and each rate is multiplied by the actual activity: Changing bed linens: $72,000/48,000 beds = $1.50 per bed Cleaning bath rooms: $64,000/32,000 bath rooms = $2.00 per bath room Other cleaning: $45,000/18,000 spaces = $2.50 per space Allocated cost: ($1.50 × 1,600) + ($2.00 × 900) + ($2.50 × (1,200 + 900)) = $9,450

How many steps are involved in activity-based costing?

4.

What is the primary barrier to using activity-based costing in a service company?

A large portion of overhead costs are company-wide costs.

Which of the following is an important element in successfully operating a just-in-time approach to production?

A multi-skilled workforce.

Which of the following is used to eliminate inventories?

A pull approach

Which of the following is a limitation of activity-based costing?

Activity-based costing can be expensive to use.

Which of the following is a limitation of activity-based costing?

Arbitrary allocations of overhead costs may continue.

How are equipment setups classified?

Batch-level activity

Which one of the following activities for a window cleaning service is a value-added activity?

Cleaning plate glass windows for a customer.

Which of the following is the third step in applying an activity-based costing system?

Compute the overhead rate for each cost driver.

Which of the following should not be included as part of the cost pool of machine setups?

Cost of the accounts payable supervisor's salary

Which of the following would not be an overhead activity cost pool?

Direct materials

Which of the following is not a reason in support of using activity-based costing?

Employee turnover will decrease as a result of using activity-based costing.

The activity-based overhead rate is computed by dividing

Estimated overhead per activity by expected use of cost drivers per activity.

An advantage of ABC is that it is inexpensive to implement.

False

JIT is based on a push-approach.

False

Product design is a unit-level activity.

False

The most difficult part of computing accurate unit costs is determining the correct amount of direct labor cost to assign to each product.

False.

Traditional costing systems group costs according to activity cost pools.

False.

Which of the following is a relevant facility-level cost driver for air conditioning costs in a chiropractor's office?

Floor space

Which of the following is not one of the four steps involved in calculating unit costs under activity-based costing?

Identify the cost driver that has a minor correlation to the costs accumulated in the activity cost pool.

Which statement is true about activity-based costing (ABC)?

It focuses on activities performed to produce a product.

Which of the following is not one of the classification levels of activity-based costing activities?

Macro-level activities

What is the primary benefit of activity-based costing?

More accurate product costing

Which of the following is not an important element of just-in-time processing?

Multiple product lines

For which of the following activities will direct labor hours and direct labor cost be an appropriate cost driver?

Painting

Which of the following is a value-added activity for a bank?

Processing electronic funds transfers

Theodore Company's overhead rate for machine setups is $115 per setup. A total of 105 setups are estimated for the period. At year-end, it was determined that Products A and B have 60 and 45 setups, respectively. How much is the overhead cost assigned to each product?

Product A $6,900, Product B $5,175

Which of the following is an overhead activity cost pool for a manufacturer?

Setting up machines

Which of the following activities adds value to a product or service?

Shaping a piece of metal on a lathe

If a traditional costing system allocates too much overhead to one product, the firm is likely to experience which of the following problems?

The firm may lose market share to competitors

Which one of the following would be the best cost driver for the activity of purchasing?

The number of purchase orders issued

Overhead is applied to Fondant using direct labor hours. What is the total amount of overhead charged to this product line using traditional costing?

The overhead rate is calculated by dividing estimated overhead divided by estimated direct labor hours. Then, the rate is multiplied by the actual activity. Rate = [($160,000 + $300,000 + $100,000) / 160,000 hours] = $3.50 per direct labor hour Applied = $3.50 × 100,000 = $350,000

Activity-based management leads to the identification of value-added and non-value-added activities.

True

Two benefits of ABC are that it leads to better management decisions and increases the accuracy of overhead cost allocations.

True

A cost driver is a factor or activity that has a direct cause-effect relationship with the resources consumed.

True.

Activity-based costing systems rely on multiple bases for overhead cost allocation.

True.

Which of the following is the proper classification of the two activities listed?

VA: Assembly NVA: Inspection

When is it appropriate to use direct labor as a basis for assigning overhead costs to products?

When direct labor constitutes a significant part of total product costs.

Which of the following statements is false concerning the use of ABC in service industries?

When using ABC for service industries, special methods must be used to identify cost pools and cost drivers due to the unique nature of the services offered.

Donatello Co. has identified an activity cost pool to which it has allocated estimated overhead of $9,600,000. It has determined the expected use of cost drivers for that activity to be 800,000 inspections. Widgets require 200,000 inspections, Gadgets 150,000 inspections, and Targets 450,000 inspections. How much is the overhead assigned to each product?

Widgets $2,400,000, Gadgets $1,800,000, Targets $5,400,000

Under just-in-time processing

all of these answer choices are correct.

Any activity that causes resources to be consumed is called a

cost driver.

Activity-based costing is most appropriate to use when labor costs are a(n) ___________ proportion of total product costs and the manufacturing process is __________.

decreasing, complex.

The primary objective of just-in-time processing is to

eliminate or reduce all manufacturing inventories.

To assign overhead costs to an individual product, the activity-based overhead rate is multiplied by

the number of cost drivers used per product.