Ch. 4: Activity Based Costing

The cost of implementing and maintaining an activity-based costing system ______ the benefits received.

may outweigh

A significant limitation of the ABC model is that the product costs computed will most likely be ______.

overstated for purposes of decision making

Designing and advertising a good are both ______-level activities.

product

Research & development is a(n)

product-level activity

Implementing activity-based costing ______.

requires taking employees away from other tasks should be done by a cross-functional team requires substantial resources

A plantwide overhead rate based on direct labor hours is ______ appropriate.

sometimes

The activity rate is computed by dividing the ______ by the ______.

total cost in the activity cost pool; activity level in the activity cost pool

True or false: Activity-based costing relies on a number of critical assumptions which could distort information for making decisions.

true

An activity that must be done for each item produced is a(n) __ level activity.

unit

Activity-based management is focused on ______.

-Reducing defects -Eliminating waste

activity-based management

a management approach that focuses on managing activities as a way of eliminating waste and reducing delays and defects

In ABC, any event that causes consumption of overhead resources is a(n)

activity

Total cost of each activity divided by the total activity is the computation of ______.

activity rates

When a company has extensive product diversity and complex overhead, it is best to assign overhead using ______.

activity-based costing

Activity

an event that causes the consumption of overhead resources

Customer orders are considered to be a(n) ______-level activity.

batch

Costs at the batch level depend on the number of ______.

batches processed

An activity cost pool accumulates costs for ______ activity measure(s).

exactly one

Focusing on activities to eliminate waste, decrease processing time, and reduce defects is the basis of

facility or organization

T/F: Activity-cost rates may either be computed per product or per activity.

false

True or false: Traditional cost systems tend to undercost standard products and overcost specialty products.

false

Benefits of activity-based costing include ______.

more accurate product costs helping target areas for process improvement helping managers understand the nature of overhead costs

Usually, traditional costing ______ high-volume products and ______ low-volume products.

overcosts; undercosts

activity rate

An overhead rate in activity-based costing. Each activity cost pool has its own activity rate which is used to assign overhead to products and services.

Total estimated manufacturing overhead is $900,000 and total estimated activity is 30,000 machine-hours. The plantwide overhead rate is $

$30 per machine hour Reason: $900,000/30,000 = $30

A company assigns overhead using a plantwide rate. If total estimated manufacturing overhead is $900,000 and the total estimated activity is 30,000 machine-hours, the overhead cost assigned to a product using 12,000 machine-hours is ______.

$360,000 Reason: ($900,000 ÷ 30,000) × 12,000 = $360,000

Given direct material cost of $10, direct labor cost of $15, direct-labor based overhead of $12 and Activity-Based Costing overhead of $16, the total cost of the product using Activity-Based costing is $

$41.00 Reason: Direct materials + direct labor cost + activity-based costing overhead $10 + $15 + $16 = $41.00

A company's total expected overhead for the year is $500,000. Two activity cost pools have been identified: Customer Service with a total cost of $200,000 and a total activity of 25,000 customer service calls; and Product Development with a total cost of $300,000 and total activity of 20,000 development hours. Using activity-based costing, calculate the appropriate activity rate(s).

$8 per customer call and $15 per development hour Reason: $200,000 ÷ 25,000 = $8 per customer call and $300,000 ÷ 20,000 = $15 per development hour.

activity cost pool

A "bucket" in which costs are accumulated that relate to a single activity measure in an activity-based costing system.

Benchmarking

A systematic approach to identifying the activities with the greatest potential for improvement. It is based on comparing the performance in an organization with the performance of other, similar organizations known for their outstanding performance.

Activity-based costing (ABC)

A two-stage costing method in which overhead costs are assigned to products on the basis of the activities they require.

Facility-level activities

Activities that are carried out regardless of which products are produced, how many batches are run, or how many units are made.

Batch-level activities

Activities that are performed each time a batch of goods is handled or processed, regardless of how many units are in the batch. The amount of resource consumed depends on the number of batches run rather than on the number of units in the batch.

Unit-level activities

Activities that arise as a result of the total volume of goods and services that are produced, and that are performed each time a unit is produced.

Product-level activities

Activities that relate to specific products that must be carried out regardless of how many units are produced and sold or batches run.

activity measure

An allocation base in an activity-based costing system; ideally, a measure of the amount of activity that drives the costs in an activity cost pool.

Activity-based costing improves the accuracy of product costs by ______.

using cost pools that are more homogeneous than departmental cost pools increasing the number of cost pools used to accumulate overhead cost using a variety of activity measures to assign overhead costs to products

Setting up machines, billing customers, and performing tests at a lab are all examples of a(n) ______.

activity

Which of the following statements are true? a. Technology has made more complex product systems less expensive to develop and maintain. b. Most companies throughout the world have moved away from using direct labor hours or machine hours to allocate overhead. c. Product diversity increases the chance of overhead costs that are unrelated to direct labor. d. On an economy-wide basis, direct labor and overhead costs are generally moving in opposite directions.

a. Technology has made more complex product systems less expensive to develop and maintain. c. Product diversity increases the chance of overhead costs that are unrelated to direct labor. d. On an economy-wide basis, direct labor and overhead costs are generally moving in opposite directions.

How much of an activity is carried out is expressed by a(n) ______, which is used as the allocation base for applying overhead costs to products and services.

activity measure

Activity-based costing ______.

computes product costs in the same way as traditional costing

T/F: Moving from plant-wide to departmental overhead rates tends to correct most of the product distortions that can occur with a plant-wide system.

false