Chapter 4. Activity-Based Costing (SmartBook)

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 ($900,000 / 30,000 = $30 $30 x 12,000 = $360,000)

In activity-based costing an activity measure is ______.

an allocation base

Costs that cannot be traced on a cause-and-effect basis to individual products are ______-level costs.

Facility

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

exactly one

Activity-cost rates may either be computed per product or per activity.

False

Departmental overhead rates correctly assign overhead costs in situations where a company has a range of products and complex overhead costs.

False

When two variables move together, they are said to be negatively correlated.

False

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

activity rates

Using direct-labor hours or another volume based cost driver to assign overhead ______.

- May result in selling products at a loss - Ignores other significant causes of overhead - May result in overcharging customers for products

Which of the following statements are true?

- On an economywide basis, direct labor and overhead costs have been moving in opposite directions for a long time. - Technology has made more complex costing systems less expensive to develop and maintain.

Setting up equipment, placing purchase orders, and arranging shipments to customers are all examples of _________ -level activities.

Batch

A systematic approach to identifying the activities that need the most improvement is called _____________.

Benchmarking

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

30 ($900,000 / 30,000)

The ABC model is useful when an organization is making decisions about how ______.

some selling and administrative expenses should be assigned to products

_____________-level activities consist of tasks that are performed each time a batch of goods is handled or processed, regardless of how many units are in a batch.

Batch

Activity-based management is focused on ______.

- Reducing defects - Eliminating waste

___________ - ____________ activities relate to specific products and typically must be carried out regardless of how many batches or units of the product are manufactured.

Product Level

Activity-based costing ______.

computes product costs in the same way as traditional costing

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

activity

For each unit of a product, the direct material cost is $10, the direct labor cost is $15, and the manufacturing overhead is $16. The total unit product cost using activity-cased costing is ______.

$41 (Unit product cost = Direct material cost + Direct labor cost + Manufacturing overhead)

A predetermined overhead rate in an activity-based costing system is called a(n) ____________ .

Activity Rate

Also called organization-sustaining activities, ____________ - ____________ activities are activities that are carried out regardless of which products are produced, how many batches are run, or how many units are made.

Facility Level

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

True

When using activity rates, overhead is assigned the same way as when using plantwide or departmental rates.

True

An activity that must be done for each item produced is a(n)________ - _________ activity.

Unit Level

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

activity

A "bucket" in which costs are accumulated that relate to a single activity measure in the ABC system is a(n) ______.

activity cost pool

Costs that cannot be traced on a cause-and-effect basis to individual products are ______-level costs.

facility

Using volume-based cost drivers to assign overhead when ABC is appropriate ______.

may lead to overpriced or underpriced goods

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

overcosts; undercosts

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

product

For decision-making purposes, the distinction between manufacturing costs and selling and administrative expenses is ______.

unimportant

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

may outweigh

Traditional cost systems tend to undercost standard products and overcost specialty products.

False (Other way around)

An activity measure in activity-based costing is used as a(n) ___________ base for applying overhead costs to products and services.

allocation

If the activity rate is $65 per order with a total of 120 orders for a product, the overhead cost assigned to the product is $__________.

$7,800 ($65 x 120 = $7,800)

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

unit

The basis of benchmarking is comparing ______.

performance within the same industry

The activity rate for the Customer Orders activity pool is $20 per order. If there are 400 customer orders for a product, the total overhead cost assigned to this product for customer orders is $ __________.

$8,000 ($20 x 400 = $8,000)

Benefits of activity-based costing include ______.

- Helping target areas for process improvement - More accurate product costs - Helping managers understand the nature of overhead costs

Implementing activity-based costing ______.

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

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

activity-based costing

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

___________ - ___________ management involves focusing on activities to eliminate waste, decrease processing time, and reduce defects.

Activity Based

When cost systems were developed in the 1800's, most companies ______.

-Focused on simplicity -Produced a small number of similar products

When evaluating ABC product costs, managers should be particularly alert to costs that contain allocations of _________ -level costs.

Facility

In activity-based costing, what is calculated by dividing the total cost of each activity by its total cost driver?

Activity rate

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

sometimes

A company incurred the following: Total manufacturing costs of $500,000, total production department costs of $300,000, and total production order costs of $275,000. It used a total of 50,000 direct labour hours and 100,000 machine hours, and 2,750 production orders were placed. Use activity-based costing to calculate the activity rate for production orders.

$100 ($275,000 / 2,750 = $100)