Managerial Acct CH 4b

Put the following ABC implementation steps in order

1. Identify the products that are the cost objects 2. Select the cost allocation base 3. Compute the allocation rates 4. Compute the total cost of the products

Chess Woods Limited produces two products: wooden chess pieces and inlaid chess boards. Under its absorption costing system the firm uses one cost driver- direct labor hours. the costs of a set of wooden chess pieces is $325.00. An analysis of the activities and their costs revealed that three cost drivers would be used under a new ABC system. They would be: equipment usage, direct labor hours, and type of wood used. The new cost of the chess pieces would be $298.00 per set. 1. The reduction in cost per unit of wooden chess pieces under ABC system is due to difference in allocation of _______ 2. All else being equal, given this change in the cost allocation system __________ 3. The goal of Chess Woods newly constructed ABC system is to __________

1. indirect costs 2. total costs remained unchanged 3. develop the best costs system for an economically reasonable cost.

It is important that product costs reflect the diversity and complexity of the manufacturing process so that __________

decision making based on product costs information is improved

activity based costing can eliminate cost distortions because ABC systems

establish a cause and effect relationship with the activities and the products manufactured

Product lines that produce different variations (models, styles) often require specialized manufacturing activities that translate into

greater overhead costs for each product line

ABC systems create

homogeneous activity-related cost pools

Service companies in particular find great value from ABC because a vast majority of their cost structure is composed of ________ costs

indirect

Activity based costing systems differ from traditional costing systems in the treatment of

indirect costs

Recognizing ABC information is not always perfect because

it balances the need for better information against the costs of creating a complex system

Product-cost cross-subsidization

means that if a company under costs at least one of its products, it will over cost at least one of its other products.

For a company with diverse products, undercosting overhead of a product will lead to

misallocating indirect costs of another product

A manufacturing firm produces multiple families of products requiring various combinations of different types of parts. Of the following, the most appropriate cost driver for assigning materials handling costs to the various products is _________

number of parts used

Unit-level cost drivers are the most appropriate as an overhead assignment base when __________

only one product is manufactured

Lavender Company is a logistics company and has recently implemented ABC system. Using activity based information, it decides to reduce the bulkiness of the packages delivered, thereby reducing freight and storage costs. This suggests that ABC systems help managers in __________ decisions.

process-improvement

___________ are the costs of activities undertaken to support individual products or services regardless of the number of units or batches in which the units are produced

product-sustaining costs

According to an ABC system, S5 uses a disproportionately ___________

smaller amount of batch level costs than would be reported under an absorption costing system

ABC and traditional systems are most similar in _________

the treatment of business level costs

Which of the following is a reason that has accelerated the demand for improvements to costing systems?

the use of product and process technology has led to an increase in indirect costs and a decrease in direct costs

A single indirect-cost rate distorts product costs because

there is an assumption that all support activities affect all products in the same way

One reason for assigning selling and distribution costs to products for analytical purposes is ________

to ensure that all product related costs are considered

Which of the following statements is true of costing systems?

ABC systems classify some indirect costs as direct costs helping to improve processes.

Which of the following statements is true of ABC systems?

ABC systems provide valuable information to managers beyond accurate product costs

Aqua company produces two products- Alpha and Beta. Alpha- produced in bulk and its major portions of cost are direct costs. Beta- based on customer orders and 55% of the costs are shared between design and startup costs. Alpha company is using a single cost pool to allocate indirect costs with the number of units sold as the cost driver. Which statement is true?

Aqua will overcast Alpha's indirect costs as it is using a single cost pool to allocate indirect costs.

Which of the following is a sign that an absorption costing system is being used by a firm with significant indirect costs?

Operations staff has substantial disagreements with the reported costs if manufacturing and marketing products and services

Which of the following statements is true of activity-based costing?

activity based costing classifies some of the costs treated as indirect costs under absorption costing as direct costs

Which one of the following statements is true of activity-based costing?

activity based costing is more suited to companies with high product diversity than companies with a single product line.

Assume a company with material batch related and product sustaining costs uses absorption costing. When comparing products manufactured in small batches and in small annual volumes with products manufactured in large batches and large annual volumes, the products manufactured in small batches will probably be

undercosted

It is usually difficult to find good cause and effect relationships between _______ and a cost allocation case

business-sustaining

_________ costs support the organization as a whole

business-sustaining

A well-designed, activity based cost system helps managers make better decisions because information derived from ABC analysis _______

can be used to eliminate non value-added activities

Products S5 and CP8 are assigned $100.00 in indirect costs by a traditional costing system. An activity analysis revealed that although production requirements are identical, S5 requires 45 minutes less batch setup time than CP8. According to an ABC system, CP8 is ___________ under the traditional system

undercosted

ABC allocates all costs as if they were ______ because the amounts allocated are a function of the use of activity cost drivers

variable