Acc 132 Ch. 5-

Organization-sustaining activities:

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

The degree of operating leverage in a company is smallest at the break-even point and increases as sales rise.

False, degree of operating leverage is largest at break-even

An increase in the number of units sold will decrease a company's break-even point.

False, has nothing to do with number of units.

Activity-based costing is best proposed, designed and implemented by the accounting department without requiring the time of busy managers.

False, managers are responsible.

Direct labor costs are usually included in the costs that are allocated to activity cost pools in an activity-based costing system.

False, not included

Organization-sustaining activities relate to specific customers and are not tied to any specific products.

False, related to neither. carried out by number of customers served or products produced.

In two companies making the same product and with the same total sales and total expenses, the contribution margin ratio will be lower in the company with a higher proportion of fixed expenses in its cost structure.

False, total expense= variable exp + fixed exp, if fixed cost is higher it means fixed cost is more than variable cost. If variable cost is less, contribution margin will be more. Higher fixed expenses caused con. margin to be higher.

On a CVP graph for a profitable company, the total expense line will be steeper than the total revenue line.

False, will not be steeper.

Batch-level activities example:

Tasks such as placing purchase orders, setting up equipment, and arranging for shipments to customers are batch-level activities.

It is often very difficult to make changes in a company's accounting system.

True

When a company shifts from a traditional cost system in which manufacturing overhead is applied based on direct labor-hours to an activity-based costing system with batch-level and product-level costs, the unit product costs of high volume products typically decrease whereas the unit product costs of low volume products typically increase.

True

When expressed on a per unit basis, fixed costs can mislead decision makers into thinking of them as variable costs.

True

Organization-sustaining activities examples:

activities such as heating the factory, cleaning executive offices, providing a computer network, arranging for loans, preparing annual reports to shareholders, etc.

Order Size cost pool will be assigned all costs of resources that are:

consumed as a consequence of the number of units produced, including the costs of miscellaneous factory supplies, power to run machines, and some equipment depreciation.

Product Design cost pool will be assigned all costs of resources that are:

consumed by designing products.

degree of operating leverage:

contribution margin / net operating income.

Steps for Implementing Activity-Based Costing:

1. Define activities, activity cost pools, and activity measures. 2. Assign overhead costs to activity cost pools. 3. Calculate activity rates. 4. Assign overhead costs to cost objects. 5. Prepare management reports.

Product-level activities example:

Activities such as designing a product, advertising a product, and maintaining a product manager and staff are all product-level activities.

Customer-level activities

Activities that are carried out to support customers, but that are not related to any specific product.

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 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.

Departmental overhead rates will correctly assign overhead costs in situations where a company has a range of products that differ in volume, lot size, or complexity of production.

False

Activity-based costing (ABC)

a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore fixed as well as variable costs.

Duration Driver:

a measure of the amount of time required to perform an activity.

Flexible Budget

a report showing the estimates of what revenues and costs should have been, given the actual level of activity for the period.

Benchmarking:

a systematic approach to identifying the activities with the greatest potential for improvement.

Activity Measure:

allocation base in an activity based costing system. The term cost driver is also used to refer to an activity measure because the activity measure should "drive" the cost being allocated.

Activity:

any event that causes the consumption of overhead resources.

Customer Relations cost pool will be assigned all costs of resources that are:

associated with maintaining relations with customers, including the costs of sales calls and the cost of entertaining customers.

Weakness of flexible budgets:

confusing the budgets is a possibility, enables cheating, less discipline

Customer Orders cost pool will be assigned all costs of resources that are:

consumed by taking and processing customer orders, including costs of processing paperwork and any costs involved in setting up machines.

Favorable revenue variance

indicates that revenue was larger than should have been expected, given the actual level of activity.

Unfavorable revenue variance

indicates that revenue was less than it should have been, given the actual level of activity.

Unfavorable spending variance

indicates that the cost was greater than it should have been, given the actual level of activity.

Favorable spending variance

indicates that the costs was less than expected, given the actual level of activity

Activity Based Management:

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

Activity Cost Pool:

is a "bucket" in which costs are accumulated that relate to a single activity measure in the ABC system.

First-stage allocation:

is the process of assigning functionally organized overhead costs derived from a company's general ledger to the activity cost pools.

Cost-volume-profit (CVP) analysis helps

managers make many important decisions such as what products and services to offer, what prices to charge, what marketing strategy to use, and what cost structure to maintain.

Other cost pool will be assigned all costs of resources that are:

not associated with customer orders, product design, the size of the orders, or customer relations.

Unit Level Activities Example:

providing power to run processing equipment, because power tends to be consumed in proportion to the number of units produced.

Sales mix

relative proportions in which a company's products are sold. Sales mix is computed by expressing the sales of each product as a percentage of total sales.

Activity Variance

shows how a revenue or cost should have changed in response to the difference between actual and planned activity.

Overhead rate:

total estimated manufacturing overhead / total estimated machine-hours

Two most common activity measures:

transition drivers and duration drivers.

Activity-based costing is a costing method that is designed to provide managers with product cost information for internal decision-making.

true

In activity based costing:

1. nonmanufacturing as well as manufacturing costs may be assigned to products, but only on a cause and effect basis. 2. Some manufacturing costs may be excluded from product costs. 3. Numerous overhead cost pools are used, each of which is allocated to products and other cost objects using its own unique measure of activity.

CVP primary purpose is to estimate how profits are affected by the following five factors:

1. selling prices 2. sales volume 3. unit variable costs. 4. total fixed costs. 5. mix of products sold.

Operating Leverage

A measure of how sensitive net operating income is to a given percentage change in unit sales.

Transaction Drivers:

A simple count of the number of times an activity occurs.

CVP relationships equations

Profit = (sales - variable expenses) - fixed expenses Profit = (P x Q - V x Q) - fixed expenses Profit = Unit CM x Q - fixed expense.

Contribution Income Statement

Sales - Variable Expense = contribution margin - fixed expenses = net operating income.

Customer-level activities example:

Sales calls, catalog mailings, general technical support not tied to any specific product.

The break-even point in units can be obtained by dividing total fixed expenses by the unit contribution margin.

True

Margin of Safety

The excess of budgeted or actual dollar sales over the break-even dollar sales.

A shift in the sales mix from high-margin items to low-margin items can cause total profits to decrease even though total sales may increase.

True

A traditional cost system is generally easier to set up and run than an activity-based costing system.

True

An ABC system such as the one described in this chapter does not conform to generally accepted principles.

True

An activity rate of $512 per product design means that on average a product design consumes resources that cost $512.

True

Auditors are likely to be uncomfortable with allocations that are based on interviews with the company's personnel.

True

Direct materials costs are usually excluded from the costs that are allocated to activity cost pools in an activity-based costing system.

True

External reports are less detailed than internal reports prepared for decision making.

True

Fawn Company's margin of safety is $90,000. If the company's sales drop by $80,000, it will still have positive net operating income.

True

If fixed expenses increase by $10,000 per year, then the sales needed to break even will generally increase by more than $10,000.

True

If the variable expense per unit decreases, and all other factors remain the same, the contribution margin ratio will increase.

True

In an ABC system, departmental managers are typically interviewed to determine how the departmental non-personnel costs should be distributed across the activity cost pools.

True

Planning Budget

a budget created at the beginning of the budgeting period that is valid only for the planned level of activity.

Static Planning Budget:

a budget that does not change as volume changes. Incorporates values about inputs and outputs that are conceived before the period begins.