MGMT 201 Chapter 7
Activity based costing provides managers with information that affects ______.
both fixed and variable costs
A product's _________ is a function of sales and the direct and indirect costs that the product causes.
product margin
When making decisions using ABC data ______.
unavoidable fixed costs should be ignored
Which of the following can be combined in activity-based costing?
highly correlated activities
The first major step when implementing an ABC system is ______.
identify the activities
A company has two activity cost pools—Customer Orders and Product Design. The activity rates are $300 per order for Customer Orders and $500 per design for Product Design. How much overhead cost would be assigned to a customer placing 4 orders and requiring 10 designs?
$6,200
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
$7800
ABC does not conform to GAAP because it ______.
1. excludes some manufacturing costs 2. includes some nonmanufacturing costs
what are the three essential characteristics of a successful activity-based costing implementation
1. top managers must strongly support the ABC implementation because their leadership is instrumental in properly motivating all employees to embrace need for change 2. top managers should ensure that ABC data is linked to how people are evaluated and rewarded 3. a cross-functional team should be created to design and implement the ABC system
Which costing system charges products only with the costs of the capacity used by those products and not with the cost of unused capacity?
Activity-based
True or false: Traditional cost systems tend to undercost standard products and overcost specialty products.
False
Activity-based costing uses numerous _______________ cost pools
overhead
In activity-based costing, first-stage allocation assigns ____________ costs to activity cost pools
overhead
Power to run production equipment is a(n) ______________ -level activity
unit
Costs such as factory supplies and power to run machines could be combined in a cost pool based on the number of ______.
units produced
Traditional cost systems allocate all manufacturing costs using ______ allocation base(s).
volume-related
Which costing system does not assign selling and administrative costs to products when computing product margin?
Traditional
Which costing method assigns only manufacturing costs to products?
Traditional absorption costing
True or false: Some manufacturing costs may be excluded from product cost when using ABC.
True
In the 19th and 20th centuries, cost systems relied on allocation bases such as ______.
labor hours and machine hours
Customer sales minus direct material, direct labor, and overhead cost pools used for each customer equal customer ____________
margin
What areas should represent the team that will use ABC data?
marketing, production, engineering, and accounting
Activity-based costing ______ include activities that do not relate to the number of units produced.
may
Usually, traditional costing ______ high-volume products and ______ low-volume products.
overcosts, undercosts
All manufacturing costs are assigned to products in ___________________ costing
traditional absorption
Simple counts of the number of times an activity occurs are ___________ drivers
transaction
What are some of the limitations of activity-based costing systems?
-ABC procedures produce numbers that do not match traditional costing. -ABC requires substantial resources. -Managers and employees may resist the change to ABC.
The total cost in the Product Design cost pool is $200,000 with a total activity of 1,600 designs. The total cost assigned to a customer who had 7 designs done is
$875
The profit from a product is also called the _______________ _____________
product margin
In activity-based costing, ______ are different from those calculated using traditional costing.
product margins
Individual customer ____________ minus individual customer ____________ equals customer margin
sales; costs
To reconcile ABC product margin to net income ______.
subtract overhead costs not assigned to products
Under activity-based costing, overhead includes ______.
All indirect costs
Which group is likely to be uncomfortable using ABC allocations that are based on personnel interviews?
Auditors
Employees may be asked to estimate their time spent dealing with cost pool activities so that ______.
first-stage allocations will be more accurate
In traditional costing, ______ costs are assigned to products.
only manufacturing
True or false: Activity-based costing can be used for process improvement.
true
True or false: In an automated environment, using traditional allocation bases based on volume may distort unit product costs.
true
True or false: When a team is created to design and implement an ABC system, it should include members that represent many different functional areas.
true
In recent years, direct labor as a percentage of total cost began declining, which caused overhead to ____________
increase
In activity-based costing, first-stage allocations are usually based on the results of ______.
interviews with employees
External reports are ___________ (more/less) detailed than internal reports
less
what are examples of customer-level activities
sales calls, catalog mailings, and general technical support not tied to any specific product
An example of a transaction driver is the ______.
number of bills sent out to a customer
In what three ways does activity-based costing differ from traditional absorption 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
In ABC, any event that causes consumption of overhead resources is a(n)
activity
In activity-based costing, each cost pool accumulates costs that relate to a single ______________ measure in the ABC system
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
Overhead includes both manufacturing and nonmanufacturing costs under ______ costing.
activity-based
In activity-based costing, the consumption of overhead resources is caused by ______.
an activity
A systematic approach that can identify improvement opportunities is ______.
benchmarking
What causes traditional and activity-based costing systems to report different product margins?
-Traditional cost systems allocate all manufacturing overhead costs to products -The ABC system assigns nonmanufacturing overhead costs to products on a cause-and-effect basis as appropriate. -Traditional cost systems allocate all of the manufacturing overhead costs to products using a volume-related allocation base.
Costs assigned and/or traced when computing product margin in a traditional cost system are ______.
direct labor, direct material, manufacturing overhead
The amount of time required to perform an activity is measured by a(n) ______________ driver
duration
Activity-based management involves focusing on activities to...
eliminate waste, decrease processing time, and reduce defects
In activity-based costing, the process of assigning overhead costs to activity cost pools is ______ stage allocation.
first
If the activity rate for the customer order cost pool is $250 per order and the total for this cost pool is $425,000, the total number of customer orders is ______.
1,700
A company's products had sales of $750,000 and total costs of $360,000. If the net operating income for the company was $215,000, total overhead costs not assigned to products was
$175,000
What is the total amount of indirect factory wages if the amount allocated to product design was $200,000 and product design consumes 40% of indirect factory wages?
$200,000 / 0.40 = $500,000
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
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 ______.
($900,000 / 30,000) x 12,000 = $360,000
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
When managers allocate organization-sustaining and unused capacity costs to products ______.
-costs will be overstated -incorrect decisions may be made
Activity-based costing is not used for external reporting because ______.
-external reports are less detailed than internal reports -it is difficult to make changes in the existing accounting system -ABC does not comply with GAAP
In ABC, the greater the number of activities, the ______.
-more costly the system will be to design -more accurate the costs are likely to be -the more complex the system will be to implement and maintain
An activity-based costing system ______.
-requires substantial resources -is costly to maintain -produces different numbers than a traditional system
Activities that could be combined into one batch-level activity are the number of ______.
-shipped orders -customer orders received
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
A company has four cost pools—customer relations, order size, product design and customer orders. Indirect labor is used 15% for customer relations, 30% for order size, and 35% for product design. The percentage is used for customer orders is:
100% - (15% + 30% + 35%) = 20%
Which of the following help companies channel their resources into the most profitable growth opportunities?
Product and customer profitability reports
Which items are the same under both ABC and traditional costing?
Total costs, net operating income, total sales
what are the five levels of activities
Unit, Batch, product, customer, organization-sustaining
What level of activity is performed each time an item of a product is produced?
Unit-level
In activity-based costing, what costs are not assigned to products?
Unused capacity Organization-sustaining
Activity-based costing data ______.
can be easily misinterpreted
In activity based costing another term for activity measure is ______.
cost driver
The most appropriate activity measure for a cost pool consisting of the costs of resources consumed taking and processing individual customer sales is the number of ______.
customer orders
ABC is generally used for ______ reporting.
internal
The most appropriate activity measure for a cost pool consisting of equipment depreciation and power to run machines is ______.
machine hours
Under activity-based costing, nonmanufacturing costs ______.
may be allocated to products based on cause
Activities that occur regardless of which customers are served, which products are produced or how many batches are run or units made are facility-level or ___________-_________ activities
organization-sustaining
Costs that are totally unaffected by which products are made during a period are ______ costs.
organization-sustaining
If ABC is not implemented correctly and organization-sustaining costs are included in product costs, then product costs will be ______ and margins will be ______.
overstated; understated
The basis of benchmarking is comparing ______.
performance within the same industry
Activity-based costing treats organization-sustaining costs as _________________ expenses
period
Activity-based costing uses more cost _____________ than traditional costing
pools
The most common reports prepared using ABC data are the product and customer _______________ reports
profitability
Costs that can be easily traced to individual products include ______.
sales commission, warranty repair costs, shipping costs
Activity-based costing uses activity rates to apply overhead costs to products in ______ stage allocation.
second
Examples of organization-sustaining costs include
security guard's wages, plant controller's salary, and plant administrative supplies
Organization-sustaining activities include ______.
setting up a computer network, heating a factory, preparing annual reports
An example of a duration driver is the ______.
time spent preparing invoices
Costs of unused or idle capacity are assigned to products when using a(n) _______________ costing system
traditional
