Accounting II Ch 17 & 18 Exam

Your phone service provider offers a plan that is classified as a mixed cost. The cost per month is $50 flat rate for the first 1,000 minutes plus $0.35 for each minute exceeding 1,000 minutes. If you use 1,200 minutes this month, your cost will be

$120

Margin of Safety in Dollars

(Actual (Expected) Sales) - (BreakEven in dollars) For example, 750,000-500,000

Required Sales in Units

(Fixed Costs + Target Net Income) / (SellingPrice - Variable Costs) For Example, (200,000+120,000)/(500-300)= 320,000/200=1600

Required Sales in Dollars

(Fixed Costs+Target Net Income) / Contribution Margin Ratio For example, (320,000)/40%=800,000

Margin of Safety Ratio

(Margin of Safety in Dollars) / (Actual or Expected Sales) For Example, (250,000) / (750,000) =33%

What are the benefits of ABC?

-Leads to more cost pools. -Leads to enhanced control over overhead costs. -Leads to better management decisions.

What are the limitations of ABC?

-can be expensive to use. -some arbitrary allocations continue.

Winston Company's high and low level of activity last year was 60,000 units produced in April and 20,000 units produced in December. Machine maintenance costs were $52,000 in April and $20,000 in December. Using the high-low method, estimated total maintenance cost for a month in which 40,000 units will be produced is

36,000 Variable cost per unit ($.80) = change in total costs ($52,000 - $20,000) / high minus low activity level (60,000 - 20,000). Fixed cost element = total cost at high level ($52,000) - variable cost at high level ($48,000 =$.80 x 60,000 units) = $4,000. Maintenance costs are therefore $4,000 fixed cost per month + $.80 variable cost per unit, and at 40,000 units, the maintenance costs = $4,000 fixed cost per month + ($.80 x 40,000 units) = $36,000

How many steps are involved in activity-based costing?

4

Variable cost per unit using the High-Low Method

Changes in cost / (high - low activity level) For example: (63,000-33,000) / (50,000-20,000) =$1.10

Which of the following is the third step in applying an activity-based costing system?

Compute the overhead rate for each cost driver.

Contribution Margin Ratio

Contribution Margin per Unit / Unit Selling Price For Example, 200/500 = 40%

Why is determination of a relevant range important?

Cost behavior outside the relevant range may be distorted.

Which of the following should not be included as part of the cost pool of machine setups?

Cost of the accounts payable supervisor's salary

Activity-based costing is most appropriate to use when labor costs are a(n) ___________ proportion of total product costs and the manufacturing process is __________.

Decreasing, Complex

Which of the following would not be an overhead activity cost pool?

Direct Materials

Predetermined overhead rate

Estimated Overhead / Direct Labor Cost

Activity Based Overhead Rate

Estimated Overhead per Activity / Expected Use of Cost Drivers per Activity For Example, Machining: $500,000/50,000 machine hours = $10 per machine hour.

The activity-based overhead rate is computed by dividing

Estimated overhead per activity by expected use of cost drivers per activity.

Fixed costs are costs that remain the same per unit regardless of changes in the activity level.

False Fixed costs are costs that remain the same in total regardless of changes in the activity level

Mixed costs change proportionately with changes in the activity level.

False Mixed costs change in total but not proportionately with changes in the activity level

Traditional costing systems group costs according to activity cost pools.

False. Activity-based costing systems, not traditional costing systems, group costs according to activity cost pools.

The most difficult part of computing accurate unit costs is determining the correct amount of direct labor cost to assign to each product.

False. Assigning overheard costs is the most difficult part of computing accurate unit costs.

Breakeven Point in Units

Fixed Costs / (Selling Price per unit - unit variable costs) For example, 200,000 / (500-300) = 1,000. Therefore 1,000 must be sold to break even

Breakeven Point in Dollars

Fixed Costs / Contribution Margin Ratio For example, 200,000/40%=$500,000

In order to achieve the most accurate costing, the cost driver chosen for a given activity must show a ___________ between the cost driver and the actual consumption of overhead costs.

High degree of correlation

Which of the following is NOT one of the four steps involved in calculating unit costs under activity-based costing?

Identify the cost driver that has a minor correlation to the costs accumulated in the activity cost pool.

As the complexity of a product's manufacturing operation increases, the number of activities and cost drivers used in an activity-based cost system will likely

Increase

Which statement is true about activity-based costing (ABC)?

It focuses on activities performed to produce a product.

What overhead allocation basis is used by many companies with automated manufacturing processes to reduce product cost distortions?

Machine Hours

Delivery costs at Hernandez, Inc. appear below for specific months of operations: Month: March Amount-$20,000 Units Produced-16,000 Month: April Amount-$18,000 Units Produced-12,000 Which type of cost are delivery costs at Hernandez?

Mixed

Delivery costs at Walco, Inc. appear below for specific months of operations: Month: June Amount-$9,680 Units Produced-11,000 Month: July Amount-$8,100 Units Produced-10,800 Which type of costs are delivery costs at Walco?

Mixed

Costs that change in total but not proportionately with changes in the activity level are

Mixed Costs

For which of the following activities will direct labor hours and direct labor cost be an appropriate cost driver?

Painting

Theodore Company's overhead rate for machine setups is $115 per setup. A total of 105 setups are estimated for the period. At year-end, it was determined that Products A and B have 60 and 45 setups, respectively. How much is the overhead cost assigned to each product?

Product A $6,900, Product B $5,175

Which of the following is likely to contain a linear relationship between costs and activities?

Relevant Range

Which of the following is an overhead activity cost pool for a manufacturer?

Setting up machines

Which of the following activities adds value to a product or service?

Shaping a piece of metal on a lathe

Fixed cost using the High Low Method

Subtract the total variable cost at either the high or low activity level from the total cost at that level. For Example: Total Cost:63,000 Variable Cost:55,000 63,000-55,000=8000

If a traditional costing system allocates too much overhead to one product, the firm is likely to experience which of the following problems?

The firm may lose market share to competitors

Which one of the following would be the best cost driver for the activity of purchasing?

The number of purchase orders issued

The range over which a company expects to operate during a year is called the relevant range of the activity index.

True

Activity-based costing systems rely on multiple bases for overhead cost allocation.

True. The activities used must have a cause and effect relationship to the cost.

A cost driver is a factor or activity that has a direct cause-effect relationship with the resources consumed.

True. This statement is correct, because a direct cause-effect relationship with the resources consumed is needed for a cost driver.

Contribution Margin Per Unit

Unit Selling Price - Unit Variable Costs For Example, Unit Selling Price:500 Variable Cost: 300 500-300=200 Contribution Margin Per Unit = 200

What type of cost remains the same per unit at every level of activity?

Variable Cost

Which statement describes a fixed cost?

When activity declines, its cost per unit increases.

When is it appropriate to use direct labor as a basis for assigning overhead costs to products?

When direct labor constitutes a significant part of total product costs.

Donatello Co. has identified an activity cost pool to which it has allocated estimated overhead of $9,600,000. It has determined the expected use of cost drivers for that activity to be 800,000 inspections. Widgets require 200,000 inspections, Gadgets 150,000 inspections, and Targets 450,000 inspections. How much is the overhead assigned to each product?

Widgets $2,400,000, Gadgets $1,800,000, Targets $5,400,000

Mixed Costs

are costs that vary as activity level changes, but do not stay the same per unit like variable cost.

Any activity that causes resources to be consumed is called a

cost driver

Activity Based Costing...

is a two-stage overhead cost allocation system that identifies activity cost pools and cost drivers.

An activity that adds costs to the product but does not increase its market value is a

non-value-added activity

To assign overhead costs to an individual product, the activity-based overhead rate is multiplied by

the number of cost drivers used per product.

The relevant range is

the range over which the company expects to operate during a year.

An example of a mixed cost is

utility costs

Mixed Costs consists of a

variable cost element and a fixed cost element.

Variable costs are costs that

vary in total directly and proportionately with changes in the activity level. remain the same per unit at every activity level. include direct materials and direct labor for a manufacturer.