Ch. 7 - Activity-Based Costing: A Tool to Aid Decision Making

What causes traditional and ABC systems to report different product margins

-Traditional cost systems allocate all manufacturing overhead costs to products -Traditional cost systems allocate all of the manufacturing overhead costs to products using a volume related allocation base -The ABC system assigns nonmanufacturing overhead costs to products on a cause and effect basis as appropriate

In ABC, what costs are NOT assigned to products?

-Unused capacity -Organization sustaining

Activities that could be combined into one batch-level activity:

- The number of customer orders - The number of shipped orders

ABC provides managers with information that affects:

-Both fixed and variable costs

ABC costing only charges products for the cost of the capacity used because:

-It results in a more stable unit product cost -Products are only assigned the cost of resources they actually use

n the 19th/20th centuries, cost systems relied on allocation bases such as:

-Machine hours -Labor hours

Costs assigned and/or traced when computing product margins in a traditional cost system are:

-Manufacturing overhead -Direct labor -Direct materials

Which of the following items are the same under both ABC and traditional costing?

-Net operating income -Total costs -Total assets

The MOST common management reports using ABC data are:

-Product profitability -Customer profitability

Activity based management is focused on:

-Reducing defects -Eliminating waste

Costs that can be easily traced to individual products include:

-Shipping costs -Sales commission -Warranty repair costs

A company assigns overhead using a plan wide rate. If total estimated manufacturing overhead is $900,000 and the total activity is 30,000 machine hours, the overhead cost assigned to a product using 12,000 machine hours is:

$360,000 [($900k/30k) x 12K]

Limitations of activity based costing (ABC):

- ABC requires substantial resources - Managers and employees may resist the change to ABC -ABC procedures produce numbers that do not match traditional costing

If managers allocate organization-sustaining & unused capacity costs to products

- Costs will be overstated - Incorrect decisions may be made

ABC does NOT conform to GAAP because it:

- Includes some non manufacturing costs - Excludes some manufacturing costs

ABC is NOT for external reporting because:

- It is difficult to make changes in the existing accounting system - ABC does not comply with GAAP - External reports are less detailed than internal reporting

in abc the greater the number of activities, the:

- More accurate the costs are likely to be - More costly the system will be to design

An activity based costing system:

- Requires substantial resources - Produces different numbers than a traditional system -Is costly to maintain

Customer level activities include:

- Sales calls - Mailing catalogs

Place the steps for implementing ABC in order

1. define activities, activity cost pools, and activity measure 2. assign overhead costs to activity cost pools 3. calculate activity rate 4. assign overhead costs to cost objects 5. prepare management reports.

The total cost in the product design cost pool is $200K with a total activity of 1,600 designs. The total cost assigned to a customer who has 7 designs is $____

=$875 ($200K/1.6k=$125 x 7 = $875)

the first major step in implementing ABC is to identify the ________ that will form the foundation for the system.

ACTIVITIES

A(n) __ is any event that causes consumption of overhead resources

ACTIVITY

Organization sustaining

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

Under activity based costing, overhead includes:

All indirect costs

An activity measure is a(n) _______ base in an activity based costing system

Allocation

In activity based costing, the consumption of overhead resources is caused by:

An activity

Which group is likely to be uncomfortable using ABC allocations that are based on personal interviews?

Auditors

Setting up equipment, placing purchase orders, arranging shipments to customers are all examples of:

Batch level activities

A systematic approach that can identify improvement opportunities is:

Benchmarking

A systematic approach to identify the activities that need the most improvement is called ________

Benchmarking

The term ______ is also used when referring to an allocation base or activity measure in activity based costing

COST DRIVER

In activity based costing another term for activity measure is:

Cost driver

The amount of time required to perform an activity is measured by a ______ driver

Duration

Individual product costs calculated using ABC are not listed on ______ reports

EXTERNAL

Top management support is needed when ABC is implemented because:

Leadership is instrumental to motivating employees to embrace ABC

The most appropriate activity measure for a cost pool consisting of equipment depreciation and power to run machines is:

Machine hours

Under ABC, non manufacturing costs:

May be allocated to products based on cause

An example of a transaction driver is the:

Number of bills sent out to a customer

In activity based costing, first stage allocation assigns _________ cost to activity cost pools

OVERHEAD

n activity based costing, first stage allocation assigns _________ costs to activity cost pools

OVERHEAD

If some products are overcosted and some are undercosted the errors will:

Offset each other in COGS and inventory valuations

Usually, traditional costing __ high-volume products and __ low-volume products

Overcosts, undercosts

Activity-based costing treats organization-sustaining costs as __ costs.

PERIOD

In traditional costing, which type of cost is NOT included in the product margin?

PERIOD

ABC cost uses more cost ______ than traditional costing

POOLS

Designing and advertising a product are all __-level activities

Product

In ABC, ____ are different from those calculated using traditional costing

Product margins

The most common reports prepared using ABC data are the product and customer __ reports

Profitability

Activity rates are used to apply overhead costs to products and customers in the _____ stage allocation

SECOND

An ABC system usually _______ a traditional cost system

SUPPLEMENTS

Activity rates =

Total cost of each activity/total activity

Costing method assigns ONLY manufacturing costs to products:

Traditional absorption costing

power to run production equipment would be a _____-level activity

UNIT

When making decisions using ABC data:

Unavoidable fixed costs should be ignored

Activity based costing uses activity rates to apply overhead costs to products in _______ allocation

Second stage