Chapter 5: Activity-Based Costing and Management

Work distribution matrix

Identifies the amount of labor consumed by each activity and is derived from the interview process (or a written survey)

Activity Output

The result or product of an activity

Product Diversity

The situation present when products consume overhead in different proportions

Calculate: Cycle Time

Time / Units produced

Calculate: Overhead

Total overhead costs / total direct labor hours

Calculate: Velocity

Units produced / time

Interview questions are asked to determine a. what activities are being performed. b. who performs the activities. c. the relative amount of time spent on each activity by individual workers. d. possible activity drivers for assigning costs to products. e. All of these.

e

The first stage of ABC entails the assignment of a. resource costs to departments. b. activity costs to products or customers. c. resource costs to a plantwide pool. d. resource costs to distribution channels. e. resource costs to individual activities.

e

Value-Added Activities

Activities that are necessary for a business to achieve corporate objectives and remain in business

Unit-Level Activities

Activities that are performed each time a unit is produced

Activity-Based Costing (ABC System)

A cost assignment approach that first uses direct and driver tracing to assign cost to activities and then uses drivers to assign costs to cost objects

Activity Dictionary

A list of activities described by specific attributes such as name, definition, classification as primary or secondary, and activity driver

Activity-Based Management

A systemwide, integrated approach that focuses management's attention on activities with the objective of improving customer value and the profit achieved by providing this value. It includes driver analysis, activity analysis, and performance evaluation, and draws on activity-based costing as a major source of information

Activity

Action taken or work performed by equipment or people for other people

Nonvalue-added Activities

All activities other than those that are absolutely essential to remain in business

Calculate: Consumption Ratio

Amount of activity driver per product / total driver quantity

Process-value analysis

An approach that focuses on processes and activities and emphasizes systemwide performance instead of individual performance

Activity Drivers

Factors that measure the consumption of activities by products and other cost objects

Nonunit-level Activity Drivers

Factors that measure the consumption of nonunit-level activities by the products and other cost objects

Which of the following statements is true of facilities-sustaining costs? a. Facilities-sustaining costs vary with the output volume and include only indirect costs. b. Facilities-sustaining costs vary with the number of groups or batches that are run. c. Facilities-sustaining costs do not vary with any factors such as units or batches but are necessary in operating the plant. d. Facilities-sustaining costs do not vary with the output volume and include direct and indirect costs.

C

Resource Drivers

Factors that measure the consumption of resources by activities

Unit-Level Activity Drivers

Factors that measure the consumption of unit-level activities by products and other cost objects

Value-added Costs

Costs caused by value-added activities.

Nonvalue-added Costs

Costs that are caused either by nonvalue-added activities or by the inefficient performance of value-added activities

Activity Reduction

Decreasing the time and resources required by an activity

Driver Analysis

The effort expended to identify those factors that are the root causes of activity costs

Cycle Time

The length of time required to produce one unit of a product

Activity Output Measure

The number of times an activity is performed. It is the quantifiable measure of the output

Velocity

The number of units that can be produced in a given period of time

Activity Selection

The process of choosing among sets of activities caused by the competing strategies

Activity Elimination

The process of eliminating nonvalue-added activities

Activity Analysis

The process of identifying, describing, and evaluating the activities an organization performs

Consumption Ratio

The proportion of an overhead activity consumed by a product

Activity Inputs

The resources consumed by an activity in producing its output

The chief management accountant of Mercury Electricals is considered for two activities: repairing components under warranty and expediting components. The components were repaired because of the failure of the purchased component, while the components were expedited because suppliers were late in delivering the required components. The total activity costs for repairing the components for the previous year were $450,000, while the cost expended for expediting the purchase of components was $100,000. In total, 1,500 components failed, while 100 units were received late by Mercury Electricals. Determine the repair rate per failed unit attributable to Mercury Electricals using activity-based costing. a. $300 per unit b. $200 per unit c. $500 per unit d. $1,000 per unit

a

The number of units that can be produced in a given period of time is termed as _____. a. velocity b. cycle time c. activity output d. cycle production

a

The second stage of ABC entails the assignment of a. activity costs to products or customers. b. resource costs to departments. c. resource costs to a plantwide pool. d. resource costs to individual activities. e. resource costs to distribution channels.

a

Which of the following is a true statement about activity-based customer costing? a. Customer diversity requires multiple drivers to trace costs accurately to customers. b. Customers consume customer-driven activities in the same proportions. c. It seldom produces changes in the company's customer mix. d. It never improves profitability. e. None of these.

a

Which of the following statements is true of resource drivers? a. They measure the consumption of resources by activities. b. They measure the consumption of activities based on products and other cost objects. c. They are used each time a unit is produced. d. They emphasize on direct tracing.

a

A company had a total of 500 sales orders for a period. The company incurred $162,500 as costs of processing these orders for the period. The company made 1,000 sales calls during this period. Calculate the activity rate for processing sales orders of the company for the period. a. $295.00 per order b. $325.00 per order c. $162.50 per order d. $108.33 per order

b

The receiving department employs one worker who spends 25% of his time on the receiving activity and 75% of his time on inspecting products. His salary is $40,000. The amount of cost assigned to the receiving activity is a. $34,000. b. $40,000. c. $10,000. d. $30,000. e. None of these.

c

Outdoor Sports Corp. produces high-end sports cycles for six major buyers. Of the six major customers, one customer accounts for 50% of the sales of Outdoor Sports, whereas the other five customers account for the rest of the sales of Outdoor Sports. It can be assumed that the other customers purchase parts in roughly equal quantities, and the orders placed by these customers are about the same size. For the current year, Outdoor Sports allocates $110,000 as order filling costs for the large customer. The allocation of order filling costs for the other five customers is also $110,000. The large customer placed 20 orders during the year, whereas the smaller customers placed 200 orders during the same period. The total cost of sales force was $110,000, of which, 50% was allocated to the large customer, and the other 50% was allocated to the smaller clients. Calculate the order filling costs per order, which are used for allocation to customers using the ABC approach, assuming that Outdoor Sports made an overall sales of 12,000 units during the year. a. $1,500 per order b. $1,000 per order c. $500 per order d. $2,000 per order

b

This year, Lambert Company will ship 1,500,000 pounds of goods to customers at a cost of $1,200,000. If a customer orders 10,000 pounds and produces $200,000 of revenue (total revenue is $20 million), the amount of shipping cost assigned to the customer by using ABC would be a. unable to be determined. b. $8,000 ($0.80 per pound shipped). c. $24,000 (2% of the shipping cost). d. $12,000 (1% of the shipping cost). e. None of these.

b

Which of the following statements is true of product diversity? a. Costs related to setups, material handling, and inspection are all possible examples of costs of product diversity. b. Product diversity means that different products consume overhead activities in systematically different proportions due to possible variations in product size, complexity, setup time, or the size of batches. c. Using only unit-based activity drivers to assign nonunit-related overhead costs can cause product diversity. d. Product diversity states that a product must have various versions with small differences.

b

A company shipped 6,000,000 pounds of goods to customers at a cost of $3,000,000. Total revenue is $40 million. If an individual customer orders 10,000 pounds, calculate the amount of shipping cost assigned to the customer using activity-based costing. a. $1,500 b. $1,000 c. $5,000 d. $20,000

c

Assume that a company takes 7,000 hours to produce 21,000 units of a product. What is the cycle time in minutes? a. 3 b. 0.33 c. 20 d. 180

c

Which of the following statements is true of an activity-based costing (ABC) system? a. An activity-based costing system focuses only on directly tracing the cost factors to the units produced. b. In an activity-based costing system, costs are assigned directly to cost objects and hence are more accurate. c. In an activity-based costing system, costs are first assigned to cost activities and then to cost objects. d. An activity-based costing system assigns more direct costs to overheads compared with other conventional costing methods.

c

A company produced 12,000 units of a product. The prime cost was $407,000. In total, 2,200 machine hours were used to produce the product. Setup hours for the period were 1,400. The activity rates were $45 per machine hour and $110 per setup hour. What is the unit cost of the product using overhead rates based on machine hours and setup hours? a. $42 b. $34 c. $21 d. $55

d

Assume that the moving activity has an expected cost of $80,000. Expected direct labor hours are 20,000, and expected number of moves is 40,000. The best activity rate for moving is a. $4 per move. b. $1.33 per hour-move. c. $4 per hour. d. $2 per move. e. None of these.

d

Lambert Company has two suppliers: Deming and Leming. The cost of warranty work due to defective components is $2,000,000. The total units repaired under warranty average 100,000, of which 90,000 have components from Deming and 10,000 have components from Leming. Select the items below that represent true statements. a. Components purchased from Leming cost $200,000 more than their purchase price. b. Components purchased from Deming cost $1,800,000 more than their purchase price. c. Components from Leming appear to be of higher quality. d. All of these. e. None of these.

d

Which of the following could be an example of a value-added activity? a. Inspection of products produced to ensure that the product meets customer specifications b. Halting the conversion of work in process while awaiting further purchase of raw materials c. Extensive usage of time and resources to determine the quantity of the units to be produced d. Filing of documents as mandated by the reporting requirements of the Securities and Exchange Commission

d

Which of the following measures activity performance? a. Efficiency b. Time c. Quality d. All of the above

d