Chapter 5 Study Guide Accounting

Why is practical capacity recommended in calculating capacity cost​ rates? A. The capacity cost driver rate should reflect the underlying efficiency of a process and this efficiency is best measured by using the total capacity of the resource supplied. B. The practical capacity of an activity cost driver changes when the​ short-run changes in external factors affect the price of a product. C. The practical capacity of the support activity cost driver includes​ short-term variations as reflected in overtime. D. The normal cost of a support activity represents the quantity of supplying resources.

A. The capacity cost driver rate should reflect the underlying efficiency of a process and this efficiency is best measured by using the total capacity of the resource supplied.

What two sets of parameters must be estimated in​ time-driven ABC? A. The capacity cost rate for each type of indirect​ resource, and an estimate of how much of a​ resource's capacity is used. B. Change of capacity resources due to the quantity of activities performed and change in the supply of resources dependent upon the demand for activities performed through management oversight. C. The cost rate for each type of direct​ resource, and the direct costs of consumption of​ resource's capacity is used. D. Variable and fixed costs must be estimated in​ time-driven ABC.

A. The capacity cost rate for each type of indirect​ resource, and an estimate of how much of a​ resource's capacity is used.

What two sets of parameters must be estimated in​ time-driven ABC? A. The cost rate for each type of direct​ resource, and the direct costs of consumption of​ resource's capacity is used. B. The capacity cost rate for each type of indirect​ resource, and an estimate of how much of a​ resource's capacity is used. C. Variable and fixed costs must be estimated in​ time-driven ABC. D. Change of capacity resources due to the quantity of activities performed and change in the supply of resources dependent upon the demand for activities performed through management oversight.

B. The capacity cost rate for each type of indirect​ resource, and an estimate of how much of a​ resource's capacity is used.

​"When a company produces both​ high-volume products and​ low-volume products, traditional product costing systems are likely to overcost​ high-volume products." Do you agree with this​ statement? Explain. A. ​Yes, traditional costing systems are more likely to overcost​ low-volume products because all direct costs are assigned to products in proportion to the number of production units. B. ​Yes, traditional costing systems are more likely to overcost​ high-volume products because all indirect and support costs are assigned to products in proportion to the number of production units and the​ low-volume products are likely to require higher indirect and support costs per unit. C. ​No, traditional costing systems underestimate the cost of resources required for​ high-volume products. D. ​No, traditional costing systems overestimate the cost of resources required for​ specialty, low-volume products.

B. ​Yes, traditional costing systems are more likely to overcost​ high-volume products because all indirect and support costs are assigned to products in proportion to the number of production units and the​ low-volume products are likely to require higher indirect and support costs per unit.

How is a​ time-driven ABC system updated as resource costs increase or changes in operations​ occur? A significant or permanent change in resource costs or operations do not trigger estimate adjustments under​ time-driven activity-based costs systems. B. As resources or operation costs​ increase, there is no change in​ time-driven activity-based cost systems since these costs are not assigned to products. C. A significant change in resource costs or operations triggers an update of the capacity cost rates or unit time​ estimates, respectively. D As changes in resource costs or operations​ occur, there is no change in​ time-driven activity-based cost systems since operation changes are not used in the formula to compute it.

C. A significant change in resource costs or operations triggers an update of the capacity cost rates or unit time​ estimates, respectively.

Why are service organizations often ideally suited for​ activity-based costing? A. Service organizations are ideally suited for​ activity-based costing because service companies have significant material costs. B. Almost all costs of a service company are direct and appear to be variable making them the most ideal candidate for​ activity-based costing. C. Service organizations are ideally suited for​ activity-based costing because virtually all of the costs for a service company are indirect and appear to be fixed. D. Service companies use step variable​ costs, which is developed using​ activity-based costing.

C. Service organizations are ideally suited for​ activity-based costing because virtually all of the costs for a service company are indirect and appear to be fixed.

What advantages does​ time-driven ABC have over original​ activity-based costing? A. Changes in resource costs and process efficiencies are easier to update in​ time-driven ABC systems. B. ​Time-driven activity-based costing exploits the detailed transactions data that are available from ERP systems. C. ​Time-driven activity-based costing provides visibility to capacity utilization and the cost of unused capacity. D. All of the above.

D. All of the above.

Potter Corporation has gained considerable market share in recent years for its​ specialty, low-volume, complex line of​ products, but the gain has been offset by a loss in market share for its​ high-volume, simple line of products. This has resulted in a net decline in its overall profitability. Advise management about specific changes that may be required in its cost accounting system and explain why the existing system may be inadequate.

Potter Corporation should switch to activity-based costing. Its current system appears to be distorting product costs, resulting in prices of specialty products that are too low and prices of simple products that are too high. This may lead Potter to push products that produce low profit margins.

Format to figure out Net income

Sales Revenue Overhead applied to ______ Overhead applied to ______ Total direct labor cost Total materials cost Total: __________________________________________ Cost of unused practical capacity SG&A Expenses NET INCOME ________

Who is likely to resist implementation of ABC costing if their department costs are more expensive than they were for traditional costing?

The manager who's cost go up because of the new costing method

​"When a company produces both​ high-volume products and​ low-volume products, traditional product costing systems are likely to overcost​ high-volume products." Do you agree with this​ statement? Explain. No, traditional costing systems underestimate the cost of resources required for​ high-volume products. B. ​Yes, traditional costing systems are more likely to overcost​ low-volume products because all direct costs are assigned to products in proportion to the number of production units. C. ​Yes, traditional costing systems are more likely to overcost​ high-volume products because all indirect and support costs are assigned to products in proportion to the number of production units and the​ low-volume products are likely to require higher indirect and support costs per unit. D. ​No, traditional costing systems overestimate the cost of resources required for​ specialty, low-volume products.

Yes, traditional costing systems are more likely to overcost​ high-volume products because all indirect and support costs are assigned to products in proportion to the number of production units and the​ low-volume products are likely to require higher indirect and support costs per unit.