Cost Accounting Smart Book Chapter 9

Given the following information, assign overhead costs to Product A using ABC. Activity Costs Cost Driver Assembling costs $200,000 Machine-hours Setup costs $75,000 Number of setups Inspecting costs $50,000 Direct-labor hours Activity Product A Use Product B Use Assembling costs 500 machine hours 300 machine hours Setup costs 10 setups 15 setups Inspecting costs 25 direct labor hours 15 direct labor hours

$186,250 Reason: 200,000 (500/800) + 75,000 (10/25) + 50,000 (25/40) 200,000(0.625) + 75,000(0.4) + 50,000 (0.625) 125,000 + 30,000 + 31250

Given budgeted overhead cost of $250,000 and budgeted machine-hours of 125,000, the overhead rate is $________ per machine-hour.

$2 $250,000/125,000

If the minutes per activity is 10 minutes and the cost driver rate is $2.50 per minute, the activity costs equals $________.

$25.00

When compared to a two-stage cost allocation, ABC ______.

-allocates costs to activities -uses batch related cost drivers

Time-driven activity-based costing requires the ______

-cost of the resources supplied to a department -time it takes to complete the various activities of the department

ABC ______.

-helps managers identify cost drivers that were previously unknown -provides more detailed information than plantwide and two-stage allocation -requires teamwork between accounting and nonaccounting employees

Examples of a company experiencing a death spiral include ______.

-increasing a product's price when the product is experiencing a decrease in demand -a major customer no longer purchasing a product causing a company to increase the product's price

TDABC ______.

-is less expensive to maintain than traditional ABC -is based on time estimates for different activities

ABC systems ______.

-must be maintained and updated -allocate cost using volume and batch bases

The plantwide allocation method uses ______.

-one cost pool for the entire plant -one rate

The choice of whether to use a plantwide rate or departmental rates depends on ______.

-the products and the production process. -the costs and benefits of information provided by each system

True or false: The cost estimate to make a product is the same regardless of the cost allocation method used.

False

True or false: Time-based activity-based costing only uses time estimates to allocate costs.

False

True or false: A death spiral can only occur when a company has decreasing demand.

False Reason: A death spiral can occur with increasing demand when there is an increase in fixed costs without an immediate increase in output.

Which of the following is true? -High-volume products should always have overhead allocated using volume-based methods. -Low-volume, complex products require more machine-setups. -High-volume products always require more direct labor-hours per unit.

Low-volume, complex products require more machine-setups.

All actual overhead costs are recorded in ______.

Manufacturing Overhead Control

True or false: When using activity-based costing, the predetermined overhead rate applies to any type of indirect cost.

True

The final step in the activity-based costing system is to assign the ________ ________ to products.

activity cost

The method that first assigns costs to activities and then assigns them to products based on the product's consumption of activities is ________-________ ________.

activity-based costing

The two-stage product costing method that assigns costs first to activities and then to the products based on each product's use of activities is called ______.

activity-based costing

Analyzing processes to uncover nonvalue-added steps that can be eliminated is a component of ________-________ ________.

activity-based management

With TDABC, the managers ______ asked to estimate what proportion of the time the employees spend on each activity.

are not

Time-driven activity-based costing ______ the need to conduct surveys or interviews of multiple managers and employees.

avoids

Costs are assigned to individual cost objects (products or services) using appropriate cost allocation ________ or ________.

bases, drivers

ABC uses production run cost drivers which are also called ________ related cost drivers.

batch

When choosing to use more complex allocation methods, the incremental costs of additional information must be justified by an increase in ________ from the improved decisions.

benefits

Overhead rates based on machine-hours are calculated by taking ________ overhead costs divided by ________ machine-hours.

budgeted, budgeted

Activity-based costing ______ be applied to administrative activities.

can

If a company is concerned about the cost of maintaining an ABC system, they should ______.

consider time-driven activity-based costing

In an ABC two-stage cost system, each activity has an associated ________ ________.

cost activity

The best ________ ________ is one that is causally related to the cost being allocated.

cost driver

The cause of an activity cost is called a(n) ________ ________.

cost driver

Classification of cost drivers into general levels of activity such as volume or batch is called a(n) ________ ________.

cost hierarchy

In a two-stage cost allocation, overhead is separated into two or more ________-________-.

cost pools

The first step in the two-stage cost allocation separates overhead costs into two or more ____.

cost pools

The major difference between department allocation and plantwide allocation is the number of ________ ________ used to allocate overhead costs.

cost pools

The process that begins by attempting to increase price to meet reported product costs, losing market, reporting higher costs, and so on until out of business is the ________ ________.

death spiral

The process where a company attempts to recover costs by increasing price for a product with decreasing demand describes the ________ ________.

death spiral

When a company uses one allocation base, it gives the appearance that when a company drops a segment, all overhead costs will (increase/decrease) ________.

decrease

If multiple products use the manufacturing facilities in many different ways, the ________ allocation method is the best choice to allocate overhead costs.

department

When overhead is allocated using the department allocation method, there is one cost pool per ______.

department

To assign overhead costs to a product, multiply the cost driver rates by the number of units of the cost ______.

driver in each product

Identifying the activities is the ______ step in developing an ABC system.

first

With TDABC, the manager is asked to estimate ______.

how much time each activity takes for a single transaction

The first step in activity-based costing is ______.

identify the activities

The second step in activity-based costing is ______.

identify the cost drivers

As companies have become more automated, including those in the service sector such as banks, direct labor has become ________ (more/less) appropriate as a basis for allocating overhead.

less

The product costs produced by an ABC system ______.

may be worse than a traditional system in some cases

The cost driver rate per minute for an activity is calculated by dividing the cost of the activity by ________ ________.

minutes available

When managers analyze a product's activities, they often uncover many ________-________ steps or activities that can be eliminated.

nonvalue-added

The basic approach in product costing is to allocate costs in the cost pools to individual cost ______.

objects

When overhead is applied based on the volume of output, high-volume products are generally ________ (over/under)-costed and low-volume products are ________ (over/under)-costed.

over, under

Activity-based costing can be applied to administrative activities to compute the cost of ______.

performing an administrative service

The term ________ refers to an entire factory, store, or hospital.

plant or plantwide

Testing for environmental compliance and design and specification are examples of ________ related costs.

product

Identifying the cost drivers is the ______ step in developing an ABC system.

second

Plantwide allocation is a ________-________ approach to allocating overhead cost.

single-stage

A TDABC can be extended to allow for differences among orders by using ________ ________.

time equations

A method that addresses the costs of maintaining an ABC system is called ________-________ activity-based costing.

time-driven

TDABC ______.

uses time equations to allow for differences among orders

When a company uses only one rate to allocate overhead costs, the accounting system treats all overhead as if the costs were ______.

variable

Activity-based costing assigns costs to products by multiplying the cost driver rate by the ________ of cost driver units consumed by the product.

volume

Given the following information, assign overhead costs to Product B using ABC. Activity Costs Cost Driver Assembling costs $200,000 Machine-hours Setup costs $75,000 Number of setups Inspecting costs $50,000 Direct-labor hours Activity Product A Use Product B Use Assembling costs 500 machine hours 300 machine hours Setup costs 10 setups 15 setups Inspecting costs 25 direct labor hours 15 direct labor hours

$138,750 Reason: 200,000 (300/800) + 75,000 (15/25) + 50,000 (15/40) 200,000(0.375) + 75,000(0.6) + 50,000 (0.375) 75,000 + 45,000 + 18,750

Which of the following are problems with identifying users of ABC?

-ABC means different things to different organizations -Organizations may not use ABC throughout their organization

Which of the following statements are true? -Assigning overhead based on direct labor produces incentive to increase the labor content of products. -The magnitude of the overhead rate based on direct labor is of more concern when resources are used proportionately. -Allocating overhead on the basis of labor signals labor is more expensive than it really is. -Small errors in assigning labor to products are magnified when overhead rates are several hundred percent or more of labor costs.

-Allocating overhead on the basis of labor signals labor is more expensive than it really is. -Small errors in assigning labor to products are magnified when overhead rates are several hundred percent or more of labor costs.

Which of the following statements are true? -Companies are not likely to announce they have discontinued the use of ABC. -ABC may be applied to parts of an organization but not everywhere. -ABC means different things to different observers. -It is generally easy to identify companies that use ABC.

-Companies are not likely to announce they have discontinued the use of ABC. -ABC may be applied to parts of an organization but not everywhere. -ABC means different things to different observers.

Which of the following statements are true? -Allocating overhead on the basis of labor signals labor is less expensive than it really is. -Large errors in assigning labor to products are hidden when overhead rates are several hundred percent or more of labor costs. -In modern manufacturing, a proportionality between machine hours and labor hours is uncommon. -Assigning overhead based on direct labor produces an incentive to decrease the labor content of products.

-In modern manufacturing, a proportionality between machine hours and labor hours is uncommon. -Assigning overhead based on direct labor produces an incentive to decrease the labor content of products.

Which of the following statements is false? -The best cost driver is the one that is causally related to the cost being allocated. -In ABC, the selection of a cost driver is often easy because a measure of the activity volume can be used. -Finding a cost driver that is causally related to the cost being allocated is easier with plantwide allocation.

Finding a cost driver that is causally related to the cost being allocated is easier with plantwide allocation.

Automation has caused direct labor costs in companies to (decrease/increase) ________.

decrease