305 chap 5

If Gargus Co. uses a volume-based overhead rate based upon machine hours, the manufacturing overhead for this product is ______.

$1,300 Reason: $195,000÷30,000 = $6.50 per machine hour × 200 hours

Calculate the total customer unit-level cost assigned to this customer.

$2,740 Reason: Unit level costs consist of the per item processing cost and per item restocking fee.: 10 × 500 × $.50 + 4 × 40 × $1.50 = $2,740.

If Gargus Co. uses an activity-based costing system, how much overhead will be assigned to the product for total machine related overhead costs (setups plus maintenance)?

$220 Reason: Overhead equals: [$12,000÷300 = $40 per set-up × 3] $120 + [$15,000÷30,000 = $.50 per machine hour × 200] $100 = $220

Which of the following is NOT one of the major benefits of activity-based costing identified in the text? Higher firm profitability Improved planning Better decision making Process improvemen

higher firm profitablity

Through activity analysis, a firm identifies the work it performs to carry out its operations by

Gathering data from existing documents and records. Collecting additional data using questionnaires, observations, or interviews of key personnel

A successful ABC/M implementation does NOT require close cooperation among ______.

customers

The first step in the ABC development process is to ______.

determine the resources that are consumed by each identified activity

how to redefine OH costs

determine ways to make OH costs direct they are easier to deal with and will be more accurate

Operational ABM can be used to ______.

enhance asset utilization enhance operational efficiency

True or false: A facility-level activity can usually be traced to a product.

false

True or false: ABC systems are similar to volume-based costing systems because they both link uses of resources to activities and then link activities to cost objects.

false

True or false: Beneficial discretionary activities are good candidates for elimination.

false

Relevant factors to consider before determining the action appropriate for each customer include ______.

growth potential of the customer cross-selling potential importance of the customer to the firm

Product delivery is a(n) ______ activity.

high value-added

Something that significantly increases the value of a product or service to a customer is called a(n) ______ activity.

high value-added

If Gargus Co. uses a volume-based overhead rate based upon direct labor hours, the manufacturing overhead for this product is ______.

$975 Reason: $195,000÷20,000 = $9.75 per direct labor hour × 100 hours

Which of the following statements is incorrect? A batch-level activity can always be traced to a product. A product-level activity can always be traced to a manufacturing facility. A unit-level activity can always be traced to a batch.

A product-level activity can always be traced to a manufacturing facility.

Involving management and employees

Choice Allows people to become more familiar with ABC/M

A factor that causes or relates to a change in the cost of an activity is a(n)

cost driver

Order processing and invoicing are ______ costs.

customer batch-level

The net present value of estimated future profits from a customer is ______.

customer lifetime value

Order processing and billing, collection and payment processing are examples of

customer specific activites

what are main questions asked by activity analysis

• What work or activities do you do? • How much time do you spend performing these activities? • What resources are required to perform these activities? • What value does the activity have for the product, service, customer, or organization?

volume based costing when is it good?

• When the costs to be allocated are relatively small versus the directly traceable costs. • When the activities supporting production are relatively homogeneous across different product/service lines. Often used by paper product manufacturers, producers of agricultural products, other commodity firms, and professional service firms

Monthly statement processing is a ______ cost.

customer sustaining

Sales commissions is a ____ cost.

customer unit-level

Total support staff cost for SST, Inc. is budgeted at $150,000. Budgeted activity is 12,000 hours and practical capacity is 15,000 hours. If the overhead rate is calculated based on practical capacity and 12,000 hours are actually used, the cost of unused capacity equals ______.

$30,000 Reason: 3,000 unused hours × $10 practical capacity overhead rate = $30,000

If Gargus Co. uses an activity-based costing system, total manufacturing overhead for this product is ______.

$731 Reason: Overhead equals: [$100,000÷40,000 = $2.50 per pound of material × 150] $375 + [$12,000÷300 = $40 per set-up × 3] $120 + [$15,000÷30,000 = $.50 per machine hour × 200] $100 + [$68,000÷1,000 = $68 per inspection × 2] $136 = $731

Calculate the total customer batch-level cost assigned to this customer.

$895 Reason: Batch level costs consist of the per order processing cost, per return fee and all delivery costs.: 10 × $50 + 4 × $30 + 10 × $25 + 10 × 10 × $.25 = $895

what are the 3 main guidelines for refining a costing system

1. Direct-cost tracing (adjust design of manufacturing facility to begin tracking/tracing items that are currently identified as INdirect material and INdirect labor) 2. Indirect-cost pools (increase the number of cost pools) 3. Cost-allocation bases (find distinct drivers for each pool)

3 steps to developing an ABC system

1. Identify resource costs and activities • An activity analysis is performed to identify key activities and the way in which the activities consume resources. 2. Assign resource costs to activities • Use resource consumption cost drivers based on cause-and-effect relationships, such as the number of labor hours, setups, moves, machinehours, employees, or square feet to assign resource costs. 3. Assign activity costs to cost objects - Use activity consumption cost drivers, such as purchase orders, receiving reports, parts stored, direct labor-hours, or manufacturing cycle time to assign activity costs.

3 principal reasons for refinements to the cost system

1. Increase in product diversity (if product offerings begin to use resources differently...some use more machine hours vs labor hours...some require more design time or inspection time than others...) 2. Increase in indirect costs with different cost drivers (if OH costs do not ↑ ↓ with all the same activities...) 3. Competition in product markets

Keeping the ABC/M design simple

Choice Helps keep costs down

True or false: Activity-based costing assigns overhead to products based on resources consumed per unit produced.

F

The process of identifying activities and cost drivers related to servicing customers is ______.

customer cost analysis

Which of the following is NOT identified as part of the three-step sequence for developing an activity-based costing system? Assign activity costs to cost objects. Assign resource costs to activities. Identify cost objects. Identify resource costs and activities.

Identify cost objects

Which of the following statements is incorrect? Most overhead costs relate directly to final products or services. Products and services are a result of activities. Many resources used in an operation can be traced to final products or services. Resources are spent on or consumed by activities.

Most overhead costs relate directly to final products or services.

Which of the following is NOT a part of an activity-based two-stage allocation procedure?

Plant or departmental level costs are assigned to cost objects.

Using ABC/M on a job that will succeed

Shows people how and why the process works

True or false: Managers may want to prepare a process map to ensure that no activities are missed in the value-added analysis.

T

Which government entity was identified in the text as an example of one using ABC/M to better understand its cost structure?

U.S. Patent and Trademark Office

Typical questions ABC project team members typically ask when gathering activity data include ______.

What resources are required to perform the activity? What value does the activity have for the product or cost object? How much time is spent performing an activity?

Potential problems from having an inaccurate costing system include ______.

a difficult time determining which product is most profitable increasing sales with decreasing profits continually losing competitive bids

cost driver

a factor that causes or relates to a change in the total cost of an activity

An activity consumption cost driver is ______.

a measure of demand placed on resources by final cost objects

activity

a specific task action or unit of work done such as a production set-up

Activity-based costing (ABC) assigns costs to ______.

activities and then cost objects

A specific task, action, or unit of work done is called a(n)

activity

In ABC costing a(n) _________ can be either a single action or a group of several actions.

activity

When developing an ABC system, the work performed to carry out a firm's operations is identified by a(n)

activity analysis

Gathering data from existing records and collecting additional data using questionnaires, observations, or interviews of key personnel is included in an ABC

activity analysis

A two-stage cost assignment procedure assigns resource costs to ______.

activity pools and then to cost objects

ABC and ABM are common in ______

all sectors of the economy

resource

an economic element needed or consumed in performing activities such as salaries and supplies

A cost object is ______.

an item of interest an output resulting from the firm's activities

cost assignment

approach for indirect (support) costs: resource costs such as factory overhead are assigned to activity cost pools and then to cost objects (jobs, clients, products, patients, etc.)

how are cost pools defined in ABC

as activities rather than production plant or department costs

The third step in the ABC development process is to ______.

assign costs of activities to items of interest, generally called cost objects

The third step in developing an activity-based costing system is ______.

assigning activity costs to cost objects

Machine setups is an example of a ______ activity.

batch level

Materials handling is an example of a ______ activity.

batch-level

Because many firms have seasonal and cyclical fluctuations in sales and production, a benefit of ABC is that it provides better information to identify the cost of unused ________________ and maintain a separate accounting for this cost

capacity

If a plant manager decides to add capacity in expectation of future sales and production, that cost should be ______.

charged as a lump sum in the plant's costs

A measure of the frequency and intensity of a demand placed on a resource by an activity is a(n) resource ________ cost driver

consumption

Measured or quantified amounts of _____ ________ are excellent bases for assigning resource costs to activities and the cost of activities to cost objects

cost driver

The overcosting/undercosting that can occur when using volume-based product costing is sometimes called

cross subsidization

The process of identifying activities and cost drivers related to servicing customers is called _____ __________ analysis

customer cost

Which of the following is NOT an expected benefit of an activity-based costing system? Higher priced products and services Process improvement Better decision making Better profitability measures Improved planning

higher priced products and services

The difference between the available capacity and the planned level of utilization is called

idle

Capacity that is available for use by other business units in the firm to expand their operations or to lease to other organizations is known as

idle capacity

Using ABM can help management identify ways to ______.

increase value to the customer reduce costs improve operations

Customer profitability analysis allows managers to ______.

introduce profitable new products and services shift customers' purchases mix choose types of after-sales services to provide manage customers' costs-to-serve

The net present value of estimated future profits from a customer for a specified time is the customer __________ value

lifetime

Potential drawbacks to using a volume-based costing system include ______.

little incentive is provided for managers to control indirect costs inaccurate product costs disproportionate assignment of indirect costs

Customer satisfaction decreases imperceptibly or remains unchanged if a(n) ______ ___________ added activity is elimiated

low value

An activity that consumes time, resources, or space, but has little impact on meeting customer needs is a(n) ______ activity.

low value-added

Activity consumption cost drivers

measure the amount of demand placed on a resource by an object, such as the number of batches used to manufacture a product

Resource consumption cost drivers

measure the amount of resources consumed by an activity, such as the number of items in a purchase or sales order.

Using volume-based costing tends to ______.

overcost high-volume products and undercost low-volume products

In a volume-based allocation procedure factory overhead costs are first assigned to ______.

plant or departmental cost pools

A limitation of a volume-based costing system is the ______.

potential for products to be charged too much or too little overhead

The capacity available with the current resources of people, equipment, policies, and facilities is called ______ capacity.

practical

A diagram that identifies each step that is currently involved in making a product or providing a service is known as a(n)

process map

Which of the following is NOT a customer service activity?

product design

Which of the following is NOT a customer-specific activity? Billing and collection Customer service Order processing Product processing

product processing

An activity-based costing system is likely to help a company develop and execute strategy by providing accurate information about the cost of ______.

products and services serving customers dealing with suppliers

he analysis of customer revenues and customer cost is the basis of customer__________ analysis

profitability

Sustaining activities for an organization include ______.

regulatory compliance building security

A(n) economic element needed or consumed in performing activities is called a(n)

resource

Ideally, a firm should choose __________ consumption cost drivers based upon cause-and-effect relationships

resource

Developing a costing system requires understanding relationships among ________, activities and products or services

resources

Labor and supplies are examples of _______ used in performing manufacturing activites

resources

Volume-based costing is likely to provide inaccurate cost information when ______.

support activity usage is not proportional to units produced or hours used the firm produces a diverse mix of products

Volume-based costing systems can be a good strategic choice for firms ______.

that offer professional services to clients with a relatively small level of common costs that produces a fairly homogeneous set of products

The second step in the ABC development process is to ______.

use resource consumption drivers to assign resource costs to activities

cost drivers Activity vs Volume

• ABC systems use drivers based on an activity or activities performed for the cost object. • Volume-based approaches use a volume-based cost driver that often bears little or no relationship to the consumption of resources by the cost objects.

cross-subsidization

• If a company undercosts one of its products, it will overcost at least one of its other products. • The overcosted product absorbs too much cost, making it seem less profitable than it really is...product is simpler to make but looks costly • Because it will likely be priced higher than it should, customers might choose to buy elsewhere...causing the company to lose money • The under-costed product is left with too little cost, making it seem more profitable than it really is...product uses more complex method but seems cheaper to make • Because it SEEMS more profitable, the company will want to sell lots of this...but it may actually be losing money on each sale!

what is the premise of ABC

• Products and services are created through performing activities. • Activities require resources. • Resources cost money.

activity costing vs volume

• Volume-based costing results may be distorted because indirect costs do not always occur in proportion to output volume. • Volume-based costing generally causes cross-subsidization of outputs (That is, some products will be overcosted and others undercosted). • Activity-based costing uses detailed information about the activities that make up indirect costs so that outputs are charged only for resources consumed by the activities needed to perform them.

2-stage cost assignment volume-based vs ABC

• Volume-based systems assign factory overhead to a single plant or departmental cost pool first and then to products or services using a volumebased rate. • ABC systems assign factory overhead costs to activities or activity cost pools using resource consumption cost drivers and then assign these costs to cost objects using activity consumption cost drivers.