ACCT 212 Chapter 4: Activity-Based Costing

Activity Cost Pool

A "bucket" in which costs are accumulated that relate to a single activity measure in an activity-based costing system.

Which of the following statements is false? (You may select more than one answer.) a) Activity-based costing systems usually shift costs from low-volume products to high-volume products b) Benchmarking can be used to identify activities with the greatest potential for improvement c) Activity-based costing is most valuable to companies that manufacture products that are similar in terms of their volume of production, batch size, and complexity d) Activity-based costing systems are based on the assumption that the costs included in each activity cost pool are strictly proportional to the cost pools activity measure

A and C

Activity-Based Management

A management approach that focuses on managing activities as a way of eliminating waste and reducing delays and defects.

Activity-Based Costing (ABC)

A two-stage costing method in which overhead costs are assigned to products on the basis of the activities they require.

Batch-Level Activities

Activities that are performed each time a batch of goods is handled or processed, regardless of how many units are in the batch. The amount of resource consumed depends on the number of batches run rather than on the number of units in the batch.

Activity

An event that causes the consumption of overhead resources.

Activity Rate

An overhead rate in activity-based costing. Each activity cost pool has its own activity rate which is used to assign overhead to products and services.

Activity-based costing improves accuracy of product costs by: a) using multiple-activity pools to accumulate overhead costs b) relying on a single measure that causes overhead costs c) implementing absorption costing approach for decision-making purposes d) using departmental overhead rates that vary by process

a) using multiple-activity pools to accumulate overhead costs

In an activity-based costing system, the _______ expresses how much of the activity is carried out and is used as the allocation base for assigning overhead costs. a) activity cost pool b) activity measure c) activity rate d) departmental overhead

b) activity measure

Under an ABC system, overhead costs are allocated to the products using a two-stage process. What happens during the second stage of that process? a) We allocate the overhead costs to individual activity pools b) we allocate the costs in the activity pools to the products using activity rates and activity measures c) We identify the activity pools d) We calculate the activity rate for each activity pool

b) we allocate the costs in the activity pools to the products using activity rates and activity measures

Implementing an activity-based costing system often results in a shift of overhead costs from: a) overpriced to underpriced products b) unit-level to batch-level activities c) high-volume to low-volume products d) low-volume to high-volume products

c) high-volume to low-volume products

Activities and Activity Measures i) Hand-processing (direct labor-hours) ii) Setting up equipment (number of setups) iii) Administering parts inventories (number of part types) Estimated Overhead Costs i) $320,000 ii) 150,000 iii) 30,000 total: $500,000 Product 1 i) 45,000 ii) 9,000 iii) 110 Product 2 i) 55,000 ii) 21,000 iii) 90 Transformation Corporation has provided the information set forth above regarding the overhead to be allocated between the two products it produces: CDE and EFG. What is the activity rate for the hand-processing units activity? a) $3.20 per setup b) $5.00 per setup c) $150.00 per part-type d) $3.20 per direct labor-hour

d) $3.20 per direct labor-hour

Which of the following is a product-level activity? a) Processing units by hand b) General factory administration c) Processing purchase orders d) Administering parts inventories

d) Administering parts inventories

Which of the following are part of the four-level hierarchy used in activity-based costing systems? - Batch-level activities - Company-wide activities - Facility-level activities - Overhead activities - Product-level activities - Unit-level activities

- Batch-level activities - Facility-level activities - Product-level activities - Unit-level activities

Which of the following explain why activity-based costing improves product cost accuracy when compared to traditional methods? (You may select more than one answer.) a) Activity-based costing typically uses more cost pools than traditional methods b) Activity-based costing assigns direct labor costs to products, whereas traditional methods do not c) Activity-based costing often uses a plantwide overhead allocation, whereas traditional methods do not d) Activity-based costing uses a variety of activity measures to assign overhead costs to products, some of which are correlated with volume and some of which are not

A and D

Benchmarking

A systematic approach to identifying the activities with the greatest room for improvement. It is based on comparing the performance in an organization with the performance of other, similar organizations known for their outstanding performance.

Which of the following statements is true? (You may select more than one answer.) a) The costs of a unit-level activity should be proportional to the number of units produced. b) Unit-level activities are performed each time a unit is produced. c) Setting up equipment is an example of a unit-level activity. d) Activity-based costing systems may use direct labor-hours and/or machine-hours to assign unit-level costs to products.

A, B, and D

Unit-Level Activities

Activities that arise as a result of the total volume of goods and services that are produced, and that are performed each time a unit is produced.

Activity Measure

An allocation base in an activity-based costing system: ideally, a measure of whatever causes the costs in an activity cost pool.

Helio Company has two products: A and B. The annual production and sales of Product A is 1,850 units and of Product B is 1,250 units. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labor-hours per unit and Product B requires 0.6 direct labor-hours per unit. The total estimated overhead for next period is $100,485. What is the company's predetermined overhead rate?

Company's predetermined overhead rate: $77 per direct labor-hour

Which of the following statements is false? (You may select more than one answer.) a) In recent years, most companies have experienced increasing manufacturing overhead costs in relation to direct labor costs. b) Batch-level costs do not depend on the number of units produced in a batch. c) Facility-level costs are not caused by particular products. d) Product-level costs are larger for high-volume products than for low-volume products.

D

Harrington Company has two products: A and B. The annual production and sales of Product A is 1,750 units and of Product B is 1,150 units. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.4 direct labor-hours per unit and Product B requires 0.7 direct labor-hours per unit. The predetermined overhead rate is $66.00 per direct labor-hour. What it the amount of overhead cost that will be allocated to each unit of Product B?

The amount of overhead cost that will be allocated to each unit of Product B: $46.20 $66.00 x 0.7 = $46.20

Activities i) Assembly ii) Processing Orders iii) Inspection Activity Rates i) $14.35 per machine-hour ii) $47.85 per order iii) $70.30 per inspection-hour True Blue Corporation provided the data set forth above from its activity-based costing system. The company makes 430 units of product D28K a year, requiring a total of 690 machine-hours, 40 orders, and 10 inspection-hours per year. The product's direct materials cost is $35.82 per unit and its direct labor cost is $29.56 per unit. What is the unit product cost of product D28K?

The unit product cost of product D28K: $94.49 14.35(690) = 9901.5 47.85(40) = 1914 70.30(10) = 703 9901.50 + 1914 + 703 = 12518.50 12518.50/430 = 29.11 29.11 + 35.82 + 29.56 = 94.49

Which of the following is a reason for the popularity of plantwide overhead rates to allocate overhead costs? a) Simplicity b) Traceability c) Accuracy d) Lower allocation base

a) Simplicity

Activity-based management involves focusing on activities to: a) avoid cost shifts due to the use of activity-based costing b) identify a single allocation base that causes overhead costs c) decrease the cost of implementing an activity-based costing system d) eliminate waste, decrease processing time, and reduce defects

d) eliminate waste, decrease processing time, and reduce defects