ACG Chapter 5
activity based costing provides managers with information that affects
both fixed and variable costs
activity based costing data
can be easily misinterpreted
employees may be asked to estimate their time spent dealing with cost pool activities so that
first stage allocations will be more accurate
First- stage allocation of overhead costs to each cost pool is accomplished using all of the following except
grouping batches and unit level activities
organization-sustaining activities include
heating a factory preparing annual reports setting up a computer network
the first major step when implementing an ABC system is
identify the activities
customer level activities include
mailing catalogs sales calls
what are some of the limitations of activity based costing systems
managers and employees may resist the change to ABC ABC requires substantial resources ABC procedures produce numbers that do not match traditional costing
In traditional costing _____ costs are assigned to products
manufacturing (not selling and admin)
in ABC the greater the number of activities, the:
more accurate the costs are likely to be more costly the system will be to design
an example of a transaction driver is the
number of bills sent out to a customer (transaction driver is a count of the number of times an activity occurs)
IF some products are over costed and some are under costed the errors will:
offset each other in cost of goods sold and inventory valuations
identifying the activities that will form the foundation for the system
often involves interviewing employees can be time-consuming involves a great deal of judgement
usually, traditional costing __ high-volume products and __ low-volume products
overcosts undercosts
in activity based costing, first stage allocation assigns
overhead
if ABC is not implemented correctly and organization sustaining costs are included in product costs, then product costs will be ____ and margin will be ____
overstated, understated
in traditional costing, which type of cost is not included in the product margin?
period
activity based costing uses more cost _____ than traditional costing
pools
Machine setups: total cost $20,000, total activity 200 setups, rate $100 per setup - Special processing: total cost $150,000, total activity 10,000 machine hours,$15 per machine hour - General factory: total cost $200,000, 20,000 direct labor hours, activity rate $10 per direct labor hour - total overhead costs $370,000 Assuming Product A uses 100 setups, no special processing and 10,000 direct labor hours, what is the total overhead cost assigned to product A?
$110,000 $10,000 for machine set up ($100 per machine set up x 100 set ups) + $0 for special processing +$100,000 general factory ($10 per direct labor hour x 10,000 direct labor hours)
Total estimated manufacturing overhead is $900,000 and total estimated activity is 30,000 machine-hours. The plant wide overhead rate is $_____ per machine hour
$30
Production overhead $800,000 Production overhead activity cost pool of assembling units 40% What is the amount of production overhead allocated to the assembling unit cost pool?
$320,000 ($800,000 x 40%)
Machine set up: activity rate = $12 per machine hour, activity rate 40MHS Customer orders: $10 per order, activity rate 5order What is the overhead cost assigned to princeville for its 5 orders of product 12B?
$530 machine set up = (12 per machine hour x 40 machine hours) = $480 + ($10 per order x 5 orders) = $50 480+50= 530
Number of employees 20 avg salary per employee $30,000 weeks/yr 52 minutes available per week 2,400 practical capacity 80% if a company uses time-driven activity based costing, what is the practical capacity of resources supplied in minutes?
1,996,800 52 weeks x 2,400 minutes/week/employee x .80 x 20 employees
steps for implementing ABC in order
1.Define activities, activity cost pools and activity measures 2. assign overhead costs to activity cost pools 3. calculate activity rates 4. assign overhead costs to cost objects 5. prepare management reports
determine unit product cost for ABC
DM + DL + MOH
costs assigned an or traced when computing product margin in a traditional cost system are
DM DL MOH
Which of the following costs would not be allocated using ABC
Direct labor
which of the following costs would not be allocated to products or customers?
Other ** would be allocated- customer service, machine setup and product design***
Some manufacturing costs many be excluded from product costs when using ABC
True
a characteristic essential for successful implementation of ABC is
a link to how people are evaluated and rewarded
the first major step in implementing ABC is to identify the _____ that will form the foundation for the system
activities
Activity based costing accumulates cost for each _______
activity
In ABC, any even that causes consumption of overhead resources is a ______
activity
activity based costing uses numerous ______ cost pools
activity
which costing system charges products only with the costs of the capacity used by those products and not with the cost of unused capacity?
activity based
overhead includes both manufacturing and non manufacturing costs under:
activity based costing
focusing on activities to eliminate waste, decrease processing time, and reduce defects is the basis of _____ ______ ______
activity based management
order size cost pool
all costs of resources consume as a consequence of the number of units produced, including cost of miscellaneous factory supplies, power to run machines and some equipment depreciation
in ABC, the consumption of overhead resources is caused by:
an activity
ABC is not used for external reporting because _____ would not be comfortable using allocations based on employee interviews
auditors
shipping orders to a grocery store would be considered a ________
batch level activity
a systematic approach that can identify improvement opportunities is
benchmarking
in activity based costing, non manufacturing and manufacturing costs are assigned to product on a
cause and effect
In ABC another term for activity measure is
cost driver
in activity based costing another term for the activity measure is
cost driver
the term ____ _____ is also used when referring to an allocation base or activity measure in ABC
cost driver
Activity based costing estimates the costs of the resources consumed by ________
cost objects
Ordering materials, setting up machines, assembling products, and inspecting products are examples of ____
cost pools
which is not a management report that is normally prepared with ABC data
customer margins (product and customer profitability are)
the most appropriate activity measure for a cost pool consisting of the costs of resources consumed taking and processing individual customer sales is the number of
customer orders
activities that could be combined into one batch level activity are the number of
customer orders shipping orders
in the 19th and 20th centuries:
direct labor hours was a satisfactory overhead allocation base
The amount of time required to perform an activity is measured by a ______ driver
duration
types of costs that might be included in a cost pool based on order size include
equipment depreciation factory supplies
calculate activity rate for cost pool
ex- total cost of machine set up or machine hours divided by the total number of activity
an activity cost pool accumulates costs for _____ activity measure
exactly one
ABC does not conform to GAAP because it
exclude some manufacturing costs includes some manufacturing costs
individual product costs calculated using ABC are not listen on ______ reports
external
types of cost that might be included in a cost pool based on order size include
factory supplies equipment depreciation
in an activity-based costing system, it is best to combine activities that are not highly correlated
false
most companies that use activity based costing replace their traditional accounting system with it
false
in ABC, _______ allocation is the process of assigning overhead costs to activity cost pools
first-stage
when managers allocate organization-sustaining and unused capacity costs to produce
incorrect decisions will be made costs will be overstated
ABC is generally used for _____ reporting
internal
Which is not a strength of TDABC? (time-driven activity based costing)
it does not require as much data collection (inputs) as ABC
external reports _____ detailed than internal reports
less
the most appropriate activity measure for a cost pool consisting of equipment depreciation and power to run machines is
machine hours
in the 19th and 20th centuries, cost systems relied on allocation bases such as
machine hours labor hours
customer sales minus direct material, direct labor, and overhead cost pools used for each customer equal customer
margin
the best team to create an ABC system should include employees from
marketing
activity based costing ______ include activities that do not relate to the number of units produced
may
under ABC, nonmanufacturing costs
may be allocated to products based on cause
compared to traditional systems, activity based costing uses _____ cost pools and unique measures of actvity
more
an example of a transaction driver
number of bills sent out to a customer
activities that occur regardless of which customer served, which product are produced or how many batches are run or units made are facility level or _____ _________
organization sustaining
costs that are totally unaffected by which products are made during a period are ____ costs
organization sustaining
costs that are totally unaffected by which products are made during a period are ________ costs
organization-sustaining
ABC treats organization-sustaining costs as ____ expenses
period
Which of the following help companies channel their resources into the most profitable growth opportunities
product and customer profitability reports
Advertising is an example of a _________ activity
product level
A products ____ is a function of sales and the direct and indirect costs that the product causes
product margin
in activity based costing, ______ are different from those calculated using traditional costing
product margins
activity based costing only charges products for the cost of the capacity used because
products are only assigned the costs of resources they actually use it results in a more stable unit product cost
unit level activities are
proportional to the number of units produced
what is the benefit of a cross functional team designing an ABC system?
resistance to change is reduced
a customer relations cost pool would include the cost of
sales call
costs that can be easily traced to individual products include
sales commission warranty repair costs shipping costs
individual customer ______ minus individual customer _____ equals customer margin
sales, cost
product profit margin formula
sales- DM-DL-MOH
activity rates are used to apply overhead costs to products and customers in the
second
activity based costing uses activity rates to apply overhead costs to products in _____ allocation
second stage
to reconcile ABC product margin to net income
subtract overhead costs not assigned to products
which of the following is not essential for the successful implementation of an ABC system
top managers must design the ABC system
Which of the following items are the same under both ABC and traditional costing
total costs net operating income total sales
The activity rate for machine set up
total overhead cost for machine setup divided by the total number of activities or setups
All manufacturing costs are allocated in a ____ costing system, regardless of whether the product consumes the resources associated with those costs
traditional/absorption
Simple counts of the number of times an activity occurs are ___ drivers.
transaction
In an automated environment, using traditional allocation bases based on volume may distort unit product costs
true
as the number of activities increases, the cost to implement an ABC system also increases
true
power to run production equipment would be a _____ level activity
unit
in ABC, what costs are not assigned to products?
unused capacity organization-sustaining
in the second stage allocation of overhead costs, we use ____ to assign costs to cost objects
activity rates
A company has two activity cost pools—Customer Orders and Product Design. The activity rates are $300 per order for Customer Orders and $500 per design for Product Design. How much overhead cost would be assigned to a customer placing 4 orders and requiring 10 designs?
$6,200
A company's total expected overhead for the year is $500,000. Two activity cost pools have been identified: Customer Service with a total cost of $200,000 and a total activity of 25,000 customer service calls; and Product Development with a total cost of $300,000 and total activity of 20,000 development hours. Using activity-based costing, calculate the appropriate activity rate(s).
$8 per customer call and $15 per development hour
TDABC strengths
1. easy to update because no employee interview 2. quantifies unused capacity costs in an objective fashion that does not require employees to self report their own idle time 3. helps companies estimate the financial impact of aligning capacity with demand, particularly with respect to step-fixed resources
A company's products has sales of 4750,000 and total costs of $360,000. If the net operating income for the company was $215,000, total overhead costs not assigned to products was $____________
175000 (750,000-360,000-215,000)
A company has four cost pools, customer relations, order size, product design and customer orders. Indirect labor is used 15% for customer relations, 30% for order size and 35% for product design. The percentage is used for customer orders is
20%
Total customer service in minutes 1,928,000 practical capacity in minutes 2,496,000 minutes available per week 2,400 weeks a year 52 practical capacity percentage What is the unused capacity in minutes?
568,000 Unused capacity= practical capacity- customer service used = 2,496,000-1,928,000= 568,000
if the activity rate is $65 per order with a total of 120 orders for a product, the overhead cost assigned to the product would be $__.
7800
customer margin
= sales-DM-DL-Overhead
which costing system assigns non-manufacturing overhead on a cause and effect basis
ABC
all of the following are differences between activity-based costing (ABC) and traditional absorption costing except
ABC allocates all manufacturing costs to products
Which of the following is an allocation base commonly used under the traditional methods for allocation of overhead costs?
Direct labor hours
a "bucket" in which costs are accumulated that relate to a single activity measure in the ABC system is a
activity cost pool
traditional cost systems allocate all manufacturing costs using ________ allocation bases
volume-related
