Ch. 4: Activity-Based Costing

How would you assign costs to labor if time is shared by several activities?

Driver tracing is the cost assignment method. Resource drivers.

When disposing of an OH variance, which account is debited if OH is material?

WIP inventory, finished goods inventory, and cost of goods sold (Material should be allocated to period's production) - prorate OH variance based on ending applied OH balances in each acct

The collected data sets that are organized and interrelated for use by an organization's ABC information system is(are): a. Activity-based costing database b. Cost objective c. Activity driver d. both "Activity driver" and "Cost objective"

a. Activity-based costing database

All of the following are non-unit-based activity drivers EXEPCT: a. Number of direct labor hours b. Number of material moves c. Number of inspections d. Number of setups

a. Number of direct labor hours

The grouping of logically related information is called: a. data set b. cost objective c. activity driver d. both "activity driver" and "cost objective"

a. data set

Define: secondary activities

activity consumed by intermediate cost objects such as primary activities, materials, or other secondary activities **costs of secondary activities consumed by primary activities MUST BE assigned to primary activities BEFORE assigning costs of primary activities to product

What is the formula for Overhead Variance?

actual OH - applied OH

What needs to occur for overhead to be considered Overapplied Overhead?

actual OH < applied OH

What needs to occur for overhead to be considered Underapplied Overhead?

actual OH > applied OH

Define: Product diversity

products consume OH activities in different proportions caused by differences in: *product size *product complexity *setup time *size of batches

Define: Applied Overhead

total OH assigned to actual production at any point in time

How are activities classified?

1. Primary 2. Secondary 3. value-added/non-value-added 4. quality-related/environmental

What are the types of Activity Drivers?

1. transaction drivers 2. duration drivers

What is the main problem with plantwide and departmental rates?

Assumption that machine hours and/or direct labor hours drive or cause all OH costs

When in OH rate calculated?

Beginning of year

Define: Normal cost system

Cost system that uses predetermined OH rates and actual costs for direct materials and direct labor

What does unit-based product costing assign?

Manufacturing costs to products

What is the formula for applied overhead?

OH rate x actual driver usage

What is calculated once applied overhead is assigned?

Unit cost

What drivers are used to calculate OH rate in unit-based costing?

Unit-level drivers

What is considered the heart of activity-based management and is the basis for continuous improvement?

Value analysis

What type of matrix is used in identifying the amount of labor consumed?

Work Distribution Matrix

An activity-based costing system uses which of the following procedures? a. Overhead costs are traced to activities, then costs are traced to products. b. Overhead costs are traced to departments, then costs are traced to products. c. Overhead costs are traced directly to products. d. All overhead costs are expensed as incurred.

a. Overhead costs are traced to activities, then costs are traced to products.

Product costs can be distorted if a unit-based activity driver is used and: a. the consumption ratios differ between unit-based and non-unit-based input categories. b. non-unit-based overhead costs are a significant proportion of total overhead. c. both "non-unit-based overhead costs are a significant proportion of total overhead" and "the consumption ratios differ between unit-based and non-unit-based input categories". d. neither "non-unit-based overhead costs are a significant proportion of total overhead" nor "the consumption ratios differ between unit-based and non-unit-based input categories".

c. both "non-unit-based overhead costs are a significant proportion of total overhead" and "the consumption ratios differ between unit-based and non-unit-based input categories".

The proportion of an overhead activity consumed by a product is the: a. fixed ratio. b. quick ratio. c. consumption ratio. d. overhead ratio.

c. consumption ratio.

Unit-level cost drivers create distortions when: a. products use resources similarly. b. products are produced using resources homogeneously. c. different products consume resources differently. d. All of these choices are correct.

c. different products consume resources differently.

All of the following are unit-based activity drivers EXCEPT: a. number of units. b. direct labor hours. c. number of setups. d. machine hours.

c. number of setups.

The overhead rates of the traditional functional-based product costing use: a. process costing. b. non-unit-based activity drivers. c. unit-based activity drivers. d. job order costing.

c. unit-based activity drivers.

When assigning OH costs, which relationship should occur?

cause and effect

Define: Non-unit-based drivers

factors other than the number of units produced that measure demands that cost objects place on activities

Define: Unit-level drivers

factors that measure the demands placed on unit-level activities by products

Define: Product-level activities

those activities performed that enable the various products of a company to be produced *activities and costs increase as number of different products increase exp.: engineering changes (to products), developing product-testing procedures, introducing new products, and expediting goods

Define: Batch-level activities

those that are performed each time a batch is produced (fixed costs) exp.: setups, inspections (if done by sampling units from a batch), purchasing, and materials handling

Define: Unit-level

those that are performed each time a unit is produced exp.: grinding, polishing, assembly

Define: Facility-level activities

those that sustain a factory's general manufacturing processes exp.: providing facilities, maintaining grounds, and providing plant security

What is the formula for unit cost?

total applied OH / units produced

What is the formula for Traditional unit product cost?

unit OH cost + unit prime cost (assigned using dir. tracing)

What are the most common resources consumed by activities?

*Labor *Materials *Energy *Capital

How is the amount of labor consumed, as noted by a Work Distribution Matrix, determined?

*interviews *survey forms *questionnaires *timekeeping systems

What is included in an activity dictionary?

*names activity (action verb & object that receives action) *describes tasks that make up the activity *classifies the activity as primary or secondary *lists users (cost objects) *identifies a measure of activity output (activity drivers)

What are commonly used unit-level drivers?

*units produced *direct labor hrs *direct labor dollars *machine hours *direct material dollars

Explain the ABC System model

-Cost of Resources *Costs assigned using driver tracing & direct tracing -Activities *Costs assigned using activity drivers -Products

What are the factors that impair ability of the unit-based plantwide and departmental rates to assign OH costs accurately?

1. Proportion of non-unit-related OH costs to total OH costs is large 2. Degree of product diversity is great

Explain unit-based product costing

1. assigns overhead costs to a functional unit, creating either plant or departmental cost pools 2. pooled costs are assigned to products using predetermined overhead rates based on unit-level drivers

What are ways of overcoming distortion caused by the unit-level rates?

1. expand # of rates used so that the rates reflect the actual consumption of OH costs by the various product (instead of pooling OH costs in plant or dept. pools, rates are calculated for each individual OH activity 2. costs are assigned to each product (activity rates X amount consumed by each activity)

What are the steps for cost assignment using Plantwide Rates?

1. first-stage cost assignment (all budgeted OH costs are assigned to a plantwide pool) 2. Plantwide rate is computed using a single unit-level driver (usually direct labor hrs) 3. Second-stage cost assignment (OH costs assigned to products by multiplying the rate by the actual total direct labor hours used by each product)

What are the design steps for an ABC system?

1. identify, define, & classify activities and key attributes 2. assign the cost of resources to activities 3. assign the cost of secondary activities to primary activities 4. identify cost objects and specify the amount of each activity consumed by specific cost objects 5. calculate primary activity rates 6. assign activity costs to cost objects

What is required for ABC users to be effective?

1. multiple products are needed 2. must be product diversity 3. non-unit-level OH must be a significant percentage of production cost

What key managerial objectives does Activity Classification facilitate?

1. product/customer costing 2. continuous improvement 3. total quality management 4. environmental cost management

What are the categories of activity classification?

1. unit-level 2. batch-level 3. product-level 4. facility-level

Why do companies use an overhead rate?

Because OH & production often are incurred non-uniformly throughout the year

If activity-based costing is used, insurance on the plant would be classified as a: a. unit-level activity. b. facility-level activity. c. product-level activity. d. batch-level activity.

b. facility-level activity.

What is the formula for Primary activity rates?

budgeted activity costs / practical activity capacity (where activity capacity is the amount of activity output (as measured by activity driver))

What is the formula for Predetermined OH Rate?

budgeted annual OH / budgeted annual driver level

Define: intermediate stage

cost of secondary activities are assigned to intermediate cost objects that consume their output

Unit-based product costing uses which of the following procedures? a. All overhead costs are expensed as incurred. b. Overhead costs are traced to activities, then costs are traced to products. c. Overhead costs are traced directly to products. d. Overhead costs are traced to departments, then costs are traced to products.

d. Overhead costs are traced to departments, then costs are traced to products.

If activity-based costing is used, set-ups would be classified as a: a. unit-level activity. b. product-level activity. c. facility-level activity. d. batch-level activity.

d. batch-level activity

For a labor-intensive manufacturing operation, which of the following would be the most appropriate activity driver? a. units of output b. number of employees c. machine hours d. direct labor hours

d. direct labor hours

Batch-level costs are assigned using: a. unit-based activity drivers. b. cost pools. c. departmental rates. d. non-unit-based activity drivers.

d. non-unit-based activity drivers

Define: activity dictionary

lists the activities in an organization along w/ desired attributes. **provides crucial information for activity-based costing as well as activity management

Define: Duration drivers

measure the demands in terms of the time it takes to perform an activity *should be used when time required to perform activity varies from transaction to transaction

Define: Activity drivers

measure the demands that cost objects place on activities

Define: Transaction drivers

measure the number of times an activity is performed, such as number of treatments and number of requests

Define: activity attributes

nonfinancial and financial information items that describe individual activities

Define: Consumption ratio

proportion of each activity consumed by a product (shared resources)

Define: activity inventory

simple list of identification activities

Define: bill of activities

specifies the product, expected product quantity, activities, and amount of each activity expected to be consumed by each product *created once duration drivers are established

Define: primary activities

activity consumed by a final cost object such as product or customer

What is the most common account used to assign OH variance?

Cost of goods sold

When disposing of an OH variance, which account is debited if OH is immaterial?

Cost of goods sold

Time-Driven Activity-Based Costing (TDABC) is a before-the-fact simplification method that simplifies the first stage of assigning costs to activities of activity-based costing (ABC) system by: a. eliminating the need for detailed interviewing and surveying to determine resource drivers. b. expanding the number of activity rates used so that the rates reflect the actual consumption of overhead costs. c. recognizing that many of the so-called fixed overhead costs vary in proportion to changes other than production volume. d. allocating weights and setting the result equal to the product's consumption ratio.

a. eliminating the need for detailed interviewing and surveying to determine resource drivers.

If activity-based costing is used, modifications made by engineering to the product design of several products would be classified as a: a. product-level activity. b. batch-level activity. c. unit-level activity. d. facility-level activity.

a. product-level activity.

A department that is capital-intensive most likely would use a predetermined departmental overhead rate based on which of the following activity bases? a. units of direct material used b. direct labor cost c. machine hours d. direct labor hours

a. units of direct material used

In the time-driven ABC systems, managers: a. assign resources to departments, then activities. b. assign resource costs first to activities, then to products. c. directly estimate the resource demands imposed by each product. d. None of these choices are correct.

b. assign resource costs first to activities, then to products.

Unit-level drivers ____ as units produced increase

increase

What stages exist if there are secondary activities?

intermediate stages

How would you assign costs to labor if 100% of the time is spent?

labor is exclusive to activity. Direct tracing is the cost assignment method.